Blended insurance scheme: A synergistic conventional-index insurance mixture

Abstract

Conventional indemnity-based insurance (“conventional insurance”) and index-based insurance (“index insurance”) represent two primary insurance types, each harboring distinct advantages depending on specific circumstances. This paper proposes a novel blended insurance whose payout is a mixture of the two, to achieve enhanced risk mitigation and cost efficiency. We present the product design framework that employs a multi-output neural network (NN) model to determine both the triggering type and the index-based payout level. The proposed framework is then applied to an empirical case involving soybean production coverage in Iowa. Our results demonstrate this blended insurance could generally outperform both conventional and index insurance in enhancing policyholders' utility.