Crop Insurance Market Research Articles

Assessing Adverse Selection in Crop Insurance Markets: An Application of Parametric and Nonparametric Methods

This paper investigates adverse selection in crop insurance markets using both parametric and nonparametric methods. Our results reject the conditional independence of the choice of insurance contracts and risk of loss, implying the presence of informational asymmetries between insurers and insureds in the markets. Results also show that actual premium rates are significantly different from both pure and fair premium rates. Our findings provide useful insights into asymmetric information problems and methods to assess the risk of loss in crop insurance markets.

On the Possibility of a Private Crop Insurance Market: A Spatial Statistics Approach

AbstractRisk theory tells us if an insurer can effectively pool a large number of individuals to reduce total risk, the insurer can then provide insurance by charging a premium close to the actuarially fair rate. However, a common belief exists that risk can be effectively pooled only when random loss is independent. Therefore crop insurance markets cannot survive without government subsidy because crop yields are not independent among growers. In this article, we take a spatial statistics approach to examine the effectiveness of risk pooling for crop insurance under correlation. We develop a method for evaluating the effectiveness of risk pooling under correlation and apply the method to three major crops in the United States: wheat, soybeans, and corn. The empirical study shows that yields for the three crops present zero or negative correlation when two counties are far apart, which complies with a weaker condition than independence, finite‐range positive dependency. The results show that effective risk pooling is possible and reveal a high possibility of a private crop insurance market in the United States.

Evidence of Adverse Selection in Crop Insurance Markets

This article analyzes farmers' choices of crop insurance contracts and offers empirical evidence of adverse selection in crop insurance markets. Farmers' risk characteristics, their level of income, and the cost of insurance significantly affect the choice of yield and revenue insurance products as well as the selection of alternative coverage levels. Empirical analysis indicates that high-risk farmers are more likely to select revenue insurance contracts and higher coverage levels. Results show that low-risk farmers are overcharged and high-risk farmers are undercharged for comparable insurance contracts, implying informational asymmetries in the crop insurance market.

Farmers' Participation in Crop Insurance Markets: Creating the Right Incentives

American Journal of Agricultural EconomicsVolume 83, Issue 3 p. 662-667 Proceeding Farmers' Participation in Crop Insurance Markets: Creating the Right Incentives Shiva S. Makki, Shiva S. Makki senior researcher Department of Agricultural, Environmental, and Developmental Economics, Ohio State University This paper was presented at the ASSA winter meetings (New Orleans, LA, January 2001). Papers in these sessions are not subjected to the journal's standard refereeing process.Search for more papers by this authorAgapi Somwaru, Agapi Somwaru senior economist Market and Trade Economics Division, U.S. Department of Agriculture, Economic Research Service The authors gratefully acknowledge helpful comments received from Joy Harwood, Robert Dismukes, and Monte Vandeveer. The views expressed herein are those of the authors and not necessarily those of the Economic Research Service or the U.S. Department of Agriculture.Search for more papers by this author Shiva S. Makki, Shiva S. Makki senior researcher Department of Agricultural, Environmental, and Developmental Economics, Ohio State University This paper was presented at the ASSA winter meetings (New Orleans, LA, January 2001). Papers in these sessions are not subjected to the journal's standard refereeing process.Search for more papers by this authorAgapi Somwaru, Agapi Somwaru senior economist Market and Trade Economics Division, U.S. Department of Agriculture, Economic Research Service The authors gratefully acknowledge helpful comments received from Joy Harwood, Robert Dismukes, and Monte Vandeveer. The views expressed herein are those of the authors and not necessarily those of the Economic Research Service or the U.S. Department of Agriculture.Search for more papers by this author First published: 01 August 2001 https://doi.org/10.1111/0002-9092.00187Citations: 24 The authors gratefully acknowledge helpful comments received from Joy Harwood, Robert Dismukes, and Monte Vandeveer. The views expressed herein are those of the authors and not necessarily those of the Economic Research Service or the U.S. Department of Agriculture. AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume83, Issue3August 2001Pages 662-667 RelatedInformation

Crop Insurance under Catastrophic Risk

AbstractWe develop a new insurance model that shows how catastrophic risk affects the nature and existence of a crop insurance market equilibrium. A reservation preference level is used to characterize long‐run equilibrium when catastrophic risk makes insurance companies risk responsive. Catastrophic risk is shown to increase premiums, reduce farmer coverage levels and, under some conditions, lead to a complete breakdown of the crop insurance market. Reinsurance can help facilitate an equilibrium and/or increase participation, particularly if the reinsurance is subsidized. The analysis has important implications for the design and management of crop insurance and reinsurance programs.

Optimum Crop Insurance under Joint Yield and Price Risk

ABSTRACT This article examines the design of an optimal policy for an insurable risk in the presence of another uninsurable risk. In the context of incomplete markets, indemnity payments are made whenever the insurable realized index is lower or higher than a critical level, depending on whether the policyholder's revenue increases or decreases with this index. These results are illustrated in an agricultural context in which crop insurance is available and price risk is uninsurable. Under the principle of increasing uncertainty, price risk induces the prudent producer to reduce his or her optimal price selection. The effect of direct subsidies on the optimal price selection is shown to depend on the producer's temperate behavior. INTRODUCTION Early literature on the theory of insurance, such as Borch (1962), Arrow (1971), and Raviv (1979), focused on optimal insurance purchasing in the context of a complete set of insurance markets for future risks. In recent years, the insurance-buying decision in incomplete markets has been examined when the insurable risk interacts in an additive manner with the uninsurable background risk, which can be correlated with the former (see Doherty and Schlesinger, 1983; Gollier, 1996). The purpose of this article is to investigate the optimal insurance policy when the indemnity is contingent only on an imperfect signal of the policyholder's revenue. More specifically, his or her random revenue is a function of an insurable random index and an independent background risk, which is assumed uninsurable. This source of uninsurability can stem from asymmetric information between insureds and insurers. In this context of incomplete markets, the design of an optimal insurance contract is derived. The optimal form depends on the effect of an increase in the insurable index on the policyholder's revenue. If the principle of increasing uncertainty (Leland, 1972) is satisfied and if the policyholder exhibits prudence (Kimball, 1990), an upper or lower bound associated with the slope of the optimal marginal coverage can be defined. Full insurance against the index is shown to be optimal if and only if the insurance premium is actuarially fair. These results are illustrated in an agricultural context in which the producer faces both yield and price uncertainty and in which a crop insurance market is available. Under a multiple peril crop insurance program, the producer selects a yield guarantee and a price selection at which a unit loss of output is compensated. The article first examines the effect of demand uncertainty on the optimal price selection and then analyzes how the payment of direct subsidies affects this price selection. To sign this effect, the concept of temperance introduced by Kimball (1992) is used. After the model has been presented in the next section, the design of an optimal insurance contract in the presence of background risk is derived. In the fourth section, these results are used to examine the producers' rationale for purchasing crop insurance when output price risk cannot be hedged. THE MODEL The problem of the insurance-purchasing decision of a risk-averse producer is considered in a static model. His or her revenue is based on an index, or a proxy, y, which is assumed insurable, and on a background risk [epsilon], which is assumed uninsurable. [1] The stochastic dependence between revenue risk and index risk is formalized by the deterministic revenue function R(y, [epsilon]), where [epsilon], where is independent of y and E([epsilon]) = 0, E denoting the expectation operator. The support of the cumulative distribution function associated with random variables y or [epsilon] is contained in [0, [y.sub.max]] or [[[epsilon].sub.min], [[epsilon].sub.max]] with [y.sub.max] [less than] 0 and [[epsilon].sub.min] [less than or equal to] 0 [less than or equal to] [[epsilon].sub.max], respectively. The revenue function is assumed strictly monotonic in the background risk and, without a loss of generality, a larger value of the [epsilon] risk generates a larger revenue; i. …

Systemic Risk, Reinsurance, and the Failure of Crop Insurance Markets

AbstractWithout affordable reinsurance, private crop insurance markets are doomed to fail because systemic weather effects induce high correlation among farm‐level yields, defeating insurer efforts to pool risks across farms. Using an empirical model of the U.S. crop insurance market, we find that U.S. crop insurer portfolios are twenty to fifty times riskier than they would be otherwise if yields were stochastically independent across farms. We also find that area yield reinsurance contracts would enable crop insurers to cover most of their systemic crop loss risk, reducing their risk exposure to levels typically experienced by more conventional property liability insurers.

The Value of Ideal Contingency Markets in Agriculture

AbstractAn incomplete markets equilibrium, in which no contingency markets are available, is compared to a complete markets equilibrium formed by introducing a futures market and a crop insurance market. The two regimes are compared using comparative static and welfare analyses. Numerical examples highlight important characteristics of the model and illustrate how the effects of introducing contingency markets can be quantified. The main conclusions are that contingency markets in agriculture increase economic efficiency, but there is no guarantee that farmers and consumers both benefit. It is found that futures and crop insurance markets may reduce farmer welfare when the demand for farm products is price inelastic.

Toward a Theory of Agricultural Insurance

AbstractIn this paper we develop a theory of crop insurance. We start by reaffirming the risk‐spreading role of competitive crop insurance markets. It is argued, however, that once the problems of imperfect information are recognized, a competitive crop insurance market may not exist at all. Two candidates present themselves. First is market insurance with the public sector as a source of (costly) information gathering and dissemination, and second, is the direct provision of crop insurance by the public sector. We focus on the latter and develop a model of public insurance as a decentralized plan where the farmer determines factor utilization taking the insurance contract as given. In turn, the insurance agency, taking factor utilization as determined by the farmer, chooses the optimal contract so as to maximize the value of aggregate output in the economy.