Abstract
Purpose - Hailstorms are a major risk in agriculture. To mitigate the negative consequences on farm revenues, we analyse the choice between insurance contracts and anti-hail nets. Furthermore, we discuss the consequences of anti-hail nets adoption on the actuarial soundness of the insurance market.
Methodology - We develop a theoretical model based on expected utility theory to compare the profitability of no-hedging against insurance and anti-hail nets. Furthermore, we test our theoretical model predictions with data of South Tyrolean apple producers.
Findings - We find that the benefit of anti-hail nets compared to insurance is an increasing function of the overall risk of hail damages, farmers' level of risk aversion and the value of the agricultural output.
Practical implications – Our findings imply that the diffusion of anti-hail nets may be beneficial for the actuarial soundness of insurance markets as they are more profitable for riskier, high-value locations and more risk-averse farmers.
Originality\Value - The model developed in the paper is specifically designed to compare the profitability of different agricultural hedging options and can be easily extended to cover other farming hazards.