Callibration of a multi - factor weather index to determine the trigger event of claim payments on crop micro insurance in Eastern Kenya

Abstract

In 2014, among the seven companies that offer agricultural insurance in Kenya, only two of the companies reported a profit. The shared characteristic between these two companies is that they both used index-based insurance. The intention of this study was to explore index based insurance through the calibration of a multi-factor weather index to be used in a crop micro insurance to' determine the trigger event of claim payments. This research used linear regression, Generalized Linear Models and Value at Risk to illustrate the relationship between weather elements and claim payments. From this study we can conclude that we can illustrate the relationship between weather elements and expected crop yield, and therefore use this interaction to base claim payoff calculations. Recommendations for further research into this topic include widen the area under study to include areas with a wider scope of weather variations and to increase the number of crops under research to include those that are more sensitive to weather changes. The work presented aims to encourage more index-based programs in Kenya to help farmers manage risk in a more innovative way and help expand the insurance industry in Kenya as a whole.