Assessing the Farm Level Impacts of Yield and Revenue Insurance: an Expected Value-Variance Approach

Abstract

This paper investigates the farm level impacts of multiple peril yield and revenue insurance in an expected value-variance framework. The analysis is conducted using stochastic simulation jointly with numerical optimisation. Simulation is used to compute the means and variances of revenues as affected by the insurance schemes under consideration. In a second step these results are incorporated in a whole-farm programming approach, which optimises a portfolio that consists of crop production and insurance activities. The results of a case study indicate that from the farmer's point of view there is an incentive to buy multiple peril crop insurance, because it significantly reduces the variability of income. The risk reduction through insurance in turn leads to a specialisation of the production program. The farm level benefit of crop insurance strongly depends on the decision maker's degree of risk aversion. Furthermore, risk free parts of the total income reduce the economic attractiveness of insurance schemes. This applies e.g. to the area payments under the European agricultural policy, which therefore limit the potential demand for crop insurance.