Year-end Sale % OFF 
Abstract
Experience across many countries shows that, without large premium subsidies, crop insurance uptake rates are generally low. In this article, we propose to use the cumulative prospect theory to design weather insurance products for situations in which farmers frame insurance narrowly as a stand-alone investment. To this end, we introduce what we call “behavioral weather insurance” whereby insurance contract parameters are adjusted to correspond more closely with farmers’ preferences. Depending on farmers’ preferences, we find that a stochastic multiyear premium increases the prospect value of weather insurance, while a zero deductible design does not. We suggest that insurance contracts should be tailored precisely to serve farmers’ needs. This offers potential benefits for both the insurer and the insured.
Highlights
Climate risks threaten agricultural crop production and are expected to become even more pronounced due to climate change [1]
We introduce a two-step procedure to test the ADJUSTMENTS with respect to changes in the risk reducing properties (Step 1: Expected Utility Theory) and changes in the prospect value (Step 2: Cumulative Prospect Theory) under various real world preference scenarios
Our approach proposes at two-step procedure to develop an insurance product that has risk reducing properties under expected utility and to evaluate the prospect value of insurance under cumulative prospect theory (CPT)
Summary
Climate risks threaten agricultural crop production and are expected to become even more pronounced due to climate change [1]. Recent evidence suggests that the cumulative prospect theory (CPT) [12] may be a better predictor of farmers’ insurance decision-making than EU theory [6,7,9,10,11,13]. For these farmers, losses are felt whenever premiums exceed payouts while gains are perceived in the opposite case
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
