Rating of Cash Crop Insurance Contracts in Tanzania Using Nonparametric Methods

This chapter used nonparametric methods to establish the parameters of cash crop insurance contracts based on zone yields. The secondary historical yields data obtained from the Food and Agriculture Organization of the United Nations, for the period of 1961 through 2018, for cotton and cashew nuts, were used both in estimating the kernel density function and forecasting the mean yield. The estimated kernel density and mean forecasts were used to tabulate, at a different level of coverage, the probability of loss, the expected yield shortfall (kilogram per hectare, denote kg/ha), and the actuarial-fair premium rates for each crop. The results showed that, at different levels of coverage (i.e., from 50% to 90%), the actuarial-fair premium rates range between 0% and 32% of the sum assured. However, the range for cashew nuts is narrow (0% to 8%) while that of cotton is 4% to 32%, a very wider range compared to cashew nuts. Further, the expected losses for cotton, in the same coverage intervals, ranges from 11.58kg/ha to 256.06kg/ha while that of cashew was 0.44kg/ha to 19.69kg/ha.

Fair premium rate of the deposit insurance system based on banks’ creditworthiness

Purpose Deposit insurance is a key element in modern banking, as it guarantees the financial safety of deposits at depository financial institutions. It is necessary to have at least a dual fair premium rate system based on creditworthiness of financial institutions, as considering singular premium system for all banks will have moral hazard. This paper aims to develop theoretical and empirical model for calculating dual fair premium rates. Design/methodology/approach The definition of a fair premium rate in this paper is a rate that covers the operational expenditures of the deposit insuring organization, provides it with sufficient funds to enable it to pay a certain percentage share of deposit amounts to depositors in case of bank default and provides it with sufficient funds as precautionary reserves. To identify and classify healthier and more stable banks, the authors use credit rating methods that use two major dimensional reduction techniques. For forecasting nonperforming loans (NPLs), the authors develop a model that can capture both macro shocks and idiosyncratic shocks to financial institutions in a vector error correction model. Findings The response of NPLs/loans to macro shocks and idiosyncratic innovations shows that using a model with macro variables only is insufficient, as it is possible that under favorable economic conditions, some banks show negative performance due to bank level reasons such as mismanagement or vice versa. The final results show that deposit insurance premium rate needs to be vary based on banks’ creditworthiness. Originality/value The results provide interesting insight for financial authorities to set fair deposit insurance premium rate. A high premium rate reduces the capital adequacy of individual financial institutions, which endangers the stability of the financial system; a low premium rate will reduce the security of the financial system.

Pricing the Zero-Coupon Bond and its Fair Premium Under a Structural Credit Risk Model with Jumps

In this paper we consider a structural form credit risk model with jumps. We investigate the credit spread, the price, and the fair premium of the zero-coupon bond for the proposed model. The price and the fair premium of the bond are associated with the Laplace transform of default time and the firm's expected present market value at default. We give sufficient conditions under which the Laplace transform and the expected present market value of a firm at default are twice continuously differentiable. We derive closed-form expressions for them when the jumps have a hyperexponential distribution. Using the closed-form expressions, we obtain numerical solutions for the default probability, the credit spread, and the fair premium of the bond.

Pricing the Zero-Coupon Bond and its Fair Premium Under a Structural Credit Risk Model with Jumps

In this paper we consider a structural form credit risk model with jumps. We investigate the credit spread, the price, and the fair premium of the zero-coupon bond for the proposed model. The price and the fair premium of the bond are associated with the Laplace transform of default time and the firm's expected present market value at default. We give sufficient conditions under which the Laplace transform and the expected present market value of a firm at default are twice continuously differentiable. We derive closed-form expressions for them when the jumps have a hyperexponential distribution. Using the closed-form expressions, we obtain numerical solutions for the default probability, the credit spread, and the fair premium of the bond.

Demand Elasticity, Risk Classification and Loss Coverage: When Can Community Rating Work?

This paper investigates the effects of high or low fair-premium demand elasticity in an insurance market where risk classification is restricted. The effects are represented by the equilibrium premium, and the risk-weighted insurance demand or “loss coverage”. High fair-premium demand elasticity leads to a collapse in loss coverage, with an equilibrium premium close to the risk of the higher-risk population. Low fair-premium demand elasticity leads to an equilibrium premium close to the risk of the lower-risk population, and high loss coverage – possibly higher than under more complete risk classification. The demand elasticity parameters which are required to generate a collapse in coverage in the model in this paper appear higher than the values for demand elasticity which have been estimated in several empirical studies of various insurance markets. This offers a possible explanation of why some insurance markets appear to operate reasonably well under community rating, without the collapse in coverage which insurance folklore suggests.