Expanding on Basis Risk Estimates for Pasture, Rangeland, and Forage Insurance

Basis risk or residual arising from disparity between an index’s estimate of losses and actual is inherent in index-based insurance products. We approximate basis as the false negative probability (FNP) within pasture, rangeland, forage (PRF) rainfall index for south-central coastal region California. FNP on average that at least one two selected coverage intervals will fail to provide indemnity when a loss realized 48%. The reduced only 11% considering whether both realized.