Index Pricing in Agriculture Insurance
Agriculture is known as a high-risk buisiness. Despite all risk management tools developed to manage the farms risk, there is still a huge amount of risk in the agricultural market. We helped an insuretech start-up create a number of advanced risk management tools by designing the mathematical back-end of a platform to manage the under-covered agricultural price risk.
Starting from well-known models in price risk management, we applied time series analysis and machine learning methods to develop new approaches to mitigate the price risk of commodities with no known risk management tool. Examples of such commodities are agricultural products with smaller trade volumes such as avocado, almond,... We applied time series and machine learning models to design index insurances which represent the core of our modeling process.
Index price insurances have a number of advantages over conventional price risk management tools (i.e. derivatives and futures) in the agricultural market. These insurances can be more conveniently purchased and claimed by farmers as a price risk management tool. In addition, there is less basis risk for these products.
