| Agriculture is important and risky. Bad-weather is a particularly troublesome hazard that has an adverse impact on agricultural development. A long history of insurance and other tools have been developed to try and help farmers or policy makers manage risk. Internationally, Weather-indexed insurance contracts in agriculture have emerged as an alternative to traditional crop insurance. These are linked to the weather risk defined as an index based on historical data rather than the extent of loss. As the index is objectively measured and is the same for all farmers, the problem of adverse selection is minimized, the need to draw up and monitor individual contracts is avoided, and the administration costs are reduced. Weather-indexed insurance can help farmers protect their overall income rather than the yield of a specific crop, let them access to bank credit, and hence reduce vulnerability to climate variability and change. What is more, quick payout in private weather insurance contracts can improve recovery times and thus enhance coping capacity.This article will be divided into two parts. The first part including three chapters will introduce the idea of a new class of insurance and how the contracts of Weather-indexed insurance are designed. The second part, including Chapter Four and Chapter Five, will focus on Weather-indexed insurance designing model and methods of pricing, and then using historical data fitting on it. In Chapter Four, considering the temperature-index insurance, daily average temperature variations are modeled in two ways in particular to explain the seasonally, trend and volatility. One way is that modeling with a mean-reverting Ornstein-Uhlenbeck process having seasonal mean and volatility. The other is that using the time series model. In Chapter Five, Gamma distribution and Monte Carlo method will be used to discuss the rain-index insurance. Then the models are applied to derive explicit prices for some standardized weather-index contract. |
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