The design of multiple crop insurance in Indonesia based on revenue risk using the copula model approach

Abstract

It is important for Indonesia as a country with agricultural bases to develop crop insurance. Until now, Indonesia has not had any insurance for horticultural crops other than for corn. This paper discusses horticultural multicrop insurance products based on revenue risk that can be triggered by low prices, low yields, or a combination of both. In designing multicrop insurance products, it is important to model the variability of revenue risk through the implementation of copula toward crop yield and price and to estimate indemnity of the revenue-based multicrop insurance. The analysis employed Gumbel and Clayton copulas to model the dependency structure between crop yield and price of multicrops. Each marginal variable was modeled by using the ARIMA model. The results showed that multicrop revenue insurance tends to reduce the price of agricultural insurance in Indonesia, and thus this program has the potential to have good acceptance in agricultural insurance.

KEYWORDS:

• ARIMA
• dependence
• copula
• multicrop insurance
• indemnity
• revenue risk

Acknowledgments

We would like to thank the READI Project for funding this research in the academic year 2019.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by READI Project Grant, the Risk Management, Economic Sustainability, and Actuarial Science Development in Indonesia.