Abstract
Analysis of yield gaps were conducted in the context of crop insurance and used to build an indicator of asymmetric information. The possible influence of asymmetric information in the decision of Spanish wheat producers to contract insurance was additionally evaluated. The analysis includes simulated yield using a validated crop model, CERES-Wheat previously selected among others, whose suitability to estimate actual risk when no historical data are available was assessed. Results suggest that the accuracy in setting the insured yield is decisive in farmers’ willingness to contract crop insurance under the wider coverage. Historical insurance data, when available, provide a more robust technical basis to evaluate and calibrate insurance parameters than simulated data, using crop models. Nevertheless, the use of crop models might be useful in designing new insurance packages when no historical data is available or to evaluate scenarios of expected changes. In that case, it is suggested that yield gaps be estimated and considered when using simulated attainable yields.
Highlights
Developing efficient agricultural insurance requires overcoming a number of market imperfections and combating asymmetric information
Analysis of yield gaps were conducted in the context of crop insurance and used to build an indicator of asymmetric information
The results show that wheat insurance demand (Insuredwheat) was higher in counties with higher wheat cultivated area (Areawheat), higher GapZ and lower asymmetric information for contracts in option
Summary
Developing efficient agricultural insurance requires overcoming a number of market imperfections and combating asymmetric information Very often, these difficulties justify governments’ intervention in promoting insurance demand through the implementation of public incentives, such as premium subsidies, and a significant degree of market intervention, guidance and overseeing (Mahul & Stutley, 2010). Moral hazard occurs when farmers’ expected indemnity under insurance is larger than under optimal uninsured conditions (Coble et al, 1997). This means that farmers might modify their behaviour after contracting insurance in order to increase the probability of being indemnified (Goodwin, 1994) or reduce the effort to escape risk once they are covered. The result can be unbalanced loss ratios, thereby affecting the actuarial robustness and sustainability of entire insurance systems
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