Designing optimum insurance schemes to reduce water overexploitation during drought events: a case study of La Campiña, Guadalquivir River Basin, Spain/ created by Carlos Dionisio Pérez Blanco and Carlos Gomez

In several arid and semi-arid Mediterranean basins, water deficits in irrigated agriculture during drought events are relieved by illegal abstractions from aquifers. Illegal abstractions are largely tolerated by the authorities and are regarded by farmers as a reliable and inexpensive form of insurance against drought. This framework of illegal abstractions is responsible for the structural water deficit that is characteristic of many Southern European regions. The situation is changing with the implementation of River Basin Management Plans and Drought Management Plans, which demand improvement in the quantitative and qualitative status of water bodies, improved surveillance of groundwater resources and more rigorous sanctions for illegal groundwater abstractions. However, these plans raise distribution and equity issues and may not be sufficient to stop illegal abstractions in certain areas. Provided that the new framework is properly enforced, private drought insurance has the potential to stabilise income levels and reduce the incentives for overexploitation during drought events. This paper develops a methodology to estimate the basic risk premium and the potential water savings of private drought insurance. This methodology is based on concatenated stochastic models (rainfall-stock), a decision model and agronomic production functions, and is illustrated through the application of the model in the La Campiña agricultural district in the Guadalquivir River Basin, Spain.