Modeling Frost Losses: Application to Pricing Frost Insurances

North American Actuarial Journal, Volume 22, Issue 1, pp. 137-159, March 2018, DOI:10.1080/10920277.2017.1387571

38 Pages Posted: 10 May 2017 Last revised: 20 Mar 2018

See all articles by Hirbod Assa

Hirbod Assa

University of Liverpool

Meng Wang

University of Liverpool - Institute of Financial and Actuarial Mathematics

Athanasios A. Pantelous

Monash University - Department of Econometrics & Business Statistics

Date Written: May 8, 2017

Abstract

The main objective of this paper is to model the losses caused by frost events and use it to price frost insurances. Since the data on frost events are either unavailable or rarely available, we have chosen to obtain a model for frost losses based on temperature by using some fundamental agricultural engineering findings on frost damages. The main challenges in modeling frost loss variables are first, the non-linearity of the frost losses with respect to the temperature and second, the fruit resistance to the first few hours of low temperature. We address both issues when introducing our frost loss variable. Then after finding the loss model, we use it to price frost insurances for a general family of insurance contracts that do not generate any risk of moral hazard. In particular, we will find the premiums of stop-loss policies for losses to citrus fruits using Value at Risk, Conditional Value at Risk and Wang's premium based on temperature data from San Joaquin Drainage County in California.

Keywords: Frost Insurance, Risk Premiums, Stop-Loss Policy

JEL Classification: C52, G22, Q14

Suggested Citation

Assa, Hirbod and Wang, Meng and Pantelous, Athanasios A., Modeling Frost Losses: Application to Pricing Frost Insurances (May 8, 2017). North American Actuarial Journal, Volume 22, Issue 1, pp. 137-159, March 2018, DOI:10.1080/10920277.2017.1387571. Available at SSRN: https://ssrn.com/abstract=2965094 or http://dx.doi.org/10.2139/ssrn.2965094

Hirbod Assa (Contact Author)

University of Liverpool ( email )

Institute for Financial and Actuarial Mathematics,
Liverpool, L18 8BF
United Kingdom
447522173132 (Phone)

HOME PAGE: http://sites.google.com/site/assahirbod/

Meng Wang

University of Liverpool - Institute of Financial and Actuarial Mathematics ( email )

Peach Street
Liverpool, L697ZL
United Kingdom
07460386765 (Phone)

Athanasios A. Pantelous

Monash University - Department of Econometrics & Business Statistics ( email )

Wellington Road
Clayton, Victoria 3168
Australia

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