A Deep Factor Model for Crop Yield Forecasting and Insurance Ratemaking

Wenjun Zhu

North American Actuarial Journal, 2024, vol. 28, issue 1, 57-72

Abstract: Effective agricultural insurance and risk management programs rely on accurate crop yield forecasting. In this article, a novel deep factor model for crop yield forecasting and crop insurance ratemaking is proposed. This framework first utilizes a deep autoencoder to extract a latent factor, called the production index, that integrates salient spatial temporal patterns in the original yield data. Then, a concatenated deep learning model is constructed to enhance the modeling of the production index and the reconstruction of crop yields. Convolutional neural networks are employed to capture the high-dimensional and highly nonlinear structure within the crop yield data, as well as its interactions with weather and economic variables. The proposed deep factor framework is applied to the county-level data in the state of Iowa. Empirical results show that the newly proposed deep factor model significantly improves the prediction accuracy, especially in the test set. Based on a retain–cede crop insurance rating game between a private insurer and the government, we show that the proposed deep factor model provides economically and statistically significant improvement over the current Risk Management Agency ratemaking methodology.

Date: 2024
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DOI: 10.1080/10920277.2023.2182792

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