The economic gains from breaking boundaries: Reformulating index insurance zones to maximize lower tail dependence
Abstract
Index insurance intended to help low-wealth households manage risk is hampered by downside basis risk, meaning that the insured suffers a loss, but the insurance index fails to signal a loss. Existing index insurance contracts use statistically ad hoc administrative boundaries to demarcate insurance zones. We develop an algorithm that creates zones that maximize lower tail dependence amongst individual units included in each zone. Breaking boundaries in this way minimizes basis risk. Using data from a satellite-based index insurance program in Kenya, we show that replacing administrative with optimized zones can as much as triple the value of insurance using an expected utility-based metric of insurance quality.
Fields of Study & Subjects
Agricultural risk and resilience
Insurance
Mortality
Demography
Risk Management
Income
Poverty
and Inequality
Publication details
- Journal / source
- Journal of Development Economics
- Publisher
- Elsevier BV
- Volume
- 184
- Pages
- 103913–103913
- Publication date
- 27 August 2026
- Language
- EN