Cheung, Eric CKIp, Ryan HLTam, Ho OnWoo, Jae-Kyung2024-11-052024-11-052024-10-29North American Actuarial Journal, ISSN: 1092-0277 (Print); 1092-0277 (Online), Taylor and Francis Group, ahead-of-print(ahead-of-print). doi: 10.1080/10920277.2024.24108221092-02771092-0277http://hdl.handle.net/10292/18227This 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.© 2024 The Author(s). Published with license by Taylor & Francis Group, LLC. This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent.http://creativecommons.org/licenses/by-nc-nd/4.0/3502 Banking, Finance and Investment35 Commerce, Management, Tourism and Services13 Climate Action0102 Applied Mathematics1502 Banking, Finance and Investment1603 Demography3502 Banking, finance and investment4901 Applied mathematicsJournal ArticleOpenAccess10.1080/10920277.2024.2410822