Abstract
Experience across many countries shows that, without large premium subsidies, crop insurance uptake rates are generally low. In this article, we propose to use the cumulative prospect theory to design weather insurance products for situations in which farmers frame insurance narrowly as a stand-alone investment. To this end, we introduce what we call "behavioral weather insurance" whereby insurance contract parameters are adjusted to correspond more closely with farmers' preferences. Depending on farmers' preferences, we find that a stochastic multiyear premium increases the prospect value of weather insurance, while a zero deductible design does not. We suggest that insurance contracts should be tailored precisely to serve farmers' needs. This offers potential benefits for both the insurer and the insured.
Document Type
Article
Publication Date
5-1-2020
Digital Object Identifier (DOI)
https://doi.org/10.1371/journal.pone.0232267
Related Content
Data are available from the gvf Versicherungsmakler AG (contact via Sebastian.Mahler@gvf.de) for researchers who meet the criteria for access to confidential data.
Repository Citation
Dalhaus, Tobias; Barnett, Barry J.; and Finger, Robert, "Behavioral Weather Insurance: Applying Cumulative Prospect Theory to Agricultural Insurance Design under Narrow Framing" (2020). Agricultural Economics Faculty Publications. 18.
https://uknowledge.uky.edu/agecon_facpub/18
S1 Data. https://doi.org/10.1371/journal.pone.0232267.s001
pone.0232267.s002.docx (152 kB)
S1 Fig. Data manipulation procedure to obtain the rainfall index that is used as insurance underlying. https://doi.org/10.1371/journal.pone.0232267.s002
pone.0232267.s003.docx (16 kB)
S1 Footnotes. https://doi.org/10.1371/journal.pone.0232267.s003
pone.0232267.s004.docx (17 kB)
S1 Formula. Incremental risk premium. https://doi.org/10.1371/journal.pone.0232267.s004
pone.0232267.s005.docx (16 kB)
S1 Table. Wilcoxon signed rank test results for changes in expected utility (H1, H2 and H3)–sensitivity analysis two-year contract. https://doi.org/10.1371/journal.pone.0232267.s005
pone.0232267.s006.docx (16 kB)
S2 Table. Wilcoxon signed rank test results for changes in expected utility (H1, H2 and H3)–sensitivity analysis four-year contract. https://doi.org/10.1371/journal.pone.0232267.s006
pone.0232267.s007.docx (16 kB)
S3 Table. Wilcoxon signed rank test results for changes in expected utility when Adjustment 1 (insure small losses also) (H1, H2 and H3) is revoked—sensitivity analysis two-year contract. https://doi.org/10.1371/journal.pone.0232267.s007
pone.0232267.s008.docx (16 kB)
S4 Table. Wilcoxon signed rank test results for changes in expected utility when Adjustment 1 (insure also small losses) (H1, H2 and H3) is revoked—sensitivity analysis four-year contract. https://doi.org/10.1371/journal.pone.0232267.s008
pone.0232267.s009.docx (15 kB)
S5 Table. Wilcoxon signed rank test results for differences in the prospect value using CPT specifications Boc.1, Boc.2 Boc.3 and Bab (H4 –H8)–sensitivity analysis two-year contract. https://doi.org/10.1371/journal.pone.0232267.s009
pone.0232267.s010.docx (15 kB)
S6 Table. Wilcoxon signed rank test results for differences in the prospect value using CPT specifications Boc.1, Boc.2 Boc.3 and Bab (H4 –H8)–sensitivity analysis four-year contract. https://doi.org/10.1371/journal.pone.0232267.s010
pone.0232267.s011.docx (1 kB)
S7 Table. Wilcoxon signed rank test results for differences in the prospect value using CPT specifications Boc.1, Boc.2 Boc.3 and Bab (H4 –H8)—sensitivity analysis 20% loading. https://doi.org/10.1371/journal.pone.0232267.s011
pone.0232267.s012.docx (16 kB)
S8 Table. Wilcoxon signed rank test results for differences in the prospect value using CPT specifications Boc.1, Boc.2 Boc.3 and Bab (H4 –H8)—sensitivity analysis discounting multiyear premiums and pay outs to the year of contract closure (2% interest rate). https://doi.org/10.1371/journal.pone.0232267.s012
Notes/Citation Information
Published in PLOS ONE, v. 15, no. 5, p. 1-25.
© 2020 Dalhaus et al.
This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.