Crop insurance premium based on proportional hazard transform

Abstract

In general, the net premium principle is used for determining insurance premiums. However, in traditional crop insurance sometimes the realized loss is larger than expected loss. To overcome this problem, insurance companies need to determine the premium where there is risk-loading in the premium. There are several methods that can be used to determine this premium. This research focused on the Proportional Hazard Transform method which results a premium called a risk-adjusted premium. In this paper, we give calculations of the risk-adjusted premium with insurance coverage modifications where an ordinary deductible and a policy limit are applied to an insurance contract, that is the risk-adjusted premium for per-loss and per-payment random variable. We provide a relationship between the calculation of the risk-adjusted premium for per-loss and per-payment random variable. The relationship shows that the value of the risk-adjusted premium for a per-payment random variable is greater or equal than the value of the risk-adjusted premium for a per-loss random variable. Simulation with data of losses experienced by rice farmers from insurance companies in Indonesia is presented in this paper.