This is Figure 3B of the paper, showing that crop insurance demand increases in response to an extreme climate event.

Adverse selection and choice frictions in crop insurance against climate risk

January 2, 2019

Despite the increased frequency of extreme weather events and large premium subsidies, the use of climate-related crop insurance contracts in European countries remains low. We investigate the economic factors behind these low coverage rates by linking Italian administrative data on insurance purchases and damage claims to high-frequency georeferenced data on weather events. We focus on two potential explanations: inefficient pricing of insurance contracts due to adverse selection and choice frictions that create a wedge between the value of insurance and actual demand. To identify adverse selection, we leverage a 2014 reform that lowered the cap for premium subsidies in EU countries. This policy caused a reduction in demand and an increase in average costs for insurers, indicating adverse selection. Regarding frictions, we document through a staggered difference-in-differences design that firms are more likely to buy insurance when faced with \virgolette{salient} extreme events, suggesting that farmers are imperfectly informed about the value they assign to insurance. We conclude by discussing how current price subsidies may be less effective than insurance mandates in light of these uncovered market failures.