Assessing the effectiveness of the actuaries climate index for estimating the impact of extreme weather for crop yield and insurance applications

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Pan, Qimeng Jr
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For crop production, extreme weather risk is a concern for farmers, governments, insurers, reinsurers, and other stakeholders. Some research estimates that as much as 90% of crop loss may be due to adverse weather for some crops in some locations. From an insurance/reinsurance perspective, which is the focus of this study, the ability to accurately estimate the frequency and severity of crop loss is critical for producing actuarial models. The Actuaries Climate Index (ACI) was launched recently by organizations representing the actuarial profession and is designed to help better understand the potential effects of climate trends and extreme weather events for actuarial applications. The objective of this research is to examine the effectiveness and feasibility of utilizing the ACI to improve estimates for crop yield and insurance/reinsurance applications through considering the impact of extreme weather. Three crop yield models are designed based on both linear and probit regression models, using corn yields from 8 midwestern states in the United States from 1961 to 2018 as the dependent variable and weather variables derived from the ACI as the independent variables. The results suggest that the ACI can provide some important insights when modelling crop yield, however, more research is needed as the model fit, and significant variables change depending on the temporal and spatial resolution of the data.
Actuaries Climate Index, Extreme weather events, Crop insurance