Crop insurance is increasingly impacted by weather-related risks such as high temperatures, drought, water scarcity, diseases, and pests, leading to higher claims and the need for updating the risk assessments and pricing mechanism is essential. As global temperatures rise and weather patterns become more erratic, insurers must adapt by refining underwriting practices, incorporating climate data, and responding to new regulations. In Egypt, these changes will likely affect the insurance market, necessitating sustainable practices and innovative solutions to manage risks and protect agricultural productivity.
This paper used the index-based insurance for crop pricing mechanism, which compensates for weather-related losses based on predetermined indices like temperature, humidity, and rainfall, reducing operational costs compared to conventional indemnity insurance. A likelihood-impact assessments conducted, ensuring transparency and consistency, and helps determine financial premiums for crop insurance based on the crop vulnerability index.
The vulnerability index is calculated based on weights assigned for each weather-related risk factors using the principal component analysis, and the risk premium is adjusted based on the risk score and its vulnerability.
The paper examined the effects of the weather-related risk factors on three economic crop productions in Egypt using a panel data and finds that cotton is the most vulnerable crop due to its high sensitivity to temperature. Rice and sugarcane show medium vulnerability across all factors, with temperature and water availability being the key risks. This will lead to higher pricing for cotton to account for the increased costs of irrigation, pest control, and reduced yields.