Multi‐site bundling of drought tolerant maize varieties and index insurance

Abstract

Drought Tolerant Maize Varieties (DTMV) and Rainfall Index Insurance (RII) are potential complements, though with limited empirical basis. We employ a multivariate spatial framework to investigate the potential for bundling DTMV with a simulated multi‐site and multi‐environment RII, designed to insure against mild, moderate and severe drought risk. We use yield data from on‐farm trials conducted by the International Maize and Wheat Improvement Center (CIMMYT) and partners over 49 locations in Eastern and Southern Africa spanning 8 countries and 5 mega‐environments (dry lowland, dry mid altitude, wet lower mid altitude, low wetland and wet upper mid altitude) in which 19 different improved maize varieties including DTMV were tested at each location. Spatially correlated daily rainfall data are generated from a first‐order two‐state Markov chain process and used to calibrate the index and predict yields with a hierarchical Bayes multivariate spatial model. Results show high variation in the performance and benefits of different bundles which depend on the maize variety, the risk layer insured, and the type of environment, with high chances of selecting a sub‐optimal and unattractive contract. We find that complementing RII with a specific DTMV produces contracts with lower premiums and higher guaranteed returns especially in dry lowland increasing the chances of scaling up RII within this environment.