Feasibility of an Area‐Yield Insurance Scheme in the EU: Evidence from Finland

Abstract

SummaryYield variability increases farm income volatility. This volatility is expected to increase as the frequency of extreme weather events intensifies with climate change. Preparation is needed in farm practices, but also in economic risk management on farms. In the EU, new crop insurance schemes are to be founded on public–private partnerships. Member States and the EU will subsidise farmers purchasing crop insurance from private insurance companies or mutual funds. At the same time, the EU is signalling that basis risk, i.e. potential mismatch between insurance pay‐out and actual crop losses at the farm level will not be tolerated. We conducted a feasibility study of area‐yield index insurance in Finland using farm‐level data. Yields between areas likely to be used in insurance policies and individual farm yields are weakly correlated. By determining the optimal cover and scale of area‐yield insurance for farms, we show that flexibility is needed in the rules for subsidised crop insurance. Systemic risks from area‐yield insurance are considerable. Because there is high correlation between area yields, insurance companies may suffer large scale losses in a given year. We suggest co‐operation in the provision of crop insurance at the EU level to enable more effective risk pooling.