Journal article
North American Actuarial Journal · 2019-10-02 · Volume 23 · Issue 4 · pp. 512-534
DOI: 10.1080/10920277.2019.1618340
Published online: 2019-10-02 · Download citation (BibTeX)
Abstract
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