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Managing hydroclimatological risk to water supply with option contracts and reservoir index insurance
Author(s) -
Brown Casey,
Carriquiry Miguel
Publication year - 2007
Publication title -
water resources research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.863
H-Index - 217
eISSN - 1944-7973
pISSN - 0043-1397
DOI - 10.1029/2007wr006093
Subject(s) - water supply , agriculture , index (typography) , business , water resource management , environmental science , environmental engineering , computer science , ecology , world wide web , biology
This paper explores the performance of a system of economic instruments designed to facilitate the reduction of hydroclimatologic variability‐induced impacts on stakeholders of shared water supply. The system is composed of bulk water option contracts between urban water suppliers and agricultural users and insurance indexed on reservoir inflows. The insurance is designed to cover the financial needs of the water supplier in situations where the option is likely to be exercised. Insurance provides the irregularly needed funds for exercising the water options. The combined option contract – reservoir index insurance system creates risk sharing between sectors that is currently lacking in many shared water situations. Contracts are designed for a shared agriculture – urban water system in Metro Manila, Philippines, using optimization and Monte Carlo analysis. Observed reservoir inflows are used to simulate contract performance. Results indicate the option – insurance design effectively smooths water supply costs of hydrologic variability for both agriculture and urban water.