Modelling yield distribution for parametric crop insurance

Abstract

In developing countries, crop insurance is a major factor of sustainability for farming business. Due to the lack of infrastructure and of claims experts in these regions, parametric crop insurance is the favorite way of providing insurance. Parametric insurance has the advantage of reducing the moral hazard and the difficulty to reach remote locations when it comes to estimating indemnification. In this context, it is important to be able to model properly the yield distributions, such distribution being at the heart of the insurance pricing. This article proposes a way to derive general characteristics of the crop yields based on first principles.