Crop Insurance as a Risk Management Strategy in Bangladesh

Hashimoto et al., 1982 introduced the above risk indices for water resources availability
study. This study adapted the methodology to apply in quantifying risk derived from climatic
changes. This part should be considered as an important value addition of the project output
as because quantification of risk is a very important for a sound actuarial analysis. Especially,
in the case of Index based Crop Insurance like Weather Index Insurance, this methodology
can be used effectively to quantify risk at both present and future scenarios.
Risk is the term defined here as the probability of the system in failure state. The term
Reliability, on the contrary is the ability of the system to be within target level, i.e. it is the
probability of the system being in a satisfactory state. The relationship between risk and
reliability is thus established as:
Risk = 1- Reliability
i.e if Reliability, α=P{Xt ∈ S},
Risk = 1- P{Xt ∈ S} = P{Xt ∈ F}
Here, S and F are respectively sates of satisfactory and failure condition.
Resiliency is the capability of the system to recover from a failure, i.e. return to a satisfactory
state after a state of failure. It can be defined as the conditional probability:
β = P{Xt ∈ S / Xt-1 ∈ F}
Vulnerability on the other hand is defined as the severity of the damage that might cause
while the system is in failure. It is actually related to the deficit occurs during a failure as:
γ = ∑sjej ; j ∈ F
Where, ej is the probability of the system is in failure state,
sj as the estimation of deficit.
Figure 5.8 explains the risk indices in a simple manner. Assume the climatic attribute as
Rainfall. In that case, if the rainfall is below the target level, it can be said as drought
condition. Now, assume that historically out of 100 days 30 days the precipitation was below
the target level, so the Risk of drought occurrence is 30%. In other way the Reliability of the
system that there will be no drought is 70%.
As it is seen from the figure 5.8, 30 days of failure occurred in 3 failure events, i.e. on an
average the length of each drought period was 10 days. Now assume another system where
for the same total days of drought condition, i.e. 30 days, there were 10 failure events, which
mean on an average the length of each drought period was 3 days. The later system can be
said to be more Resilient as it can recover from a failure within a shorter period of time. The
index is important to quantify as because the loss amount usually multiplies quickly for
prolonged climatic extreme events other than shorter ones.
Other than length of failure, as shown in Figure 5.8, another information might be important
as magnitude of failure, i.e. for a failure event, the observed value was below the target level
by what per cent or magnitude. The magnitude of failure determines the severity of the event,
like the height of storm surge or the water level for flooding, which actually determines the
Vulnerability level from the disaster. Whether a prolonged drought or flood of moderate
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