Multiple Peril Crop Insurance Research Articles

Risk Preferences and the Adoption of Subsidised Crop Insurance: Evidence from Lithuania

Crop insurance adoption remains low among small and medium farms – despite financial public support in the form of premium subsidies. A better understanding of smaller farmers’ insurance decisions and contract attribute preferences is thus needed to encourage insurance solutions. Moreover, previous research has primarily examined risk preferences and insurance adoption among Western European farmers, while little is known about insurance markets and risk preferences in Central and Eastern European countries. We contribute to the literature by i) contrasting the current status of insurance adoption by Lithuanian farmers by farm size, ii) assessing farmers’ risk preferences and attitudes towards crop insurance, and iii) investigating small and medium farmers’ preferences for the characteristics of a new (hypothetical) subsidised multiple peril crop insurance (MPCI) product. Therefore, we conduct a socio-economic survey in Lithuania that features a risk preference elicitation task and a discrete choice experiment (DCE). Findings show that, on average, sampled farmers are risk-neutral to slightly risk-seeking and that insurance adoption is lowest among smaller farms (<50 hectares). Moreover, insurance adoption was associated with higher risk exposure, higher trust in insurance services, and higher willingness to take farming-specific risks on all farms. For small and medium farms, the DCE results suggest preference heterogeneity for contract attributes and higher adoption rates when contract design reduces the risks and efforts associated with subsidised insurance.

Index and multirisque insurance products in agriculture: perspectives of development

The article discusses current trends in the development of insurance market in agriculture with the use of the index in both developed and developing countries. The analysis of the main insurance products based on the index, presented their advantages over writing multiple peril crop insurance and possible brake factors when projecting into domestic practice.

Multiple-peril crop insurance: successes and challenges

Purpose– The purpose of this paper is to examine international experience with multiple-peril crop insurance (MPCI). Named peril crop insurance is available in most countries but MPCI is less common. While named peril insurance is widely successful, MPCI has a checkered history. In most cases, MPCI actuarial experience has been poor and large premium subsidies have been required to incentivize purchasing.Design/methodology/approach– International experience with MPCI is reviewed with a particular focus on the USA which has the largest MPCI program in the world. Rationales for government involvement in facilitating MPCI offers are examined and future challenges are explored.Findings– In most cases, MPCI actuarial experience has been poor and large premium subsidies have been required to incentivize purchasing. MPCI purchasing has increased dramatically in recent years but so have government expenditures to support MPCI programs. Significant challenges remain with providing cost-effective MPCI coverage for crop farmers.Originality/value– While previous articles have reviewed MPCI in the USA, this paper also considers experiences in other countries. Future challenges and research needs are described.

Securitizing Area Insurance: A Risk Management Approach

This paper examines the possibility of developing a risk management instrument by designing a financial security whose value is linked to the average revenue of a given area. This type of program is sufficiently general to be considered for any group of businesses that face production uncertainty. In agriculture, it has been proposed as an alternative to multiple peril crop insurance programs, as area yield, revenue or rainfall insurance in order to eliminate ex ante and ex post moral hazard. While most of the literature concentrates on the determination of value of the indemnity and the payment of such an insurance, this paper focuses on the fact that, unlike other forms of insurance, area insurance can be cast in the form of a hedging security and, as a consequence, rather than depending only on the demand for diversification (the beta of the Capital Asset Price Model), it makes possible a risk shifting strategy based on the heterogeneity of risk attitudes of the economic agents operating in a given area.

Securitizing Area Insurance: A Risk Management Approach

This paper examines the possibility of developing a risk management instrument by designing a financial security whose value is linked to the average revenue of a given area. This type of program is sufficiently general to be considered for any group of businesses that face production uncertainty. In agriculture, it has been proposed as an alternative to multiple peril crop insurance programs, as area yield, revenue or rainfall insurance in order to eliminate ex ante and ex post moral hazard. While most of the literature concentrates on the determination of value of the indemnity and the payment of such an insurance, this paper focuses on the fact that, unlike other forms of insurance, area insurance can be cast in the form of a hedging security and, as a consequence, rather than depending only on the demand for diversification (the beta of the Capital Asset Price Model), it makes possible a risk shifting strategy based on the heterogeneity of risk attitudes of the economic agents operating in a given area.

Is There a Viable Market for Area‐Based Crop Insurance?

The performance of area yield insurance and farm‐level multiple peril crop insurance is analyzed for cotton and soybean production in Georgia and South Carolina. The analysis improves on many previous studies by utilizing actual farm‐level yield data and by comparing the two types of insurance products not only for actuarially fair premium rates but also for actual unsubsidized and subsidized premium rates. Results suggest that, even in heterogeneous production regions, area yield insurance may be a viable alternative to farm‐level insurance when premium rates for farm‐level insurance contain large positive wedges.

Innovation in risk transfer for natural hazards impacting agriculture

Agricultural income from growing crops is susceptible to a variety of risks—the price of output and the actual amount of output are generally the largest risk variables. This article focuses on yield risk rather than price risk by reviewing innovation in risk transfer for natural hazard risk in agriculture. While many higher-income countries have long-standing crop insurance programs, these programs are not appropriate for lower-income countries. Lower-income countries can ill-afford the subsidies that are used in most multiple peril crop insurance programs throughout the world. Still, lower-income countries have large numbers of small farms increasing the need for agricultural insurance to protect against common problems that create disastrous losses for many individual farm households.

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. …

Adverse Selection in Crop Insurance: Actuarial and Asymmetric Information Incentives

AbstractAdverse selection is often blamed for crop insurance indemnities exceeding premiums plus subsidies. However, nationwide empirical evidence has been lacking or based on inadequate county‐level data. This article uses nationwide farm‐level data on corn and soybeans to decompose incentives for participation in U.S. multiple peril crop insurance into a risk‐aversion incentive (the conventional justification for insurance), an actuarial or subsidy incentive (reflecting government subsidization), and an asymmetric information incentive (which reflects farmers' information advantage). Results show that the risk‐aversion incentive is small. Farmers participate in crop insurance primarily to receive the subsidy or because of adverse selection possibilities.

A Two-Stage Model of the Demand for Specialty Crop Insurance

Proposals for reform of the federal multiple-peril crop insurance program for specialty crops seek to change fees for catastrophic (CAT) insurance from a nominal fifty-dollar per contract registration fee to an actuarially sound premium. Growers argue that this would cause a significant reduction in participation rates, thus impeding the program's goals of eventually obviating the need for ad hoc disaster payments and worsening the actuarial soundness of the program. The key policy issue is, therefore, empirical one - whether the demand for specialty crop insurance is elastic or inelastic. Previous studies of this issue using either grower or county-level field crop data typically treat the participation problem as either a discrete insure / don't insure decision or aggregate these decisions to a continuous participation rate problem. However, a grower's problem is more realistically cast as one of simultaneously making a coverage level / insurance participation decision. Because the issue at hand considers a significant price increase for only one coverage level (50%), differentiating between these decisions is necessary both from an analytical and econometric standpoint. To model this decision, the paper develops a two-stage estimation procedure based on Lee's multinomial logit-OLS selection framework. This method is applied to a county-level panel data set consisting of eleven years of the eleven largest grape-growing counties in California. Results show that growers choose among coverage levels based upon expected net premiums and the variance of these returns, as well as the first two moments of expected market returns. At the participation-level, the mean and variance of indemnities are also important, as are several variables measuring the extent of self-insurance, such as farm size, enterprise diversity, or farm income. The results also show that the elasticity of 50% coverage insurance is elastic, suggesting that premium increases may indeed worsen the actuarial soundness of the program. These increases will also cause a significant adjustment of growers among coverage levels.

An Expected‐Indemnity Approach to the Measurement of Moral Hazard in Crop Insurance

AbstractA definition of moral hazard in multiple peril crop insurance is proposed that focuses on expected indemnities rather than input use. Five years of production and insurance data for a panel of Kansas wheat farms is used to empirically test for this type of moral hazard. Results suggest that moral hazard affects multiple peril crop insurance indemnities in poor production years but that no significant moral hazard occurs in years when growing conditions are favorable.

Survey of U.S. Multiple Peril Crop Insurance Literature since 1980

Since 1980, the Multiple Peril Crop Insurance (MPCI) program has occupied a prominant role in U.S. farm policy. MPCI coverage offerings have been greatly expanded to try to effectively substitute for other forms of federal crop disaster assistance. In this paper, we survey a substantial body of agricultural economics literature that has examined issues relating to the MPCI program. We give an assessment of research findings along with suggested directions for future research.

Modeling Farm‐Level Crop Insurance Demand with Panel Data

AbstractA random‐effects, binomial probit model is applied to data for a panel of Kansas wheat farms to examine Multiple Peril Crop Insurance demand. A theoretical model is developed which suggests inclusion of the moments of both market return and the return to insurance. Empirical results indicate that the first and second moments of both market return and the returns to insurance are significant. The price elasticity of demand is estimated to be −0.65. Preseason weather variables when included in the models were not found to be significant, failing to support the hypothesis of intertemporal adverse selection.

The Demand for Multiple Peril Crop Insurance: Evidence from Montana Wheat Farms

AbstractAn econometric analysis of the demand for multiple peril crop insurance is carried out for a sample of 370 Montana wheat farms. The study is the first to model the farm's participation and coverage‐level decisions separately through Heckman two‐stage estimation procedures. These decisions are shown to be determined in different ways. In addition, farms with positive expected returns from insurance make coverage‐level decisions in different ways from farms with negative expected returns. These differences indicate that adverse selection effects limit the efficacy of across‐the‐board premium rate increases as mechanisms for reducing loss ratios.

An Empirical Analysis of the Demand for Multiple Peril Crop Insurance: Comment

American Journal of Agricultural EconomicsVolume 76, Issue 4 p. 948-951 Comments and Replie An Empirical Analysis of the Demand for Multiple Peril Crop Insurance: Comment Barry Barnett, Barry Barnett post-doctoral research fellow Department of Agricultural Economics, at the University of KentuckySearch for more papers by this authorJerry Skees, Jerry Skees professor Department of Agricultural Economics, at the University of KentuckySearch for more papers by this author Barry Barnett, Barry Barnett post-doctoral research fellow Department of Agricultural Economics, at the University of KentuckySearch for more papers by this authorJerry Skees, Jerry Skees professor Department of Agricultural Economics, at the University of KentuckySearch for more papers by this author First published: 01 November 1994 https://doi.org/10.2307/1243754Citations: 1AboutPDF 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 onFacebookTwitterLinkedInRedditWechat Citing Literature Volume76, Issue4November 1994Pages 948-951 RelatedInformation

An Empirical Analysis of the Demand for Multiple Peril Crop Insurance: Reply

American Journal of Agricultural EconomicsVolume 76, Issue 4 p. 952-953 Comments and Replie An Empirical Analysis of the Demand for Multiple Peril Crop Insurance: Reply Barry K. Goodwin, Barry K. Goodwin associate professor in the Department of Agricultural and Resource Economics North Carolina State UniversitySearch for more papers by this author Barry K. Goodwin, Barry K. Goodwin associate professor in the Department of Agricultural and Resource Economics North Carolina State UniversitySearch for more papers by this author First published: 01 November 1994 https://doi.org/10.2307/1243755Citations: 1AboutPDF 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 No abstract is available for this article.Citing Literature Volume76, Issue4November 1994Pages 952-953 RelatedInformation

Erratum

AbstractThe following 1993 PhD recipients were not included in the May 1994 issue listing.Texas A…M UniversityDanny Alan Barefield, “Design and Application of an Econometric Model of the U.S. Beef Sector to Policy Analysis.”Ming‐Che Chien, “An Analysis of the X‐Efficiency and Total Factor Productivity in the U.S. Farm Credit System Using Longitudinal Data.”Keith Harlan Coble, “An Examination of the Existence and Consequences of Asymmetric Information in Multiple Peril Crop Insurance Programs.”Luis Remo Fellin, “International Corn and Soybean Transporting System: Quadratic Programming Models.”Heason Kim, “Developing Weights for Information on Nutritional Labels.”Raymond Lloyd Kirby, “The Allocation of After‐Tax Income and Other Available Funds: A Linkage of Demand Systems and Macroeconomics.”Boujemaa Mouflih, “Three Essays on Co‐Integration.”Joseph Shannon Neibergs, “Modeling Agribusiness Profitability in Response to Dynamic Macroeconomic Policies.”

An Empirical Analysis of the Demand for Multiple Peril Crop Insurance

AbstractKnowledge of factors affecting farmer purchases of crop insurance is essential for evaluating the soundness and profitability of crop insurance programs. Despite this importance, the demand for crop insurance has received limited empirical attention. The present paper reports on an empirical assessment of the demand for crop insurance by Iowa corn producers. Adverse selection in the insured pool suggests that producers with differing levels of loss‐risk have different demand elasticities. Loss‐risk is included in the empirical analysis and is found to influence the elasticity of demand. Results show average demand elasticities of about −0.32 for relative insured acres and −0.73 for liability per planted acre. Implications for the actuarial soundness of the industry are provided.

An Analysis of Lenders' Influence on Agricultural Producers' Risk Management Decisions

AbstractAgricultural lenders have a stake in and are in a position to influence their borrowers' management decisions. Risk management practice adoption is an area in which lenders might want to exercise this influence. This study employs logistic statistical models to estimate lenders' influence on crop producers' decisions regarding use of three alternative risk management practices: federal multiple-peril crop insurance, crop hail and fire insurance, and forward contracting. Results suggest lenders can exert significant influence on these decisions but that poor communication between lenders and borrowers likely reduces this influence.

Participation in Multiple-Peril Crop Insurance: Risk Assessments and Risk Preferences of Cranberry Growers

To investigate the poor participation rate of cranberry growers in the multiple-peril crop insurance program, a sample of 15 Massachusetts growers was interviewed. According to their risk preferences, a much greater proportion of growers should have insured, than actually did. A possible solution is to match the distribution used by the insurer closer to that believed by the grower. Adjusting each grower's historical yield series for trend brought the historical and subjective mean yields much closer. However, an aggregate test found the effect of adjustment to be insignificant, implying that the avenue for increased participation lies elsewhere.