Assessment of insurance for paddy production: a case study in Indonesia

The present study demonstrated the importance of designing insurance as a part of broader risk management, using pilot insurance for rice farmers in East Java, Indonesia, as a case. An independent-sample t-test, using historical data on the areas of monthly rice harvest failure at regency level for the recent 10 years, finds that harvest failure during the rainy seasons in a group of the regencies located in the Bengawan Solo River Basin is significantly greater than the other group consisting of the remaining regencies in the province. This is due to frequent floods, which are largely attributed to the declining function of the Wonogiri reservoir as the primary flood control facility. It suggests the necessity of risk prevention measures, such as those to pump out dead storage and upgrade spillway capacity, to allow insurance to work in the basin. The present study also investigated a feasibility of weather index insurance. It compares the correlation coefficients and statistical significance of monthly rice harvest failure between 29 regencies in the province on one hand, and those of monthly rainfall on the other. It finds that rice harvest failure has higher spatial dependency than rainfall, indicating a potential problem of a basis risk.