Insurers and Insured Individuals Interaction as Basis for Persistent Agricultural Production Process

Abstract

The paper is focused on the issue of determining correct insurance rates, which are a key point in the interaction between insurers and the insured from the authors' perspective. It should be noted that insurance is one of the tools supporting a continuous and uninterrupted production process, contributing to stability and persistence of achieved living standards. However, insurance rates determined incorrectly can cause either a downfall of insurance companies with insurance even worsening instability or unavailability of insurance services making pointless the instruments of ensuring stability. Insurance rates can be calculated in agricultural insurance on the base of conventional models, but rates might be understated in this case for an insurance company due to correlation of losses according to separate contracts. The authors propose a simulation model involving correlation of losses according to separate contracts to eliminate this shortcoming. Business activity outcomes of insured and non-insured farmers are analyzed. Simulation is carried out assuming the normalcy of crop yield distribution. Simulation relies on the approaches suggesting an insured event occurrence and losses arising according to separate insurance contracts. The final model results from the total probability formula. The developed model makes it possible to improve validity of insurance rates and affordability of insurance services for farmers without gaining in collapse risks of insurance companies.