Forecasting Index Insurance Payouts for Agricultural Risk Using Singular Spectrum Analysis

The READI Actuaries Science Applied Research Program in Indonesia is looking for potential research related to risk estimation using climate information along with actuarial assumptions and methods. The monthly accumulated precipitation value is one of the climate information recorded by the Meteorology, Climatology, and Geophysical Agency of Indonesia (BMKG in Indonesian language). This weather factor can be used to calculate the financial risks of paddy crops in all provinces of Indonesia. The first stage of this calculation is forecasting the precipitation values in 2016-2017 from the data up to 2015 using Singular Spectrum Analysis (SSA) both Univariate and Multivariate accordingly, considering the three areas of calculations: Province, Region, and Country. The second step is to convert these rainfall values to calculate payouts based on several linear index insurance models, with 6 Million IDR per hectare per planting season as the maximum indemnity. The procedure is based on additional analyses, such as comparisons between areas of calculations, between method combinations of the SSA itself, and between various missing data handling methods, are also included in this research. A simulation study based on different rainfall distributions is also included. The major findings of this research are the better performance of some SSA method combinations and the best linear index insurance model to reproduce the payouts. There are many factors to be considered when discussing good policies and the benefits of such insurance against agricultural risk.