Using Bayesian Kriging for Spatial Smoothing in Crop Insurance Rating

Eunchun Park, B Brorsen and Ardian Harri

American Journal of Agricultural Economics, 2019, vol. 101, issue 1, 330-351

Abstract: Rating insurance policies depends on the probability of events in the tail of a distribution. A method to measure such tail-related risk based on Extreme Value Theory could potentially improve insurance rating. It is also widely agreed that there is a spatial structure to crop yield distributions. Considering the spatial structure may provide more precisely rated policies. In this context, this research provides two contributions in rating area yield crop insurance. One is to provide a method that fits the tail of crop yield distributions using the Generalized Pareto Distribution (GPD), a member of the family of extreme value distributions that models only the tail of the distribution. The second is to estimate parameters of the distribution using a Bayesian Kriging approach that provides spatial smoothing of GPD parameters. The proposed model provides estimates of the spatial structure across regions such as the maximum distance of the spatial effect. Based on an out-of-sample performance game between a private insurance company and the federal agency the proposed model provides considerable improvement, particularly when rating deeper tail probability.

Keywords: Area yield insurance rating; Bayesian Kriging; Bayesian spatial smoothing; extreme value theory; Gaussian spatial process; spatial econometrics (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
http://hdl.handle.net/10.1093/ajae/aay045 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:ajagec:v:101:y:2019:i:1:p:330-351.

Access Statistics for this article

American Journal of Agricultural Economics is currently edited by Madhu Khanna, Brian E. Roe, James Vercammen and JunJie Wu

More articles in American Journal of Agricultural Economics from Agricultural and Applied Economics Association Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().