Monopoly Pricing of Weather Index Insurance

Overview

This study models the monopoly pricing of weather index insurance using a Bowley-type sequential game. It involves a profit-maximizing insurer and a farmer who minimizes risk using neural networks. The research uses Iowa's soybean yields and PRISM weather data to test its models.

Key Insights

• CNN-based Designs: CNNs yield smoother payoffs, reducing basis risk and increasing insurer profits.
  • Evidence: Based on Iowa's soybean yields and PRISM weather data.
  • Verifiable: Yes, through replication of the study's methodology.
• Pricing Flexibility: Expanding from a single loading to a flexible pricing kernel increases equilibrium profits.
  • Evidence: Theoretical modeling and simulations.
  • Verifiable: Yes, through model validation.

Why It Matters

This research is crucial for insurers in the weather index insurance market, as it provides insights into pricing strategies that can enhance profitability and reduce risk.

Actionable Implications

• Insurers should consider using CNNs for modeling index payoffs to reduce basis risk.
• Expanding pricing flexibility can lead to higher profits, suggesting a review of current pricing models.