Moderators of pricing and willingness to pay for parametric weather risk mitigants in agriculture: An integrative review, conceptual framework, and research agenda

Abstract

AbstractThe agriculture sector observed the penetration of parametric weather risk financial products, including weather index insurance and weather derivatives, between the late 1990s and the early 2000s. However, the adoption of such products remains low. While the reasons for low adoption are mentioned in the extant literature, there is a lack of a theoretical framework that captures the moderators accelerating and inhibiting pricing structure and willingness to pay for parametric weather risk mitigants in agriculture. Also, the extant literature does not adequately explain the relationships or interdependencies between pricing structure and willingness to pay for parametric weather risk mitigants. This study bridges this gap by performing an integrative literature review. The review integrates the bibliometric analysis and systematic literature review and categorizes the extant literature into five focal areas: (1) weather analytics capability; (2) design, pricing, and testing; (3) users’ criteria for adoption; (4) prototyping; and (5) product efficacy of weather risk mitigation. A conceptual framework evolved from the review classifies the moderators into accelerants and inhibitors of pricing and willingness to pay. The framework hypothesizes that product design, contract specifications such as tick size and strike levels, hedge effectiveness, and instrument adoption have a recursive interaction with the willingness to pay and pricing structure. Future research directions guided by the proposed framework can motivate scholars and practitioners to explore the scope of bundling parametric (index) insurance and weather derivatives as a standalone product to enhance adoption.

Keywords

• weather derivatives
• parametric (index) insurance
• pricing
• willingness to pay
• hedge effectiveness
• integrative literature review