An average model approach to experience based premium rates discounts: an application to Spanish agricultural insurance

Abstract

We address some issues in agricultural insurance, describing drawbacks of the bonus-malus system (BMS) methodology used in Spain and many other EU countries. We develop an alternative experience based premium rate discount system taking into account the adverse years when high losses caused by extreme weather events happen. Our contribution consists of a two-step methodology. Firstly, we use tobit or Tweedie regressions to calculate yearly correction rates. Secondly, we calculate the mean of the correction rates. This average model acts as a bufer against adverse year losses. We compare three alternatives: our two resulting average models and the BMS operating in the Spanish line of business exemplifed—table grapes.