Determining Critical Yield Index of Area Yield Insurance based on Basis Risk Constraint

Abstract

 Area yield index insurance at district level faces heterogeneous basis risk due to geographical conditions which implies to obtain unprecise critical index . Clustering and zone-based area yield scheme can reduce heterogeneous basis risk that leads to determine the suitable alternative for . On the previous research, we have obtained 7 clusters and 2 level of paddy productivity based on clustering assumption from primary data in Java. The suitable clustering assumption for calculating  is cluster based assumption, which gives the homogeneous paddy productivity under 7 clusters in Java. Therefore, our goal is to develop area yield index at district level (cluster based) with minimize basis risk at certain constraints for paddy farmer productivity in Java Indonesia. There are some methods for calculating  such as mean, median, winsor mean, one sigma, two sigma and  (first quartile) method on the basis risk constraints using confusion matrix. Furthermore, two basis risk constraints are the difference between overpayment and shortfall is not extremely far, and total basis risk does not exceed 20% of its total claim occurrence. Two sigma method has the lowest basis risk, overpayment, and shortfall, but it has lowest pure premium, small probability of claim, and low range of claim. Hence, we consider to use  (first quartile) method as alternative and suitable method to calculate  that satisfied two basis risk constraints. In conclusion, our research provides analytical calculation for area yield index at district level with pure premium as Rp 152,151 using  ( method), which is sufficient to cover the total claim and consistent with the simulation.