A deep factor model for crop yield forecasting and insurance ratemaking

• Main Author: Zhu, Wenjun
• Other Authors: Nanyang Business School
• Format: Article
• Language: English
• Published: 2023
• Subjects: Business::Finance; Crop Insurance; Weather Derivatives
• Online Access: https://hdl.handle.net/10356/170183
• Institution: Nanyang Technological University

Effective agricultural insurance and risk management programs rely on accurate crop yield forecasting. In this article, a novel deep factor model for crop yield forecasting and crop insurance ratemaking is proposed. This framework first utilizes a deep autoencoder to extract a latent factor, called the production index, that integrates salient spatial temporal patterns in the original yield data. Then, a concatenated deep learning model is constructed to enhance the modeling of the production index and the reconstruction of crop yields. Convolutional neural networks are employed to capture the high-dimensional and highly nonlinear structure within the crop yield data, as well as its interactions with weather and economic variables. The proposed deep factor framework is applied to the county-level data in the state of Iowa. Empirical results show that the newly proposed deep factor model significantly improves the prediction accuracy, especially in the test set. Based on a retain–cede crop insurance rating game between a private insurer and the government, we show that the proposed deep factor model provides economically and statistically significant improvement over the current Risk Management Agency ratemaking methodology.