Weather-Based Index Insurance Pricing- Canonical Vine Copula Function Approach

Gardening products, like apple, are exposed to a variety of risks caused by unfavorable weather conditions. This kind of risk is unavoidable, but manageable. Agricultural insurance is an effective scheme in weather risk management. Nevertheless, current insurance schemes have challenges, such as high transaction costs, and problems caused by asymmetric information, i.e. adverse selection and moral hazard. Therefore, this study aimed to present an appropriate insurance scheme for apple production in Damavand, the so-called “weather-based index insurance”. In this regard, the information on apple yield and weather variables was collected between 1987-2016, from Iranian Agriculture Jihad Organization and the local meteorological station. The dependency structure between apple yield and weather variables was investigated by C-Vine Copula as a joint distribution to compute the expected loss. Then, according to the expected loss, weather-based index insurance premium was measured. The premium amount was equal to Thousand Rials 32,546.11 in the crop year 2016-17, which is different from the current insurance premium. This difference is because of the distinct nature of the two insurance schemes and the imperative and official mode of current insurance scheme.