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Can expert knowledge compensate for data scarcity in crop insurance pricing?

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  • Shen, Zhiwei
  • Odening, Martin
  • Okhrin, Ostap

Abstract

Although there is an increasing interest in index-based insurances in many developing countries, crop data scarcity hinders its implementation by forcing insurers to charge higher premiums. Expert knowledge has been considered a valuable information source to augment limited data in insurance pricing. This article investigates whether the use of expert knowledge can mitigate model risk which arises from insufficient statistical data. We adopt the Bayesian framework that allows for the combination of scarce data and expert knowledge, to estimate the risk parameter and buffer load. In addition, a benchmark for the evaluation of expert information is created by using a richer dataset generated from resampling. We find that expert knowledge reduces the parameter uncertainty and changes the insurance premium in the correct direction, but that the effect of the correction is sensitive to different strike levels of insurance indemnity.

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Bibliographic Info

Paper provided by Agricultural and Applied Economics Association in its series 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. with number 149431.

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Date of creation: 2013
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Handle: RePEc:ags:aaea13:149431

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Keywords: expert knowledge; data scarcity; crop insurance pricing; Bayesian estimation; Agricultural Finance; Farm Management; Research Methods/ Statistical Methods; Risk and Uncertainty; C14; Q19;

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  1. Aleksey Min & Claudia Czado, 2010. "Bayesian Inference for Multivariate Copulas Using Pair-Copula Constructions," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 8(4), pages 511-546, Fall.
  2. H. Holly Wang & Hao Zhang, 2003. "On the Possibility of a Private Crop Insurance Market: A Spatial Statistics Approach," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(1), pages 111-124.
  3. John Duncan & Robert J. Myers, 2000. "Crop Insurance under Catastrophic Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 842-855.
  4. repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
  5. Biener, Christian, 2013. "Pricing in Microinsurance Markets," World Development, Elsevier, vol. 41(C), pages 132-144.
  6. Barry K. Goodwin, 2001. "Problems with Market Insurance in Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 643-649.
  7. Wei Xu & Ostap Okhrin & Martin Odening & Ji Cao, 2010. "Systemic Weather Risk and Crop Insurance: The Case of China," SFB 649 Discussion Papers SFB649DP2010-053, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  8. Julia I. Borman & Barry K. Goodwin & Keith H. Coble & Thomas O. Knight & Rod Rejesus, 2013. "Accounting for short samples and heterogeneous experience in rating crop insurance," Agricultural Finance Review, Emerald Group Publishing, vol. 73(1), pages 88-101, April.
  9. Raushan Bokusheva, 2011. "Measuring dependence in joint distributions of yield and weather variables," Agricultural Finance Review, Emerald Group Publishing, vol. 71(1), pages 120-141, May.
  10. Mario J. Miranda & Katie Farrin, 2012. "Index Insurance for Developing Countries," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 34(3), pages 391-427.
  11. Mary Kynn, 2008. "The 'heuristics and biases' bias in expert elicitation," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 171(1), pages 239-264.
  12. Martin Odening & Oliver Musshoff & Wei Xu, 2007. "Analysis of rainfall derivatives using daily precipitation models: opportunities and pitfalls," Agricultural Finance Review, Emerald Group Publishing, vol. 67(1), pages 135-156, May.
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