The Impact of Air Pollution Risk on the Sustainability of Crop Insurance Losses

Abstract

Climate change poses significant risks to natural and economic environments, particularly through its interaction with air pollution. As agriculture is vital for national production, and crop insurance supports social security, it is crucial to examine how air pollution affects crop insurance. Here, we quantify the impact of air quality on crop insurance claims from an actuarial perspective and evaluate the implications for the industry. Utilizing claims data from the U.S., we explore the potential of particulate matter (PM2.5) as a predictor of insurance claims, building on literature that highlights its economic damage to crops. Through the application of a generalized additive model (GAM) and extreme gradient boosting, we found that PM2.5 is indeed a factor influencing crop insurance indemnity in both models, with the GAM demonstrating superior predictive performance. Furthermore, we employed Bai and Perron breakpoint analysis to elucidate the relationship between PM2.5 levels and crop insurance claims over time, alongside two-way fixed effects models to investigate its correlation with various crop types. Our findings highlight the need for crop insurance managers to integrate air quality considerations into their risk processes to ensure sustainability of the industry and pricing strategy in the face of evolving environmental challenges.