Is a drought insurance for irrigation water an option to reduce water scarcity and cope with droughts?
A forthcoming research paper on Water Policy authored by Dionisio Pérez and Carlos M. Gómez, SPADIS AG leader, explores the potential for a new drought insurance in southern Spain where current water gaps are largely covered from illegal groundwater abstractions. Aquifers thus play the role of buffer stocks and are used by farmers as a reliable, though informal, insurance system. This has led to groundwater depletion and increased scarcity and drought risk. An effective solution to this problem requires the replacement of this spontaneous, informal and uncoordinated insurance scheme rather using a formal and planned insurance provided by the financial system.
The paper develops a methodology to estimate a fair risk premium and the potential water savings associated with drought insurance for irrigated agriculture. This method is illustrated with its application to the Campo de Cartagena Agricultural District in the Segura River Basin (SE Spain). Results show that although the potential for illegal abstractions is high (9.5 hm3 / year), the cost of the insurance system is 10 times lower than the amount that risk-adverse farmers are willing to pay for water security. This information may serve as a starting point for the design of an innovative drought insurance system able to cope with other relevant institutional challenges.