Agricultural Insurance Ratemaking: Development of a New Premium Principle

North American Actuarial Journal, 23(4), 512-534.

Posted: 8 Sep 2016 Last revised: 11 Feb 2020

See all articles by Wenjun Zhu

Wenjun Zhu

Nanyang Business School, Nanyang Technological University

Ken Seng Tan

University of Waterloo

Lysa Porth

University of Manitoba - Warren Centre for Actuarial Studies and Research; University of Waterloo - Department of Statistics and Actuarial Science; University of Manitoba - Department of Agribusiness and Agricultural Economics

Date Written: September 6, 2016

Abstract

Determining the appropriate premium to charge for the underlying risk is central to delivering a sustainable agricultural insurance program. While this is fundamental to all types of insurance, in agriculture this is a particularly challenging task given systemic risk, information asymmetry, and a number of multifaceted factors pertaining to the loss experience data, including scarcity and credibility. The objective of this paper is to formally introduce premium principles to the agricultural insurance literature, with a focus on a new premium principle approach based on the multivariate weighted distribution. The multivariate weighted premium principle (MWPP) formalizes the reweighting of historical loss experience using external factors in order to refine the agricultural insurance pricing. These external factors may reflect systemic risk and include material information, such as economic and market conditions, weather, soil, etc. In the empirical study, a unique reinsurance data set from the province of Manitoba, Canada, is used to evaluate a number of potential premium principles. With the flexibility of the MWPP, the empirical results indicate that the MWPP approach can be a viable premium principle for pricing agricultural insurance. Furthermore, the MWPP redistributes premium rates and assigns increased loadings to higher risk layers, helping reinsurers manage their reserves and achieve improved sustainability in the long term.

Keywords: Agricultural insurance, Loss reweighting, Ratemaking, Premium principles, Weighted distribution, Weighed premium

Suggested Citation

Zhu, Wenjun and Tan, Ken Seng and Porth, Lysa, Agricultural Insurance Ratemaking: Development of a New Premium Principle (September 6, 2016). North American Actuarial Journal, 23(4), 512-534., Available at SSRN: https://ssrn.com/abstract=2835481 or http://dx.doi.org/10.2139/ssrn.2835481

Wenjun Zhu (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

50 Nanyang Avenue
Singapore, 639798
Singapore
(65) 6592-1859 (Phone)

HOME PAGE: http://sites.google.com/view/wenjun-zhu

Ken Seng Tan

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

Lysa Porth

University of Manitoba - Warren Centre for Actuarial Studies and Research ( email )

638 Drake Centre, 181 Freedman Crescent
Winnipeg, MB R3T 2N2
Canada

University of Waterloo - Department of Statistics and Actuarial Science ( email )

Waterloo, Ontario N2L 3G1
Canada

University of Manitoba - Department of Agribusiness and Agricultural Economics ( email )

Winnipeg, MB, R3T 2N2
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
103
Abstract Views
1,085
rank
320,193
PlumX Metrics