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A bootstrap approach for pricing crop yield insurance

Yugu Xiao (Center for Applied Statistics, School of Statistics, Renmin University of China, Beijing, China)
Ke Wang (Agricultural Information Institute, Chinese Academy of Agricultural Sciences, Beijing, China)
Lysa Porth (Warren Centre for Actuarial Studies, University of Manitoba, Winnipeg, Canada)

China Agricultural Economic Review

ISSN: 1756-137X

Article publication date: 2 May 2017

276

Abstract

Purpose

While crop insurance ratemaking has been studied for many decades, it is still faced with many challenges. Crop insurance premium rates (PRs) are traditionally determined only by point estimation, and this approach may lead to uncertainty because it is sensitive to the underwriter’s assumptions regarding the trend, yield distribution, and other issues such as data scarcity and credibility. Thus, the purpose of this paper is to obtain the interval estimate for the PR, which can provide additional information about the accuracy of the point estimate.

Design/methodology/approach

A bootstrap method based on the loss cost ratio ratemaking approach is proposed. Using Monte Carlo experiments, the performance of this method is tested against several popular methods. To measure the efficiency of the confidence interval (CI) estimators, the actual coverage probabilities and the average widths of these intervals are calculated.

Findings

The proposed method is shown to be as efficient as the non-parametric kernel method, and has the features of flexibility and robustness, and can provide insight for underwriters regarding uncertainty based on the width of the CI.

Originality/value

Comprehensive comparisons are conducted to show the advantage and the efficiency of the proposed method. In addition, a significant empirical example is given to show how to use the CIs to support ratemaking.

Keywords

Acknowledgements

Funding for this study was supported by the Fundamental Research Funds for the Central Universities and the Research Funds of Renmin University of China (No. 12XNJ017).

Citation

Xiao, Y., Wang, K. and Porth, L. (2017), "A bootstrap approach for pricing crop yield insurance", China Agricultural Economic Review, Vol. 9 No. 2, pp. 225-237. https://doi.org/10.1108/CAER-08-2015-0105

Publisher

:

Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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