Area yield index and multi-peril crop insurance model profitability analysis

The Ministry of Agriculture in Indonesia has launched a crop insurance program in order to improve farmers’ welfare, adopting the MPCI model. With the results being unsatisfactory, the area yield index (AYI) model was proposed as an alternative, with the hope of increasing the participation rate of the said program and preventing MPCI’s underlying risk (moral hazard and adverse selection). Yet, the profitability aspect of these models in the short-term has yet to receive enough attentions and thus, it becomes the focus of this research. By conducting Monte Carlo simulation, it was found that both models were profitable but with several differences. The profitability of the AYI model contains more variability, indicating risk towards the insurance company, nevertheless, there are no occasion in which it led to negative profit. The MPCI model on the other hand tend to have stable profit in the short-term, yet it should be noted that MPCI’s drawbacks has the potential to bring huge losses. In conclusion, the AYI model is appropriate to be implemented in Indonesia as not only it has a lower premium and deals with MPCI’s weaknesses, it is also profitable and is thus, safe towards the insurance company.