Modeling indemnity of revenue-based crop insurance in Indonesia using time-varying copula models

Abstract

Crop insurance is a potential business line to develop, especially in countries with agricultural bases. In such type of insurance, a loss can be defined as a lack of revenue resulted from the crop yield or the price. The purpose of this paper is to model the variability of revenue-based agricultural losses through the implementation of time-varying copula towards crop yield and price, and to estimate the indemnity of the revenue-based crop insurance. The analysis employs both static and time-varying Normal and Archimedean copula to model the structure of dependency between crop yield and price. Each marginal variable is modeled using ARIMA model. A simple algorithm is proposed to estimate revenue-based losses and indemnity of the revenue-based crop insurance.Crop insurance is a potential business line to develop, especially in countries with agricultural bases. In such type of insurance, a loss can be defined as a lack of revenue resulted from the crop yield or the price. The purpose of this paper is to model the variability of revenue-based agricultural losses through the implementation of time-varying copula towards crop yield and price, and to estimate the indemnity of the revenue-based crop insurance. The analysis employs both static and time-varying Normal and Archimedean copula to model the structure of dependency between crop yield and price. Each marginal variable is modeled using ARIMA model. A simple algorithm is proposed to estimate revenue-based losses and indemnity of the revenue-based crop insurance.