The demand for crop insurance: combined approaches for France and Italy.

Abstract

AbstractThe aim of this paper is to understand which factors affect crop insurance decision in France and in Italy. These neighbor countries are characterized by a changing insurance system from a public fund to private policies which are highly subsidized. Despite the stakes related to crop insurance - CAP reform, size of the market, implication of the governments -, few studies have been drawn on this topic. The literature in finance and in agricultural economics allows to build a two-stage empirical model which computes the elasticities of demand for crop insurance, and to define its key determinants. It appears that France and Italy present similar insurance systems in terms of products and of ability to indemnify. However, the farmers' sensitivity to insurance is most contrasted across the Alps. This leads to a discussion about the creation of an insurance market at the European scale.Keywords: Crop insurance, Insurance demandJEL Classification: G22, Q14IntroductionThe management of risk in agriculture and the role of insurance long have been the centre of attention for researchers and policymakers. A review of the literature on the subject consistently shows the failure of private markets for comprehensive (multiperil) agricultural insurances and their unsustainability in the absence of any public intervention. Even with strong public support, insurance demand is not often as high as could be expected.Reasons for such failures are usually found in either supply or demand conditions. On the supply side, the most explored issues are asymmetric and incomplete information (Chambers 1989; Miranda 1991; Mahul 1999; Just, Calvin and Quiggin 1999; Bourgeon and Chambers, 2003), with the resulting problems of adverse selection, moral hazard and systemic risk. This may pose the most serious obstacle to the emergence of an independent private comprehensive crop insurance industry. Especially due to the systemic character of yield risks, reinsurance becomes very expensive. Without government subsidies or public reinsurance, insurers pass this high cost to the farmers' premiums (Doherty and Dionne 1993; Miranda and Glauber 1997; Mahul 2001).On the demand side, the inability of farmers to assess precisely the benefits derived from agricultural insurances is often cited as one possible reason for limited demand (Garrido and Zilberman 2008). Another explanation for the limited interest in multiperil crop insurance is simply that the organizational structure of farming is such that farmers can use other private instruments - such as product diversification, credit, financial markets, and so on - to manage risk and therefore that the potential demand for crop insurance is lower than commonly believed (Wright and Hewitt 1994). We can also consider that massive government intervention in developed countries may also crowd out private markets.Knowledge of factors affecting farmer purchases of crop insurance is essential for evaluating the soundness and profitability of insurance programs and the pertaining public support (Goodwin and Smith 1995). In spite of its importance, the demand for crop insurance has received little empirical attention in literature, mainly devoted for investigation focused on North American area. Gardner and Kramer (1986); Niewoudt et al. (1985); and Barnett et al. (1990) found that the expected rate of return to insurance was an important factor in determining the demand for insurance. Lower attention has been devoted to the possible impact of financial issue on this field (Enjolras and Sentis 2011).Currently, for the European countries this lack of empirical evidence is exacerbated (Capitanio and Adinolfi, 2009). With this preliminary remarks, carrying out this analysis we wish to point out which factors could affect crop insurance decision in France and Italy, taking into account both agricultural and financial variables (De Castro et al, 2011)The first part of this paper is devoted to a presentation of the French and Italian insurance systems. …