THE FEASIBILITY OF FARM REVENUE INSURANCE IN AUSTRALIA

Abstract

Arrow (1965) stated that making markets for trading risk more complete can be socially beneficial. Within this perspective, we discuss the feasibility of farm revenue insurance for Australian agriculture. The feasibility is first discussed from an insurer's point of view. Well-known problems of moral hazard, adverse selection and systemic risk are central. Then, the feasibility is studied from a farmer’s point of view. A simulation model illustrates that gross revenue insurance can be both cheaper and more effective than separate price and yield insurance schemes. We argue that due to the systemic nature of price and yields risks within years and the positive correlation between years, some publicprivate partnership for reinsurance may be necessary for insurers to enter the gross revenue insurance market. Pros and cons of alternative forms of a public-private partnership are discussed. Once insurers can deal with the systemic risk problem, we conclude that there are opportunities for crop gross revenue insurance schemes, especially if based on area yields and on observed spot market prices. For insurance schemes to cover individual farmer’s yields and prices, we regard the concept of coinsurance as crucial. With respect to livestock commodities, we argue that yields are difficult to include in an insurance scheme and we propose aspects of further research in the field of price and rainfall insurance.