Use of Climatological Data in Weather Insurance

Abstract There are three major types of crop-related weather insurance: hail, all perlis, and rain insurance. The development of rates is an exercise in applied climatology, and the importance of the historical data selected for assessing risk (and developing rates) is revealed by the problems encountered by firms insuring against deficient summer rainfall during the drought of 1988. Extensive purchase of premiums costing $9 million for coverage ($400 million) in the Midwest occurred with buyers (farmers) apparently aware during May and June 1988 that an unusually dry event was in progress. The levels of loss (50% or less of average June-August rainfall) offered by insurance firms were exceeded throughout the Midwest. The firms attempted to refund the record number of premiums accepted in June, and in turn, 8000 farmers filed a class-action suit against the firms for failure to accept premiums and to provide coverage. The insurance firms ultimately settled by agreeing to pay $48 million in claims. The cov...