Rating exotic price coverage in crop revenue insurance
ISSN: 0002-1466
Article publication date: 4 May 2020
Issue publication date: 5 October 2020
Abstract
Purpose
Revenue insurance is the most popular form of insurance available in the US federal crop insurance program. The majority of crop revenue policies are sold with a harvest price replacement feature that pays out on lost crop yields at the maximum of a realized or projected harvest price. The authors introduce a novel actuarial and statistical approach to rate revenue insurance policies with exotic price coverage: the payout depends on an order statistic or average of prices. The authors examine the price implications of different dependence models and demonstrate the feasibility of policies of this type.
Design/methodology/approach
Hierarchical Archimedean copulas and vine copulas are used to model dependence between prices and yields and serial dependence of prices. The authors construct several synthetic exotic price coverage insurance policies and evaluate the impact of copula models on policies covering different types of risk.
Findings
The authors’ findings show that the price of exotic price coverage policies is sensitive to the choice of dependence model. Serial dependence varies across the growing season. It is possible to accurately price exotic coverage policies and we suggest these add-ons as a possible avenue for developing private crop insurance markets.
Originality/value
The authors apply hierarchical Archimedean copulas and vine copulas that allow for flexibility in the modeling of multivariate dependence. Unlike previous research, which has primarily considered dependence across space, the form of exotic price coverage requires modeling serial dependence in relative prices. Results are important for this segment of the agricultural insurance market: one of the main areas that insurers can develop private products around the federal program.
Keywords
Acknowledgements
This work was supported by the USDA National Institute of Food and Agriculture, Hatch project 1016069.
Citation
Ramsey, A.F., Ghosh, S.K. and Goodwin, B.K. (2020), "Rating exotic price coverage in crop revenue insurance", Agricultural Finance Review, Vol. 80 No. 5, pp. 609-631. https://doi.org/10.1108/AFR-10-2019-0107
Publisher
:Emerald Publishing Limited
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