Margin Insurance Research Articles

An improved agricultural household margin insurance scheme with insured–insurer risk protection: a time-varying copula approach

Agricultural household margin insurance (AHMI) is a crop insurance scheme that considers a farmer's trading capability. The scheme examines farmers' losses in terms of both agricultural input and output using the farmer exchange rate index. In this article, we improve the previous design of the AHMI [A. Ahdika, D. Rosadi, A.R. Effendie, and Gunardi, Household margin insurance of agricultural sector in Indonesia using a farmer exchange rate index, Agric. Finance Rev. 81 (2020), pp. 169–188.] proposed to be implemented in Indonesia – which only provided risk protection for companies – by broadening the formula of losses so that risk protection covers both farmers and companies. We also provide premium payment scenarios, both seasonally and non-seasonally. We employ a time-varying Student-t copula with the extended dynamic parameter to identify the dynamic dependency between the indexes involved in determining the loss variable. We also determine the premium rate for the insurance scheme with various payment scenarios and investigate the implications for farmer survival and company management. Examining the farmer exchange rate index data of Indonesia, the empirical results show that the improved AHMI using a time-varying copula approach produces more reasonable loss estimates and various premium payment options with low premium rates for farmers, compared to either the previous AHMI design or the current crop insurance program in Indonesia.

A Study on the Influence of Oil Price Fluctuations on Agricultural Value-Added

Recently, the volatility of oil prices has significantly increased due to various factors. This study aims to analyze the influences of oil price fluctuations on agricultural value added, with a particular focus on comparing the magnitude of ripple effects across different categories. In order to achieve this, we designated not only oil prices but also exchange rates and the prices of three grains as random variables, and developed a stochastic model that considers their correlations. When oil prices fluctuate within expected ranges, it was analyzed that agricultural value-added changes by approximately 540 billion KRW. When examined by category, it was found that fruit-bearing vegetables exhibited the largest ripple effect. As a policy alternative to alleviate the farmers’ operational risk, this study introduces margin insurance to effectively manage both the increases in input costs due to rising oil prices and the decreases in agricultural commodity prices.

The impact of price hedging on subsidized insurance: Evidence from Canada

AbstractThis article examines the effect of price hedging on publicly subsidized insurance. Theoretically, the effect of hedging is found to have an ambiguous effect on the incentive to purchase revenue insurance. A simulation is used to analyze the relationship between hedging and the Canadian AgriStability program in three regions in Saskatchewan. AgriStability is a margin insurance product, though in the simulation I hold input use constant, allowing the program to operate as if it were revenue insurance. Hedging is found to substantially reduce enrolment in AgriStability in each region. Furthermore, in some simulations the benefits that producers receive from AgriStability are smaller than the value of government subsidies. The results offer an explanation for low participation in AgriStability and show that the risk‐reducing effect of AgriStability is moderated by the ability of crop producers to hedge price risk through other means.

A Protocol for Margining Derivatives

We give a general construction for margining derivative contracts. This generalises usefully to futures, options, collateralized loans, and state contracts such as prediction markets. For partly collateralized contracts, each side is long an option on their own defaulting and short an option on their counterparty defaulting. Margin insurance can be constructed directly with collateralized loans using the margined contract as collateral. We estimate this cost at different levels of collateral for futures, loans, and options using minute exchange data for BTC/USD from 2013 to 2020.

Managing Price Risk of Pork through Gross Margin: A Depiction from China and US

China’s demand for pork has been increasing at a relatively constant rate and its pork imports are increasingly determined by the fluctuations of its domestic supply. This fluctuation in domestic supply has resulted in making farmers suffer from the shocks of price instability. Despite the absence or underdevelopment of livestock insurance in most developing countries, an experience from China and US serves as a lesson for these countries to pay attention to the subsector with potential contribution to the country’s economy but having little or no efforts accorded to the same. This study explored the importance of Livestock Gross Margin (LGM) insurance by analyzing the pork price fluctuation trend in China and linking the risk to the impacts on revenues of pork producers. The sources of data were national surveys reports, research papers and data obtained from China’s Ministry of Agriculture (MoA). Findings revealed that Pork producers in China had been faced with adverse price fluctuations that posed threats to producers’ revenues. The study shows LGM insurance as an important and alternative tool to smooth incomes of the producers in the pork industry when it is managed in its advanced stage. For pork industry to continue prospering, the study recommends establishment of reliable futures market to provide partial income risk insurance to producers whose output is risky.

Household margin insurance of agricultural sector in Indonesia using a farmer exchange rate index

PurposeFarmer exchange rate (FER) is the ratio between a farmer's income and expenditure and is also an indicator of farmers’ welfare. There is little research regarding its use in risk modeling in crop insurance. This study seeks to propose a design for a household margin insurance scheme of the agricultural sector based on FER.Design/methodology/approachThis research employs various risk modeling concepts, i.e. value at risk, loss models and premium calculation, to construct the proposed model. The standard linear, static and time-varying copula models are used to identify the dependency between variables involved in calculating FER.FindingsFirst, FER can be considered as the primary variable for risk modeling in agricultural household margin insurance because it demonstrates farmers’ financial ability. Second, temporal dependence estimated using the time-varying copula can minimize errors, reduce the premium rate and result in a tighter guarantee's level of security.Originality/valueThis research extends the previous similar studies related to the use of index ratio in margin insurance loss modeling. Its authenticity is in the use of FER, which represents the farmers' trading capability. FER determines farmers’ losses by considering two aspects: the farmers’ income rate and their ability to fulfill their life and farming needs. Also, originality exists in the use of the time-varying copulas in identifying the dependence of the indices involved in calculating FER.

A generalized Livestock Gross Margin insurance program for the developing countries

Purpose The purpose of this paper is to propose a new margin protection (MP) scheme for the producers of hog, cattle and dairy in the developing countries. Design/methodology/approach The proposed MP scheme is inspired by the Livestock Gross Margin (LGM) program that has been successfully implemented in US directly implementing the LGM program in developing countries can be difficult due to the rudimentary of the futures market with limited futures listing. To address this issue, the authors proxy the futures prices by relating to some relevant spot prices via an econometric model. The proxied futures prices, in turn, enable the implementation of a generalized LGM, which the authors denote as the MP scheme. Findings As China is the world’s largest consumption and production of pork, the authors describe the proposed MP scheme by demonstrating how a generalized LGM can be constructed for the Chinese hog producers. By empirically comparing to the pilot hog price index insurance for the Beijing’s hog producers, the authors find that the proposed MP scheme is more effective in providing MP for the producers. Research limitations/implications The proposed MP scheme still requires the availability of some relevant spot prices in order to use an econometric model to proxy the missing futures prices. Originality/value The value of this research stems from demonstrating how an MP scheme can be constructed for developing countries that have rudimentary futures markets.

Insurance Products in Rastin Profit and Loss Sharing Banking

Purpose: This paper aims to explain new insurance products and policies in Rastin Profit and Loss Sharing (PLS) Banking. Rastin Banking is a full Islamic Banking System with all necessary parts for banking operations that can be installed in conventional and Islamic banks both. In this paper, we are going to explain the milestones of new insurance products and policies.
 Design: Rastin Banking complies with the nature of the intermediary financial activity and has a new type of banking operations. The systems and instruments of this type of banking have different risk treatments, and new insurance policy and measures should be defined to cover the risks of the operations In order to fulfill this goal, appropriate insurance policies are described.
 Findings: Some new insurance products are defined such as Certificate Insurance, Insurance of Market Value of Certificate, Responsibility/Engineering Insurance, Insurance of Accidents Concerning the Article of Sharing, Collateral Insurance, Loss Margin Insurance, Profit Margin Insurance, Merchandise Transportation Insurance, Production Equipment and Installations Insurance, Product Quality Insurance, Insurance of Commodity under Production, Inventory Insurance, Production Limited Loss Insurance, Transaction Limited Loss Insurance to handle Rastin Banking.
 Research limitations: Many of these insurance policies are new and require more elaborations for further practical development and adjustment.
 Practical implications: These insurance products can be used both in Rastin Banking operations as well as conventional business and finance arrangements. These insurance policies have no conflict with indisputable legal principles, and insurance companies can supply these insurance products based on their own actuary calculations.
 Social implications: The introduced insurance policies actually change profit and loss sharing activity to just profit sharing.
 Originality/value: Approach of this system and the designed insurance policies is entirely different and new.

Addressing basis risk in agricultural margin insurances

PurposeAfter several reforms of the common agricultural policy, domestic product prices and farm incomes have become more volatile in the EU. Risk-averse farmers are therefore seeking income stabilizing measures. Margin insurance is among the feasible options but is not yet established in the EU. The purpose of this paper is to explore such an insurance under EU conditions for a major crop.Design/methodology/approachThe paper explores conditions for a viable margin insurance. It presents a modeled-loss trigger for a margin insurance scheme using wheat production in Austria as the case study.FindingsWhile margin insurance products are widely used in the USA, such products are not available in the EU. Basis risk seems to be an important reason. An exploration of wheat production in Austria shows that heterogeneity among farms is relevant. The authors demonstrate an approach aiming to lower basis risks.Research limitations/implicationsThis paper presents a technically feasible approach to handle the basis risk of a margin insurance under EU conditions. Before such a product can be placed on the market, further research on systemic risk is needed. Market research is necessary to fine-tune the details of the product to meet the actual demand of farmers. Further empirical validation of the modeled losses is needed. Legal implications are not explored in this paper.Practical implicationsThe insurance product presented here demonstrates a concept that is established in the USA under EU conditions. It is motivated by several shortcomings of income risk mitigation approaches in the EU.Social implicationsIncome risk may be seen as a problem of social policy. The approach shows that it can be addressed by market-oriented instruments.Originality/valueTo the authors’ knowledge, this paper is the first to propose a tool to handle basis risk for margin insurance products in agriculture in the EU. A special feature of the proposed approach is that it is not limited to a single product such as wheat.

Abstract P5-09-10: Preferences in educational topics of interest for women with breast cancer: Does income level influence topic preferences?

Abstract Purpose: To ensure that people with breast cancer receive materials and programs that fit their needs for education, information, and support by identifying clinical, treatment, demographic, socioeconomic, and emotional characteristics targeting their specific needs and concerns. Respondents and Methods: Women diagnosed with breast cancer responded to an online 80-question survey to identify educational and support needs. Participants self-reported income level and were asked to rate their level of interest in 35 educational topics, including treatment issues and practical, financial, and psychosocial concerns. Potential ratings were "Not Interested," "Interested," and "Very Interested." This analysis examined whether income level was associated with interest level in these topics. Interest ratings were collapsed into "Not Interested and "Very Interested or Interested." Contingency tables were generated, and phi coefficients were calculated to determine bivariate association. A false discovery rate adjustment was applied to the significance threshold (p < .021) to account for multiple comparisons. Results: The response rate for each item/topic was approximately 75.1% (2,625/3,496). Topics that received high levels of interest, regardless of income, included prevention of other illnesses after cancer and new treatment and research. However, higher income was negatively associated with interest in clinical trials (p < .01), dating (p < .001), pain management (p < .001), and health insurance (p < .001). It was positively associated with interest in sexuality (p < .001) and parenting issues (p = .02). Conclusions: Income can be a determining factor in women's preferences for breast cancer educational topics. Women across all income levels agree that prevention of other illnesses after cancer and staying informed about new treatments and research are of great interest, but topic preferences for women with incomes of <$50k annually differed from those with higher income levels. In this analysis, lower income women were more interested in clinical trials, dating, pain management, and health insurance, and were less interested than women with higher incomes in sexuality and parenting issues. Lower income women are often diagnosed with higher staged cancers and have poorer outcomes overall. They may have less access to information about the clinical trials process and be less likely to ask about trial availability. Marginal insurance may drive their interest in pain management since they have fewer resources to manage their discomfort and other treatment side effects. Understanding the unique educational needs of lower income women and developing interventions targeted to address them could encourage greater participation in clinical trials for which they would qualify, appropriate pain management and enhanced access to resources to alleviate insurance concerns. Attention should be paid to differences in the educational needs of lower income women. Empowering them by meeting these needs could enhance quality of life and may improve overall outcomes. Citation Format: Swiger KD, Guglielmino JE, Labban JD, Rugo HS, Domchek SM, Anders CK, Nelson HCM, Hanson AA, Dinerman H, Henry CC. Preferences in educational topics of interest for women with breast cancer: Does income level influence topic preferences?. [abstract]. In: Proceedings of the Thirty-Eighth Annual CTRC-AACR San Antonio Breast Cancer Symposium: 2015 Dec 8-12; San Antonio, TX. Philadelphia (PA): AACR; Cancer Res 2016;76(4 Suppl):Abstract nr P5-09-10.

The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden

This paper provides a simple, yet robust framework to evaluate the time profile of benefits paid during an unemployment spell. We derive sufficient-statistics formulae capturing the marginal insurance value and incentive costs of unemployment benefits paid at different times during a spell. Our approach allows us to revisit separate arguments for inclining or declining profiles put forward in the theoretical literature and to identify welfare-improving changes in the benefit profile that account for all relevant arguments jointly. For the empirical implementation, we use administrative data on unemployment, linked to data on consumption, income, and wealth in Sweden. First, we exploit duration-dependent kinks in the replacement rate and find that, if anything, the moral hazard cost of benefits is larger when paid earlier in the spell. Second, we find that the drop in consumption affecting the insurance value of benefits is large from the start of the spell, but further increases throughout the spell. In trading off insurance and incentives, our analysis suggests that the flat benefit profile in Sweden has been too generous overall. However, both from the insurance and the incentives side, we find no evidence to support the introduction of a declining tilt in the profile. (JEL D82, E21, E24, J64, J65)

Can insurance provide the US dairy farm safety net?

US farm programs have been moving towards using insurance to provide the farm safety net for many years but this policy transformation has not been realized for dairy farms. Historically, support for dairy farmers focused on milk price but has been declining in real terms for decades. Dairy policy in the US has been in flux because of the recent increases in feed price levels and increases in export markets that have made historic milk price supports essentially irrelevant. Recently a program of subsidized insurance for the margin between milk and feed price has met with limited success. We analyze the potential demand for margin insurance using estimates from a survey of US dairy farmers. Dairy farmers with larger herds and more education were willing to pay more for the insurance. In addition, those dairy farm operators who had used milk and feed price risk instruments in the past were willing to pay more for margin insurance than those who had not. However, the willingness-to-pay for these contracts by farmers who had not used risk management tools was low, calling into question the feasibility of using margin insurance as the foundation of policies intended to support all dairy farms.

Tails Curtailed: Accounting for Nonlinear Dependence in Pricing Margin Insurance for Dairy Farmers

Livestock Gross Margin Insurance for Dairy Cattle (LGM‐Dairy) is a risk management tool for protecting milk income over feed cost margins. In this article, we examine the assumptions underpinning the method used to determine LGM‐Dairy premiums. Analysis of the milk–feed dependence structure is conducted using copula methods, a rich set of tools that allow modelers to capture nonlinearities in dependence among variables of interest. We find a significant relationship between milk and feed prices that increases with time‐to‐maturity and severity of negative price shocks. Extremal, or tail, dependence is the propensity of dependence to concentrate in the tails of a distribution. A common theme in financial and actuarial applications and in agricultural crop revenue insurance is that tail dependence increases the risk to the underwriter and results in higher insurance premiums. We present, to our knowledge, the first case in which tail dependence may actually reduce actuarially fair premiums for an agricultural risk insurance product. We examine hedging effectiveness with LGM‐Dairy and show that, even in the absence of basis or production risk, hedging horizon plays an important role in the ability of this tool to smooth farm income over feed cost margins over time. Rating methodology that accounts for tail dependence between milk and feed prices extends the optimal hedging horizon and increases hedging effectiveness of the LGM‐Dairy program.

Livestock Gross Margin Insurance for Dairy: The Other Dairy Safety Net Solution

With all the attention on the new Margin Protection Program for Dairy Producers (MPP) let us not forget about Livestock Gross Margin Insurance for Dairy Cattle (LGM-Dairy). Similar to MPP, LGM-Dairy is also a USDA risk management instrument which offers protection against declines in average dairy income-over-feed-cost (IOFC) margins. Introduced in 2008, LGM-Dairy is an insurance product overseen by USDA’s Risk Management Agency. Like crop insurance, LGM-Dairy is sold by private insurance agents and underwritten by the Federal Crop Insurance Corporation (for a complete description of LGM-Dairy rules see here).

Bio-economic modelling of decisions under yield and price risk for suckler cow farms

Applying a bio-economic whole-farm model, we assess the impact of price and weather risk as well as different risk-management strategies on the variability of the gross margin in Swiss suckler cow production. For instance, flexible adjustment of fodder composition, feed stocks, or land use as well as gross margin insurance are considered. Our results show that assuming moderate risk aversion farms’ gross margin variability is rather high, with a coefficient of variation of gross margin ranging from 19 to 21%. Accounting for on-farm risk-management strategies we find that gross margin variability can be reduced significantly, causing only low reductions of average gross margin levels. We find that the use of maize as a switch crop and a market for the trade of roughage are the most efficient risk-management strategies. Our results also indicate that gross margin insurance is not attractive for farmers. Thus in particular promoting better access to markets for feedstuffs provides a valuable opportunity for farmers to manage gross margin risks.

Exposure and Exclusion: Disenfranchised Biological Citizenship among the First-Generation Korean Americans

Based on fieldwork with a highly uninsured and underinsured Korean American population, this article maps how the current healthcare system in the United States disenfranchises those of marginal insurance status. The vulnerability of these disenfranchised biological citizens is multiplied through exposure to disproportional health risks compounded by exclusion from essential healthcare. The first-generation Korean Americans, who commonly work in small businesses, face the double burden of increased health risks from long, stress-laden work hours and lack of access to healthcare due to the prohibitive costs of health insurance for small business owners. Even as their health needs become critical, their insurance status and costly medical bills discourage them from visiting healthcare institutions, leaving Korean Americans outside the "political economy of hope" (Good, Cult Med Psychiatry 52:61-69, 2001). Through an ethnographic examination of the daily practice of doing-without-health among a marginalized sub-group in American society, this paper articulates how disenfranchised biological citizenship goes beyond creating institutional barriers to healthcare to shaping subjectivities of the disenfranchised.

Revenue risk management, risk aversion and the use of Livestock Gross Margin for Dairy Cattle insurance

The Livestock Gross Margin Insurance for Dairy Cattle is a federally reinsured insurance program that enables US dairy producers to establish minimum levels of milk income net of feed cost. Given the structure of this program there are an infinite number of possible contract designs based on the choice of deductible level and proportion of production insured. Adding to this complexity, producers vary in their risk preferences, which affect the incentive to insure their margin. It is unclear as to how producers may adopt this program for revenue risk management. This paper investigates the interplay between producer risk preferences, contract design and the subsidization of premium in determining program coverage. We undertook this analysis within an expected utility framework. Optimal contracts under different rates of constant relative rate of risk aversion and subsidies were analyzed using a nonlinear optimization model. We found that total optimal coverage increased significantly with the level of risk of aversion at lower deductibles but as deductible level increased, the level of risk aversion had a lesser impact on total optimal coverages. As expected, at the same deductible and risk aversion levels, inclusion of a premium subsidy increased the total optimal coverage.

Identifying cost-minimizing strategies for guaranteeing target dairy income over feed cost via use of the Livestock Gross Margin dairy insurance program

Milk and feed price volatility are the major source of dairy farm risk. Since August 2008 a new federally reinsured insurance program has been available to many US dairy farmers to help minimize the negative effects of adverse price movements. This insurance program is referred to as Livestock Gross Margin Insurance for Dairy Cattle. Given the flexibility in contract design, the dairy farmer has to make 3 critical decisions when purchasing this insurance: 1) the percentage of monthly milk production to be covered, 3) declared feed equivalents used to produce this milk, and 3) the level of gross margin not covered by insurance (i.e., deductible). The objective of this analysis was to provide an optimal strategy of how a dairy farmer could incorporate this insurance program to help manage the variability in net farm income. In this analysis we assumed that a risk-neutral dairy farmer wants to design an insurance contract such that a target guaranteed income over feed cost is obtained at least cost. We undertook this analysis for a representative Wisconsin dairy farm (herd size: 120 cows) producing 8,873kg (19,545lb) of milk/cow per year. Wisconsin statistical data indicates that dairy farms of similar size must require an income over feed cost of at least $110/Mg ($5/cwt) of milk to be profitable during the coverage period. Therefore, using data for the July 2009 insurance contract to insure $110/Mg of milk, the least cost contract was found to have a premium of $1.22/Mg ($0.055/cwt) of milk produced insuring approximately 52% of the production with variable monthly production covered during the period of September 2009 to June 2010. This premium represented 1.10% of the desired IOFC. We compared the above optimal strategy with an alternative nonoptimal strategy, defined as a contract insuring the same proportion of milk as the optimal (52%) but with a constant amount insured across all contract months. The premium was found to be almost twice the level obtained under the cost-minimizing solution representing 1.9% of the insured amount. Our model identifies the lowest cost insurance contract for a desired target guaranteed income over feed cost.

What Future for Agricultural Safety Net Programs?

The early 1990s held the promise of decoupled farm programs in Canada and the U.S.; however, the potential benefits of decoupling have been eroded by ad hoc disaster programs. This paper assesses the benefits and difficulties of disaster programs relative to traditional farm programs, and proposes gross margin insurance as an approach to safety nets that captures the benefits of both. Gross margin insurance is applied to hogs in Ontario and Minnesota as case studies, with the cost and level of income protection compared. We show that based on simple estimates of actuarially fair premium costs, gross margin insurance compares favorably with programs that have been used to support hog farm incomes in both regions.

Corporate capital structure and pension-funding strategy

This article provides an integrated analysis of pension funding and corporate financing strategies in the presence of default risk. The article shows that when the marginal personal income tax rate is constant, the financing decision with respect to pension funding is influenced entirely by tax considerations. When the marginal personal income tax is progressive, the optimal financing of pension funding depends on the cyclical nature of the firm (as characterized by the sign of beta), the riskiness of pension assets, and ERISA regulations concerning the pension-benefit guaranty rate, the marginal pension insurance premium and the firm's legal responsibility for its unfunded pension obligations. It is shown that a necessary condition for partial pension funding is that the marginal insurance premium imposed by PBGC must be less than actuarially fair, and a necessary condition for pension funding to be financed by both debt and equity is that beta must be positive.