Subsidized Crop Insurance Research Articles

Heterogeneity, climate change, and crop yield distributions: Solvency implications for publicly subsidized crop insurance programs

AbstractClimate change continues to fuel concern about the future cost of publicly subsidized crop insurance programs in developed nations. These changes in climate are expected to alter the upper and lower tails of crop yield distributions differently. This may best be captured by modeling the climate–yield relationship heterogeneously across different parts of the yield distribution. To this end, we consider a mixture model with the parameters expressed as nonparametric functions (to capture any nonlinearities) of weather variables estimated by machine learning methods (neural net). By doing so, we are able to identify possibly heterogeneous effects of climate change on each component, the mixing probabilities, and thus all moments of the yield distribution. We find changing climate alters, quite significantly, the entire shape of the yield distribution. The overall probability of the lower tail tends to increase as temperatures rise, to the point where some yield distributions become positively skewed. Across a range of climate change scenarios, premium rates for fixed guarantees are expected to rise 20–66% relative to no climate change by 2040. However, if we allow the yield guarantees to also fall because of additional losses from climate change, premium rates (albeit not comparable given yield guarantees are different) increase notably less (6–14%), suggesting less solvency issues than first thought.

Does crop insurance attenuate farm financial risk?

PurposeFederally subsidized crop insurance aims to mitigate farm risks of crop producers. A body of literature has examined informational problems under this program. However, few studies empirically link crop insurance participation with farm financial performance. Most use county-level aggregates to argue that crop insurance participation is associated with increased farm financial debt. Using farm-level data, this study provides empirical evidence of crop insurance's effects on farm financial risk.Design/methodology/approachThe impact of crop insurance on farm financial risks is assessed using farm-level data from Kansas. The sample consists of at least 1,600 farms each year from 2002 to 2015. Financial risks are measured using the probability of falling into the critical zone of five different financial ratios. The study uses two matching estimators to estimate the causal effects of crop insurance participation on farm financial risks. Several alternative empirical approaches account for unobserved heterogeneity and potential endogeneity.FindingsCrop insurance participation has reduced the farm's likelihood of being in the critical liquidity risk by 8%. This result is robust across matching estimators and alternative specifications to account for unobserved heterogeneity and potential endogeneity.Originality/valueThis is one of the few studies to examine whether crop insurance reduces farm financial risks. This study provides empirical evidence of the extent to which crop insurance enrollment impacts farm financial risks. Findings suggest that crop insurance is critical to maintaining the financial well-being of crop producers, and significantly reduces the likelihood of producers being in a critical liquidity risk.

Subsidized Crop Insurance under Limited Access to Incomplete Financial Markets

Abstract Almost universally, crop insurance uptake has been very low in the absence of significant governmental subsidies. We proposed an explanation for the low uptake by analyzing farmers’ optimal behavior in the presence of subsidized crop insurance and incomplete financial markets. Under specific replication conditions, farmers’ valuation of crop insurance is lower than insurers’ valuation if farmers have access to fewer financial assets than insurers. A potential rationalization is that farmers and insurers have dissimilar price formation processes. Our model implies that subsidized crop insurance changes farmers’ production choices by altering both the relative returns across states of Nature and their risk choices. However, because of the separation between consumption and production decisions, farmers will use crop insurance in a manner consistent with profit maximization, independent of risk preferences.

The impact of crop insurance on farm financial outcomes

AbstractWe use data from the Kansas Farm Management Association to estimate the impact of crop insurance liability and insurance indemnities on farm debt. Subsidized crop insurance may increase farms' financial risk through a mechanism known as “risk balancing.” Previous findings in support of risk balancing may suffer from bias due to unobservable farm characteristics and simultaneity in insurance and debt decisions. Employing a simultaneous equations model with farm fixed effects, we find no statistical relationship between crop insurance liability and debt, calling into question the risk balancing hypothesis in federal crop insurance. We show that large insurance indemnity payments reduce farms' reliance on short‐term debt, but leave the total debt level unchanged.

Simultaneous Analysis of Insurance Participation and Acreage Response from Subsidized Crop Insurance for Cotton

US crop insurance is subsidized to encourage producers to participate and reduce their risk exposure. However, what has been the impact of these subsidies on insurance demand and crop acres planted? Using a simultaneous system of two equations, we quantify both insurance participation and acreage response to subsidized crop insurance for cotton-producing counties across the US at the national and regional levels. We also quantify the impact of both the realized rate of return and the expected subsidy per pound, plus the combined effects of expected yield and price while accounting for the adoption of Bacillus thuringiensis (Bt) technology and other factors. Results show that both the rate of return and the expected subsidy per unit of production have a statistically significant and positive effect on the percentage of arable acres planted. Furthermore, the marginal effect of expected price on insurance participation is much more significant for low- than high-yield counties. Results indicate that not all regions respond the same to subsidized crop insurance and that subsidies should be based on dollars per expected unit of production rather than expected production to be less distorting. Overall, US cotton acreage response is estimated to be inelastic (0.58) to insurance participation.

Does subsidized crop insurance affect farm industry structure? Lessons from the U.S.

Farm policies have unintended consequences and subsidized crop insurance is no different. We draw on the theory of long-run competitive equilibrium to estimate the effect of subsidized crop insurance on farm output and number of farms in the U.S. Results show that the subsidy led to fewer and larger farms. To the extent that larger farms benefit disproportionately from other farm subsidies, known to increase farm size, subsidized crop insurance can only contribute to further farm consolidation, with consequences for sustainability and depopulation of rural communities. These unintended effects could make the case for reverting to ad-hoc disaster payment programs.

Premium rates and selection in specialty crop insurance markets: Evidence from the catastrophic coverage participation

Catastrophic coverage, fully-subsidized insurance that provides indemnities when yields fall below 50% of historical averages, has been the most widely used crop insurance product among specialty crop growers in the United States. Patterns in catastrophic coverage across a variety of fruit, vegetable, tree nut and horticultural crops and indicate that expected returns to “investing” in subsidized crop insurance affect the use of insurance. Our simple model shows that smaller net returns from higher coverages, imply more catastrophic and free coverage participations. Our econometric estimation uses observations of insured acreage, liabilities, indemnities, and premiums across 20 major crops and more than one thousand counties, over all the 23 years since catastrophic coverage became available. We find that a 10% reduction in the ratio of the indemnities to the premiums of non-catastrophic coverages, which implies a 4% reduction in expected returns to growers, leads to larger catastrophic coverage shares by almost one percent. Panel quantile regressions show that the result is robust to distributional assumptions. Estimation using subsamples and alternative specifications further confirm the robustness of our results. The conceptual and empirical results demonstrate the degree to which farms self-select into crop insurance products that provide greater expected payouts. Our empirical results also indicate that catastrophic coverage generates greater underwriting gains, which affects the reinsurance fund allocation of private insurers.

The Impact of Enhancements to Weather-Forecasting Services on Agricultural Investment Behavior: A Field Experiment in Taiwan

AbstractA better understanding of farmers’ investment strategies associated with climate and weather is crucial to protecting farming and other climate-exposed sectors from extreme hydrometeorological events. Accordingly, this study employed a field experiment to investigate the investment decisions under risk and uncertainty by 213 farmers from four regions of Taiwan. Each was asked 30 questions that paired “no investment,” “investment with crop insurance,” “investment with subsidized crop insurance,” and “investment” as possible responses. By providing imperfect information and various probabilities of certain states occurring, the experimental scenarios mimicked various types of weather-forecasting services. As well as their socioeconomic characteristics, the background information we collected about the participants included their experiences of natural disasters and what actions they take to protect their crops from weather damage. The sampled farmers became more conservative in their decision-making as the weather forecasts they received became more precise, except when increases in risk were associated with high returns. The provision of insurance subsidies also had a conservatizing effect. However, considerable variation in investment preferences was observed according to the farmers’ crop types. For those seeking to create comprehensive policies aimed at helping the agricultural sector deal with the costs of damage from extreme events, this study has important implications. This approach could be extended to research on the perceptions of decision-makers in other climate-exposed sectors such as the construction industry.

Osiguranje dohotka u vinogradarstvu – Inovacija za upravljanje rizikom: slučaj Istarske županije

To cope with different types of risks, farmers can implement on-farm strategies and risk-sharing strategies. Risk management tools within EU Common Agricultural Policy are subsidized crop insurance, mutual funds (MF), and income stabilization tool (IST). While subsidized crop insurance is widely applied, IST and MF are not so common. Price volatility and climate change risk significantly influence farm income. Mediterranean area is especially exposed to climate change, so Istria County as part of Mediterranean is chosen for research. IST could protect against income variability, but more research and discussions are needed prior to its commercial scale implementation. Qualitative research on the small sample was applied with the goal to explore attributes that could impact the selection of IST. Paper provides an overview of IST and previous experience of IST on the EU level, on the basis of semi structured interviews, explains the perception of climate risks and IST on wine cases in Istria. The results show that all selected cases were familiar with subsidized crop insurance; however, they were not familiar with IST. After being introduced to the IST, wine producers were ready to consider its application. Lack of experiences in business linkages could be a constraint in the development of IST and challenge for policymakers.

General Equilibrium Modelling of the Insurance Industry: U.S. Crop Insurance

The U.S. farm policy has progressively changed in recent years, with greater reliance on subsidized crop insurance programs in the place of fixed direct payments. Despite the use of such insurance over a long period of time, quantitative macroeconomic assessments of insurance programs are lacking. We develop an original stochastic computable general equilibrium framework where we isolate the coverage effects provided by subsidized insurance programs. We find that their welfare effects are dramatically modified once we recognize their risk sharing properties. Our simulated market effects on the U.S. cereal markets are consistent with currently available microeconometric evidence.

General Equilibrium Modelling of the Insurance Industry: U.S. Crop Insurance

The U.S. farm policy has progressively changed in recent years, with greater reliance on subsidized crop insurance programs in the place of fixed direct payments. Despite the use of such insurance over a long period of time, quantitative macroeconomic assessments of insurance programs are lacking. We develop an original stochastic computable general equilibrium framework where we isolate the coverage effects provided by subsidized insurance programs. We find that their welfare effects are dramatically modified once we recognize their risk sharing properties. Our simulated market effects on the U.S. cereal markets are consistent with currently available microeconometric evidence.

Moral hazard and subsidized crop insurance

AbstractAlong with adverse selection, moral hazard is one of the major hurdles that private and public insurance plans must contend with. Moral hazard occurs if risks are endogenous to a producer's behavior and if the insurer is unable to properly monitor the insured. We review the role of moral hazard in the US crop insurance program. We conduct an empirical analysis of one important aspect of the US crop insurance program—prevented planting. This provision provides indemnity payments if conditions are not suitable for planting. The program has been the subject of considerable controversy, especially during 2019, when the rate of claims is expected to be especially high. Because loss adjustors may encounter difficulties in assessing the weather conditions associated with prevented planting claims, the program is susceptible to moral hazard. We consider the extent to which prevented planting claims may be endogenous to prices. We find significant evidence of moral hazard. The likelihood of prevented planting claims increases as the expected market price decreases or as fertilizer costs increase for corn and soybeans in the Prairie Pothole Region and for grain sorghum and cotton in all states.

EVALUATION OF SUBSIDIZED CROP INSURANCE IN POLAND

The aim of the paper was the evaluation of subsidized crop insurance during the years 2010-2019. Crop production is highly exposed to the effects of unfavourable weather conditions leading to significant fluctuations in yield. Farmers are not able to fully cope with these phenomena. They may use the available risk reduction techniques, e.g. diversifying production, but these actions might not be sufficient. In addition, there is a need to transfer risk outside the farm for a reasonable price. Such an effect can be achieved by offering crop insurance in Poland with state subsidies. In the description, data from the Central Statistical Office were used. For change evaluation, structure indicators of insured crop surface and dynamics indicators were used to determine the relative change in the importance of particular types of crop covered by the insurance. Also, the sum insured per 1 ha of insured crops and its trend were calculated. The authors still emphasize that there is an unsatisfactory level of universality of crop insurance among farmers. Despite the modification of legal regulations concerning them, it is estimated that only approximately 20% of cultivated area is protected. In the analysed years, the insured area of cereal crops constituted over 50% of the share in total insured area. The highest percentage of insurance area was observed for oilseed rape with the highest production risk.

Insurance of agricultural products with state support in Ukraine: state, problems and prospects of development

The purpose of the research is to substantiate the laws of development of agricultural insurance with state support in Ukraine, and provide a set of practical recommendations for implementation of insurance mechanisms for financial support of agriculture. Methodology. The theoretical and methodological basis of the research are the dialectical method of knowledge of economic processes, the fundamental provisions of modern economic theory, scientific works domestic and foreign scientists on economic relations between participants of the agricultural insurance market with state support for agricultural products. A systematic approach, methods of generalization, induction, deduction, analysis, synthesis and comparison were used to achieve this purpose. Results. The necessity and importance of using insurance mechanisms to mitigate risks for agricultural producers had been determined. The state of economic relations for the protection of property interests of agricultural producers had been reviewed in general, and trends in the development of subsidized crop insurance in the insurance market of Ukraine had been identified. The indicators of agricultural insurance and the amount of subsidies from the state budget allocated to reduce the cost of insurance premiums (contributions), which actually had been paid by actors of the agricultural market, had been analyzed. It was revealed that in 2005-2008 the introduction of state support for crop insurance had a positive impact on the performance of the agricultural insurance market, contributed to the popularization of this type of insurance in Ukraine, and positively affected protecting the interests of agricultural producers. The factors hindering the development of domestic crop insurance with state support were revealed. It had been proved that current level of penetration of this kind of insurance protection remains low and insufficient to guarantee the safety of business activities in the agricultural sector, the current model of agricultural state aid, provided by the Law of Ukraine “On peculiarities of crop insurance with state support”, was inefficient and therefore required reformation. The importance of improvements in state regulation, including implementation mechanisms of the existing legislation, and state policy of financial support had been substantiated. It was determined that the market model of crop insurance system in Ukraine should be based on the principles of public-private partnership. Practical meaning appears in the possibility of using theoretical conclusions and practical recommendations for the further development of agricultural insurance in general and crop insurance with state support in particular. Prospects for further research are identification and scientific substantiation of the ways of forming a reliable mechanism for insurance protection of property interests of agricultural producers, development and legislation of recommendations on the forms of effective interaction between the main participants in agricultural insurance – agricultural producers, insurance companies and government.

A preliminary test on risk and ambiguity attitudes, and time preferences in decisions under uncertainty: towards a better explanation of participation in crop insurance schemes

The exposure of farmers to different (and increasing) risks has been recognized by the EU policy, which supports several risk management tools through the Common Agricultural Policy (CAP). Despite the vulnerability of the agricultural sector, and the attention paid at the EU level, the uptake of such tools is generally low across EU countries. The Italian case is emblematic: the uptake of subsidized crop insurance contracts is low, limited to few products, and concentrated in few areas. Coherently, the interest of policy makers toward explaining these characteristics and in gaining insights on the interventions that may help promoting participation is intense. This contribution investigates behavioral aspects linked to choices under risk and ambiguity, and account for time preferences in order to mimic the scenario faced by the potential adopters of the subsidized crop insurance contracts in Italy. Data are collected through questionnaires submitted to students from agricultural colleges in three administrative regions located in northern, central and southern Italy. Results show that attitude toward risk, ambiguity, and impatience are correlated with the intrinsic characteristics of respondents. In addition, some of those attitudes may help explaining decisions under uncertainty. Despite the empirical analysis is preliminary and focused on students, it allowed to validate a promising methodological approach capable of explaining farmer’s willingness to adopt (or renew) insurance contracts. By accounting for (currently under-investigated) behavioral aspects, it is likely to prove useful to re-design or implementing, more effectively, the current policies.

Effects of subsidized crop insurance on crop choices

AbstractThis study focuses on how subsidized crop insurance affects crop choices. Crop insurance may change farm investments by reducing risks and providing subsidies. First, actuarially fair insurance reduces risks in crop production and marketing, holding the expected return constant. Second, insurance subsidies encourage farms to purchase crop insurance, which increases the expected return to insured risky crops. Farms also have many self‐insurance mechanisms such as crop diversification or working off the farm. We derive conditions under which (1) unsubsidized and actuarially fair crop insurance or (2) insurance premium subsidies lead to more investment in a risky higher return crop. We then examine the role of self‐insurance for these conditions. The impact of premium subsidies is decomposed into a direct profit effect and an indirect coverage effect. These effects are explained by substitutions between market insurance and self‐insurance and between a risky crop and a safe crop. We discuss each effect as a combination of subsidy and risk effects. Numerical illustrations show that an insurance subsidy has a larger impact on risky crop investments compared to that of an input subsidy when farms are more risk‐averse and have high costs of self‐insurance. The framework provides a novel way to evaluate subsidized crop insurance programs.

PŁATNOŚCI BEZPOŚREDNIE A DOTOWANE UBEZPIECZENIA UPRAW W ROLNICTWIE

The article presents types of subsidized crop insurance in agriculture. The purpose of the study was to discuss changes in the area of insured crops in 2009-2015 and to show the link between the introduction of the crop insurance law and the actual level of insurance contracts concluded by farmers. The study attempted to answer the question whether, the principle of compulsory insurance connected with the receipt of direct payments increased the interest of farmers in state-subsidized insurance. The article used data from Statistical Yearbooks of Central Statistical Office, reports of insurance companies submitted to the Ministry of Agriculture and Rural Development and FADN (Farm Accountancy Data Network). The analysis covered detailed FADN agricultural accounting data for 2009-2015.

Dotowane ubezpieczenia upraw w Polsce. Stan i perspektywy

W artykule podjęto próbę analizy funkcjonowania dotowanych ubezpieczeń upraw w Polsce w latach 2012–2016. Oceniono zmiany, którym poddano system ubezpieczeń upraw. Wskazano na deficytowość tych produktów dla zakładów ubezpieczeniowych oraz brak powszechności nabywania polis przez producentów rolnych w Polsce. Artykuł zawiera propozycje zmian, które mogą wpłynąć na poprawę funkcjonowania tych ubezpieczeń, zarówno po stronie popytu, jak i podaży.

Integrating Historic Agronomic and Policy Lessons with New Technologies to Drive Farmer Decisions for Farm and Climate: The Case of Inland Pacific Northwestern U.S.

Climate-friendly best management practices for mitigating and adapting to climate change (cfBMPs) include changes in crop rotation, soil management and resource use. Determined largely by precipitation gradients, specific agroecological systems in the inland Pacific Northwestern U.S. (iPNW) feature different practices across the region. Historically, these farming systems have been economically productive, but at the cost of high soil erosion rates and organic matter depletion, making them win-lose situations. Agronomic, sociological, political and economic drivers all influence cropping system innovations. Integrated, holistic conservation systems also need to be identified to address climate change by integrating cfBMPs that provide win-win benefits for farmer and environment. We conclude that systems featuring short-term improvements in farm economics, market diversification, resource efficiency and soil health will be most readily adopted by farmers, thereby simultaneously addressing longer term challenges including climate change. Specific ‘win-win scenarios’ are designed for different iPNW production zones delineated by water availability. The cfBMPs include reduced tillage and residue management, organic carbon (C) recycling, precision nitrogen (N) management and crop rotation diversification and intensification. Current plant breeding technologies have provided new cultivars of canola and pea that can diversify system agronomics and markets. These agronomic improvements require associated shifts in prescriptive, precision N and weed management. The integrated cfBMP systems we describe have the potential for reducing system-wide greenhouse gas (GHG) emissions by increasing soil C storage, N use efficiency (NUE) and by production of biofuels. Novel systems, even if they are economically competitive, can come with increased financial risk to producers, necessitating government support (e.g., subsidized crop insurance) to promote adoption. Other conservation- and climate change-targeted farm policies can also improve adoption. Ultimately, farmers must meet their economic and legacy goals to assure longer-term adoption of mature cfBMP for iPNW production systems.

Impact of farm programs on farm households in the US

The growth of the firm is often financed through retained earnings. Entrepreneurs look to expand, make new investments, or pay off debt using free cash flows from the business. However, entrepreneurs in farming businesses derive income from enterprises that have variable income, and farm program payments provided by the government helps smooth income and consumption. Using national-farm level data (2008–2013) and free cash modelling approach we study how government commodity support (decoupled, coupled payments and subsidized crop insurance) affects the financial status of farm businesses. Additionally, we investigate the impact of government commodity support on farming business and household expenditures. Findings suggest that free cash flows to equity has a significantly negative impact on total farm household expenditures. Further, our results also suggest that the effect of farm program payments, especially decoupled payments, is small. Elasticities on the decoupled Payments and coupled Payments variables are both positive. However, the magnitude of the effect on the former is four times higher than on the latter. Hence, most of the impact of Title I support on total farm household expenditures will likely be via the decoupled Payments channel. Nonetheless, if the goal of commodity support is to reduce the consumption volatility of farm household, our results suggest that these payments have little impact.