A Spatial Econometric Approach to Designing and Rating Scalable Index Insurance in the Presence of Missing Data

Abstract

Index-Based Livestock Insurance has emerged as a promising market-based solution for insuring livestock against drought-related mortality. The objective of this work is to develop an explicit spatial econometric framework to estimate insurable indexes that can be integrated within a general insurance pricing framework. We explore the problem of estimating spatial panel models when there are missing dependent variable observations and cross-sectional dependence, and implement an estimable procedure which employs an iterative method. We also develop an outof-sample efficient cross-validation mixing method to optimise the degree of index aggregation in the context of spatial index models.