Household margin insurance of agricultural sector in Indonesia using a farmer exchange rate index
ISSN: 0002-1466
Article publication date: 31 July 2020
Issue publication date: 15 March 2021
Abstract
Purpose
Farmer exchange rate (FER) is the ratio between a farmer's income and expenditure and is also an indicator of farmers’ welfare. There is little research regarding its use in risk modeling in crop insurance. This study seeks to propose a design for a household margin insurance scheme of the agricultural sector based on FER.
Design/methodology/approach
This research employs various risk modeling concepts, i.e. value at risk, loss models and premium calculation, to construct the proposed model. The standard linear, static and time-varying copula models are used to identify the dependency between variables involved in calculating FER.
Findings
First, FER can be considered as the primary variable for risk modeling in agricultural household margin insurance because it demonstrates farmers’ financial ability. Second, temporal dependence estimated using the time-varying copula can minimize errors, reduce the premium rate and result in a tighter guarantee's level of security.
Originality/value
This research extends the previous similar studies related to the use of index ratio in margin insurance loss modeling. Its authenticity is in the use of FER, which represents the farmers' trading capability. FER determines farmers’ losses by considering two aspects: the farmers’ income rate and their ability to fulfill their life and farming needs. Also, originality exists in the use of the time-varying copulas in identifying the dependence of the indices involved in calculating FER.
Keywords
Acknowledgements
The authors express our gratitude to the Ministry of Research Technology, and Higher Education of the Republic of Indonesia for their Domestic Postgraduate Education Scholarships (BPPDN) which funding this research as a part of the first author’s dissertation. The authors also thank Prof Calum G. Turvey and the anonymous reviewers who provided valuable feedback and comments.
Citation
Ahdika, A., Rosadi, D., Effendie, A.R. and Gunardi (2021), "Household margin insurance of agricultural sector in Indonesia using a farmer exchange rate index", Agricultural Finance Review, Vol. 81 No. 2, pp. 169-188. https://doi.org/10.1108/AFR-11-2019-0117
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited