Cluster based area yield scheme for crop insurance policy in Java

Abstract

Zone based area yield scheme becomes a potential in improving the development of area yield index for crop insurance policy in Indonesia. The characteristics of productivity varies among municipalities in Indonesia. Therefore, it will be challenging to apply area yield index policy without developing clusters, especially in Java which is considered as one of the central productivities of paddy in Indonesia. Clustering the productivity is one of the solutions to reduce the heterogeneous basis risk within municipalities of a province. Clustering areas is recommended in order to determine accurate critical yield index leading to a more precise ratemaking in the process of developing area yield index policy. In order to define the clusters, we have not only considered average and volatility of productivity over the past ten years, but also integrated the spatial effect of municipalities. Ward-like hierarchical method shows that clustering of municipalities within each province provides better homogeneity. It has been found that there are 12 clusters in Java tend to have low (8.33%), middle (50%), and high (41.67%) productivity. Therefore, we suggest that the Ministry of Agriculture design the area yield index policy based on these clusters and each cluster will have different critical productivity index and adjusted premium.