A Bootstrap Simulation for comparison of Group Risk Plan and Multi-Peril Crop Insurance Policy

Abstract

Agricultural insurance is one of the solutions for farmers to avoid risks such as climate change, pest, disease and price fall which increase the risk of crop failure. Indonesian Ministry of Agriculture (MoA) and Jasindo have been using subsidized Multi-Perils Crop Insurance (MPCI) and faced some disadvantages that mainly due to high risk moral hazard, adverse selection, and high administrative costs. Our research provides an alternative policy area yield index insurance known as Group Risk Plan (GRP) to handle this problem. To find homogeneous basis risk in GRP, the data was classified into two categories: up to and above two hectares. Bootstrapping approach was used to find MPCI and GRP indemnity amount for each term of harvesting period. In addition, both parametric estimation and goodness of fit test indicated appropriate distribution used by MPCI and GRP in each term of harvesting period as well. To compare the aggregate loss distribution, the conditional value at risk CV aR(X) measures the mean of excess loss exceeding V aR(X). It reflects how risky and measures the amount of money insurance company should retain. Simulations indicated that MPCI has greater CV aR(X) than GRP, which implies the higher likelihood of loss. The insurance company should have enough reserve for MPCI to cover that loss. On the other hand, the GRP policy that minimizes moral hazard and adverse selection thereby reduces administrative costs and offers potential to market at lower costs, may encourage farmers to do good farming practices that will result in the lower likelihood of loss. Therefore, GRP could be considered as an alternative crop insurance policy in Indonesia.