Determining the premium of paddy insurance using the extreme value theory method and the operational value at risk approach

Abstract

Paddy farming is a source of livelihood for most rural communities in Indonesia. Indonesia as an agrarian country with a tropical climate, where the sun shines all the time and farmers can grow crops throughout the season. However, changes in air temperature, weather, and annual rainfall which sometimes change uncertainly cause changes in cropping patterns, which are caused by minimal water supplies in the dry season and flooding in the rainy season. This uncertainty will certainly increase the risk of crop failure. In addition to the risk of weather, other disturbances from plant pests and plant pests also cause the risk of crop failure, which results in greater losses to farmers. One way to transfer this risk is through a rice agricultural insurance program. This study aims to calculate the premium price using the Extreme Value Theory (EVT) method with the Operational Value at Risk (OpVaR) approach based on weather, pests and plant diseases. In this study, the data used are weather data Pests and plant diseases disturbance in West Java in 2009-2019. The stages in this research, the first step is to determine the estimated threshold value to obtain extreme data, then estimate the parameters using the likelihood method. Data suitability test with Generalized Pareto Distribution (GPD) was performed using the QQplot test. Risk is determined by the Operational Value at Risk (OpVaR) approach, the results of which are used to calculate the appropriate premium for paddy agricultural insurance.