Cointegration Analysis of Crop Yields and Extreme Weather Factors Using Actuaries Climate Index with Application of Bonus–Malus System

This article analyzes the long-term temporal co-movement of the extreme weather variables in the Actuaries Climate Index (ACI) and crop yields, modeling their relationship using an error correction model (ECM). The analysis suggests that significant weather variables can serve as trigger parameters in the pricing framework of weather index crop insurance. To address the challenge of weather index crop insurance while preserving the advantages of a bonus–malus system (BMS), we propose a transition rule that distinguishes between damages caused by severe weather and those resulting from the policyholder’s decisions. Subsequently, we also explore the challenges of implementing such a new hybrid BMS for crop insurance where extreme weather outcomes are integrated into the classical BMS.