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An innovative type of forest insurance in China based on the robust approach

Feng, Xin, Dai, Yongwu
Forest policy and economics 2019 v.104 pp. 23-32
foresters, forestry, forests, insurance, models, prices, probability, subsidies, China
Lack of a differential premium scheme is a major factor restricting the development of China's forest insurance. In this paper, we tackle the forest insurance design problem. By establishing an insurance game model among government, insurance company, and foresters, we first derive an innovative type of insurance based on the value of forest stock volume. This type of insurance has a more flexible pricing space and less dependence on government subsidy. Next, taking the disaster probability and its likely unpredictability into account, we propose a robust premium design strategy based on the min-max regret criterion where the disaster probability can assume any real value within a given interval. Then, we introduce a computational experiment to explain the relationship between the characteristics of forestry (e.g., forest value, government subsidies, understanding of the forest insurance, attention on disaster probability, and variability of the annual disaster probability) and the efficiency of the proposed insurance. The experiment also reveals that the performance of the proposed insurance in an average scenario is much improved.