The aim of this talk is to introduce pricing of weather insurance contracts based on temperature indices. Three different pricing methods are analysed: the classical burn approach, index modelling and temperature modelling. We take the data from Malaysia as our empirical case. Our results show that there is a significant difference between the burn and index pricing approaches on one hand, and the temperature modelling method on the other. The latter approach is pricing the insurance contract using a seasonal autoregressive time series model for daily temperature variations, and thus provides a precise probabilistic model for the fine structure of temperature evolution. We complement our pricing analysis by an investigation of the profit/loss distribution from the contract, in the perspective of both the insured and the insurer.
Joint work with Professor Fred Espen Benth.
Joint work with Professor Fred Espen Benth.
Published Mar 28, 2012 01:13 PM - Last modified Apr 10, 2012 12:10 PM
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