Combining participating insurance and financial policies: a new risk management instrument against natural disasters in agriculture

Purpose - This paper examines a new insurance policy against natural catastrophes. This paper proves the market for insurance could grow with a combination of participating contracts and market-based instruments. The first cover individual risks while the second cover systematic risks. Design/methodology/approach - We propose an optimisation model, which involves both the insurer and the farmer. The farmer decides to insure his farm if and only if insurance improves the utility he’s expecting over a given year. Therefore, our paper takes the perspective of an insurer who wants to maximise the farmer’s wealth so that he will be more likely to subscribe the policy. The choice and the combination of the policies are then determined and designed by the insurer to reach that aim. Findings - The new policy leads both the insurer to manage small and large risks and the insured to be financially interested. It also provides an optimal coverage against natural events for insured farmers. Practical implications - The paper offers many perspectives for the renewal of the crop insurance market using new instruments. Originality/value - The paper proves that the use of a combination of participating insurance and financial contracts provides a better result than the use of these instruments taken separately.