Modelling Crop Insurance Based on Weather Index Using The Homotopy Analysis for American Put Option

Abstract

The crop insurance in Indonesia (AUTP) is much focused on the area impacted by flood, drought, and pest attack. The complication of the procedure to claim the loss must follow several conditions. The different approaches in the insurance sector, using weather index can be taken into consideration to produce a variety of insurance products. This insurance product used the American put option with the primary asset is the rainfall and the cumulative rainfall to exercise the claim, considering the optimal execution limit. The homotopic analysis is used to determine the valuation of the American put option, which also becomes the insurance premium. The case study is focused on areas experiencing a drought so that insurance claims can be exercise when the rainfall index value is below a predetermined limit. Considering the normality of the rainfall data, the calculation of insurance premium was done for the first growing season. The insurance premium is varies based on the optimal execution limit, while the calculation of profit is based on the optimum limit exercise and the minimum rainfall for the growing season, and its different depended on insurance claim acceptance limits.