A first year Ph.D. student at University of Wisconsin School of Business, received the Best Paper Award from the Journal of Insurance Issues and for his creation of an index-based insurance formula to provide stability to farmers in developing countries.
Adolph Okine’s formula provides a way to insure farmers whose farms face unpredictable weather patterns.
Originally from Ghana, Okine earned his Bachelor’s degree in actuarial science at University of Cape Coast. He then completed his masters at Illinois State University before joining UW’s Ph.D. program.
According to Okine’s paper, in places like Ghana, where agricultural farming accounts for 36 percent of the country’s gross domestic product, weather related factors like rainfall can cause damage to crops, causing production loss.
Despite the importance of agriculture Okine’s home country and other African countries, he said there are few options for farmers to insure and protect their investments.
While studying actuarial science in the masters program at Illinois State, Okine developed the basis for his formula, which would help farmers in developing countries similar to his homeland. The formula would insure farmers’ crops so they are correctly paid for the crops lost.
Index-based insurance is an alternative form of insurance for agricultural farming. It compensates farmers for production losses due to a trigger or an event. Events can include weather patterns like heavy rain, Okine explained.
“I realized that some things were kind of triggers, and among those kinds of triggers in the payments made by insurance businesses were very important,” Okine said.
These “triggers,” Okine said, can minimize the basis risks. For index-based insurance, basis risk reflects the difference between the realized index’s expected loss and the actual crop loss.
But the insured index does not exactly correlate with individual farm yields. Because of this, insurers of index-based insurance can be exposed to this basis risk, Okine said.
For example, Okine explained that it is possible for those insured for temperature-based or rainfall-based insurance policies to experience production loss. But while the insured suffered a loss, they are not eligible to receive a payment because there has been no occurrences of trigger for temperature changes or rainfall shortage.
Similarly, he said it is possible for an insured farmer to receive a payment when they did not experience a production loss. Using an effective weather induced crop yield model is crucial in creating weather-based index insurance that is satisfactory for the insured and the insurer, Okine said
To create this effective weather induced crop yield model, Okine said his team needed to find the optimal trigger. The optimal trigger would allow index-based insurance businesses to better price for production losses.
The clustering analysis is a data driven method that helped determine the optimal trigger in rainfall for drought identification, according to UW statement.
Okine’s team segmented the rainfall into two parts, allowing them to discover a unique threshold for rainfall that correlated with crop yields.
“I’m proud to have worked on this project because it has the potential to help countries like Ghana, who depend on agriculture,” Okine said.
