Few lines of business are as complex and challenging from an underwriting perspective as crop insurance. The sheer number of variables at play—from the impact of the weather across different stages of growth, to the tolerance of different crops to environmental stress, to location-specific farming practices and technological change—make estimating potential crop losses a daunting task.
Crop insurance and reinsurance underwriters spend considerable time and resources on weather forecasts in an attempt to assess loss potential. Unfortunately, the skill of a weather forecast made at the beginning of the planting season is too uncertain to be useful for underwriting purposes. In addition, traditional actuarial models that rely on historical crop yield time series or past program losses will produce biased results if they fail to take into account technological changes in farming practices.
The Leading Technology for Modeling Crop Yields
AIR Worldwide scientists addressed these complexities when they developed the AIR Multi-peril Crop Loss Model. The model employs crop yield-weather relationships at county resolution and fits robust distributions that take into account the impact of weather variability on crop production. Critical to the robustness of the model is the detrending methodology developed at AIR, which effectively isolates the weather impact from changes in technology on crop yields. That methodology relies on AIR’s Agricultural Weather Index™, or AWI™, a county- and crop-specific weather index that leverages vast amounts of high resolution weather data that AIR ingests daily to support its catastrophe models.
How good is the AWI? So good that AIR’s agriculture risk modeling team has finished first in the FACTSim Futures and Options Trading Competition in four of the last five years.
The AIR Multi-peril Crop Insurance Model meets the demand for a more scientific approach to analyzing crop insurance and reinsurance programs. Today, all leading crop reinsurers are using the model for assessing the potential gains and losses to their portfolio and for pricing. Crop insurers are using the model for improved fund allocation and risk management.
Listed below are additional materials of interest to crop insurers and reinsurers: