A simulation analysis of the effects of government policy and changing discount and surcharge rate on the crop insurance purchase rate: Focusing on the rice farm

Abstract

In this study, the most effective policy direction is proposed by comparing the simulation results on the change in farmers crop insurance purchase rate. We set the base scenario reflecting the current level of crop insurance purchase rate under adverse selection and evaluate the effect of additional policies through Monte Carlo simulations. As a result of the analysis, the most influential policy is identified to be lowering the surcharge rate. Decreasing the surcharge rate is expected to increase the likelihood of moral hazard and adverse selection. This causes a loss of insurance company in the mid-term. On the other hand, policy that provides an additional discount of insurance premium to low-risk farms have relatively low effectiveness in the short-term. However, this policy is expected to increase the insurance purchase rate of a low-risk farm, thereby reducing a loss of insurance company. This will lower insurance premium for crop insurance in the mid-term.