The Computation of Weather-Based Index Insurance Premium and Indemnity function for Apple in Damavand County: The Application of Different Types of Elliptical and Archimedean Copulas

Considering the current challenges of agricultural insurance such as high implementation costs, problems caused by asymmetric information, and agricultural insurance’s being loss-incurring, presenting a proper insurance model is one of the most crucial issues in the field of agricultural products risk management. Thus, given the world successful experience, this study has designed the weather-based index insurance for apple in Damavand County, as one of the biggest apple production center within country. Data were collected during 1987-2016 from Iranian Agricultural Organization and the Meteorological Station in Damavand County. With the frequent application of Archimedean and elliptical copula functions in modeling the multivariate risk, dependency structure between weather variables and apple yield was determined through these functions, and Bayesian approach was employed to estimate the copula parameter. The investigation of different types of copulas indicated that Joe copula was able to model the joint distribution way better than other copulas. Hence there is a strong positive asymmetric dependency structure between variables. The expected loss caused by inappropriate weather condition has been 64281.25 ton for the Entire County. Therefore, the premium amount for each hectare at 100 percent coverage level had been computed as 36348910 Rials. The results of indemnity function demonstrated that frost is the most important loss factor for the apple product in Damavand County. Given the successful results of this insurance system in the world, it is recommended that officials and policy-makers investigate the weather based index insurance plans in different countries and identify its different dimensions to implement this insurance system in the country