Given the assumption that weather risks affect crop yields, we designed a weather index insurance product for soybean producers in the US state of Illinois. By separating the entire vegetation cycle into four growth stages, we investigate whether the phase-division procedure contributes to weather-yield loss relation estimation and, hence, to basis risk mitigation. Concretely, supposing stage-variant interaction patterns between temperature-based weather index growing degree days and rainfall-based weather index cumulative rainfall, a nonparametric weather-yield loss relation is estimated by a generalized additive model. The model includes penalized B-spline (P-spline) approach based on nonlinear optimal indemnity solutions under the expected utility framework. The P-spline analysis of variance (PS-ANOVA) method is used for efficient estimation through mixed model re-parameterization. The results indicate that the phase-division models significantly outperform the benchmark whole-cycle ones either under quadratic utility or exponential utility, given different levels of risk aversions. Finally, regarding hedging effectiveness, the expected utility ratio between the phase-division contract and the whole-cycle contract, and the percentage changes of mean root square loss and variance of revenues support the proposed phase-division contract.
%0 Journal Article
%1 51f060e5e7394878ade5a32d4bb6556d
%A Zou, Jing
%A Odening, Martin
%A Okhrin, Ostap
%D 2023
%I Cambridge University Press
%J Annals of actuarial science
%K topic_engineering FIS_scads PS-ANOVA, Weather additive generalized growth indemnity, index insurance model, nonlinear plant stages,
%N 3
%P 438--458
%R 10.1017/S1748499523000167
%T Plant growth stages and weather index insurance design
%V 17
%X Given the assumption that weather risks affect crop yields, we designed a weather index insurance product for soybean producers in the US state of Illinois. By separating the entire vegetation cycle into four growth stages, we investigate whether the phase-division procedure contributes to weather-yield loss relation estimation and, hence, to basis risk mitigation. Concretely, supposing stage-variant interaction patterns between temperature-based weather index growing degree days and rainfall-based weather index cumulative rainfall, a nonparametric weather-yield loss relation is estimated by a generalized additive model. The model includes penalized B-spline (P-spline) approach based on nonlinear optimal indemnity solutions under the expected utility framework. The P-spline analysis of variance (PS-ANOVA) method is used for efficient estimation through mixed model re-parameterization. The results indicate that the phase-division models significantly outperform the benchmark whole-cycle ones either under quadratic utility or exponential utility, given different levels of risk aversions. Finally, regarding hedging effectiveness, the expected utility ratio between the phase-division contract and the whole-cycle contract, and the percentage changes of mean root square loss and variance of revenues support the proposed phase-division contract.
@article{51f060e5e7394878ade5a32d4bb6556d,
abstract = {Given the assumption that weather risks affect crop yields, we designed a weather index insurance product for soybean producers in the US state of Illinois. By separating the entire vegetation cycle into four growth stages, we investigate whether the phase-division procedure contributes to weather-yield loss relation estimation and, hence, to basis risk mitigation. Concretely, supposing stage-variant interaction patterns between temperature-based weather index growing degree days and rainfall-based weather index cumulative rainfall, a nonparametric weather-yield loss relation is estimated by a generalized additive model. The model includes penalized B-spline (P-spline) approach based on nonlinear optimal indemnity solutions under the expected utility framework. The P-spline analysis of variance (PS-ANOVA) method is used for efficient estimation through mixed model re-parameterization. The results indicate that the phase-division models significantly outperform the benchmark whole-cycle ones either under quadratic utility or exponential utility, given different levels of risk aversions. Finally, regarding hedging effectiveness, the expected utility ratio between the phase-division contract and the whole-cycle contract, and the percentage changes of mean root square loss and variance of revenues support the proposed phase-division contract.},
added-at = {2024-11-28T16:27:18.000+0100},
author = {Zou, Jing and Odening, Martin and Okhrin, Ostap},
biburl = {https://puma.scadsai.uni-leipzig.de/bibtex/2fd423ecbfa92495faa9aab2b4014ebdd/scadsfct},
day = 3,
doi = {10.1017/S1748499523000167},
interhash = {555551e8a2ee04f61856e22aed5fc34b},
intrahash = {fd423ecbfa92495faa9aab2b4014ebdd},
issn = {1748-4995},
journal = {Annals of actuarial science},
keywords = {topic_engineering FIS_scads PS-ANOVA, Weather additive generalized growth indemnity, index insurance model, nonlinear plant stages,},
language = {English},
month = nov,
note = {Publisher Copyright: {\textcopyright} The Author(s), 2023. Published by Cambridge University Press on behalf of Institute and Faculty of Actuaries.},
number = 3,
pages = {438--458},
publisher = {Cambridge University Press},
timestamp = {2024-11-28T17:41:00.000+0100},
title = {Plant growth stages and weather index insurance design},
volume = 17,
year = 2023
}
