Among the most challenging aspects of crop-hail insurance is setting appropriate premium rates based on short-term insurance data because of the specific characteristics of hailstorms.
The frequency of hailstorms is generally low in small geographic areas. In other words, it may be very likely that hailstorm occurrences will vary between neighboring locations within a short period of time. Besides, a newly launched insurance scheme lacks the data. It is, therefore, difficult to sustain a sound insurance program under these circumstances, with premium rates based on meteorological data without a complimentary adjustment process.
To address this issue, a practical premium rate adjustment method was developed that could be used by insurers with short-term insurance data. This method, which is easy also for non-actuarial people to understand, was developed empirically by conducting simulations of various options in several scenarios.
The essence of this method is to smooth and increase the credibility of villages' loss costs with short-term insurance data by using a set of spatial and temporal adjustment factors. This is accomplished by creating a weighting method for the loss costs of hierarchical geographic units to be established based on the length of the villages' insurance records.
The required premium rates were determined by dividing the weighted loss costs by the target loss ratios. For the final premium rates, as a complement, a parcel-based rate adjustment plan has been designed based on the loss ratio.
The initial part of this paper highlights the characteristics and loss potential of hailstorms, the following part of this paper discusses briefly the basic elements of rating, the third part of the paper provides the historical background of premium rates in crop-hail insurance in Turkey, and the fourth part focuses the principles of rate adjustment, and the last part of this paper describes the village-based rate adjustment method and proposes a parcel-based rate adjustment plan.
