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Actuarial Implication of Structural Changes in El Niño-Southern Oscillation Index Dynamics

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  • Chen, Shu-Ling

Abstract

The influence of climate variability on agricultural production and financial risks faced by an individual or an institution has been the center of the public discussion in the recent years. The changing weather patterns and environmental conditions could cause substantial unpredicted economic loss. Failure to capture the changing climate would underestimate the insurance contract’s expected indemnity and further create a major obstacle for insurance sectors. In this paper, we undertake a case study of El Niño-Southern Oscillation Index insurance for coastal Peru proposed by Skees. We examined the behavior of El Niño dynamics and found El Niño indices are changing over time. A class of generalized autoregressive conditional heteroskedasticity (GARCH) - family process that allows the disturbance variance to vary over time is used to design and rate the El Niño-Southern Oscillation Index insurance contract.

Suggested Citation

  • Chen, Shu-Ling, 2010. "Actuarial Implication of Structural Changes in El Niño-Southern Oscillation Index Dynamics," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61384, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea10:61384
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    File URL: http://purl.umn.edu/61384
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    More about this item

    Keywords

    actuarial rating; climate variability; El Niño; fractional integration ARCH; FIGARCH; index insurance; structural change; Agricultural Finance; Financial Economics; Risk and Uncertainty; G21; G22; Q10; Q14;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • Q10 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - General
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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