Abstract
This paper studies the application of the Conditional Value-at-Risk (CVaR) in the crop insurance industry under climate variability. We designed a model to help farmers decide about buying crop insurance products to reduce climate and price risks. The objective is to minimize farmers’ return losses, while using CVaR to control the risk aversion level. We illustrate the application of the model by studying a farm with two crops (cotton and peanut) in Jackson Co., Fl. Crop insurance contracts with the greatest expected return were: for peanut, 75% actual production history (APH) during El Nino and Neutral years, and 65% APH during La Nina years; and for cotton, 75% APH in all El Nino Southern Oscillation phases. Risk averse farmers could select 75% APH for peanut during La Nina years.
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