Working Paper BETA #2021-44

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Title : Index insurance for coping with drought-induced risk of production losses in French forests

Author(s) : Sandrine Brèteau-Amores, Marielle Brunette, Christophe François, Antoine Leblois and Nicolas Martin-StPaul

Abstract : Drought-induced risk of forest dieback is increasing due to climate change. Insurance can be a good option to compensate potential financial losses associated with forest production losses. In this context, we developed an ex ante index-based insurance model to cope with drought-induced risk of forest dieback. We applied this model to beech and oak forests in France. We defined and then compared different indices from simple ones relying on rainfall indices to more complex ones relying on the functional modelling of forest sensitivity to water stress. After the calibration of the contract parameters, an insurance scheme was optimized and tested. We showed that optimal insurance contracts generate low gain of certain equivalent income, high compensation, and a high basis risk. The best contract was not proportional to the complexity of the index. There was no clear advantage to differentiate contracts based on species. Results highlighting the various perspectives of this first approach are discussed at the end of this paper.

Key-words : Drought; Forest; Index insurance.

JEL Classification : D01, G22, Q23, Q54