Measuring the Dependency Structure between Yield and Weather Variables for Ratemaking Weather-Based Crop Insurance in Ahar

Abstract

In Iran, agricultural insurance suffers from asymmetric information, and such problems lead to enormous costs. Weather-Based Crop Insurance scheme as an effective way can solve a number of fundamental problems. Likewise, the designing and pricing of this system is strongly dependent on dependency structure between yield and weather variables. In this paper, we used more flexible approach, so-called "vine copula" to measure joint distribution function of weather variables and rainfed barley yield in Ahar County over the period from 1995 to 2014. We used R-vine to compute premium. The premium was calculated in four levels of coverage (75, 80, 90 and 100 percent) that its amount in 80 percent coverage level is 320058 Rials. The computing premium in WBCI is less than current insurance premium, which is reasonable.