INDEX-BASED INSURANCE CONTRACTS TO FOSTER COOPERATION BETWEEN AGENTS EXPOSED TO UNCORRELATED DROUGHT AND FLOODING RISKS

Worldwide, conflict over shared water resources is exacerbated by population growth, economic development and climate change. In multi-purpose water systems, stakeholders can face higher financial risks as a consequence of increased hydrological uncertainty and recurrent extreme events. In this context, a financial hedging tool able to bundle together the uncorrelated risks faced by different stakeholders may be an efficient solution to both foster cooperation and manage the financial losses associated with extreme events. In this work we explore the potential of risk diversification strategies involving index-based insurance joint contract solutions, to manage financial risk in a multi-purpose water system prone to both drought and flood risk. Risk diversification can allow for reduced insurance premiums in situations in which the bundled risks are entirely, or mostly, uncorrelated. Jointly covering flood and drought related risks from competing users in the same geographic area represents a novel application. The approach is demonstrated using a case study on Lake Maggiore, a regulated lake whose management is highly controversial due to numerous and competing human activities. In particular we focus on the ongoing conflict among the lakeshore population, affected by flood risk, and the downstream farmers’ districts, facing drought related losses. Results are promising and indicate that bundling uncorrelated risks from competing users is beneficial to both promoting insurance premium affordability and facilitating collaboration schemes at the catchment scale.