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Can Crop Insurance Premiums Be Reliably Estimated?

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Author Info

  • Ramirez, Octavio A.
  • Carpio, Carlos E.
  • Rejesus, Roderick M.

Abstract

This paper develops and applies a methodology to assess the accuracy of historical loss-cost rating procedures, similar to those used by the U.S. Department of Agriculture’s Risk Management Agency (RMA), versus alternative parametric premium estimation methods. It finds that the accuracy of loss-cost procedures leaves much to be desired, but can be markedly improved through the use of alternative methods and increased farm-level yield sample sizes. Evidence suggests that the high degree of inaccuracy in crop insurance premium estimations through historical loss-cost procedures identified in the paper might be a major factor behind the need for substantial government subsidies to keep the program solvent.

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File URL: http://purl.umn.edu/107091
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Bibliographic Info

Article provided by Northeastern Agricultural and Resource Economics Association in its journal Agricultural and Resource Economics Review.

Volume (Year): 40 (2011)
Issue (Month): 1 (April)
Pages:

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Handle: RePEc:ags:arerjl:107091

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Web page: http://www.narea.org/
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Related research

Keywords: agricultural subsidies; crop insurance premium estimation; loss-cost procedures; Risk Management Agency; Agricultural and Food Policy; Agricultural Finance; Farm Management; Risk and Uncertainty;

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References

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  1. Bruce J. Sherrick & Fabio C. Zanini & Gary D. Schnitkey & Scott H. Irwin, 2004. "Crop Insurance Valuation under Alternative Yield Distributions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(2), pages 406-419.
  2. Harwood, Joy L. & Heifner, Richard G. & Coble, Keith H. & Perry, Janet E. & Somwaru, Agapi, 1999. "Managing Risk in Farming: Concepts, Research, and Analysis," Agricultural Economics Reports 34081, United States Department of Agriculture, Economic Research Service.
  3. Lu, Yue & Ramirez, Octavio A. & Rejesus, Roderick M. & Knight, Thomas O. & Sherrick, Bruce J., 2008. "Empirically Evaluating the Flexibility of the Johnson Family of Distributions: A Crop Insurance Application," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 37(1), April.
  4. Alan P. Ker & Keith Coble, 2003. "Modeling Conditional Yield Densities," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(2), pages 291-304.
  5. Carriquiry, Miguel A. & Babcock, Bruce A. & Hart, Chad E., 2008. "Using a Farmer's Beta for Improved Estimation of Expected Yields," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 33(01), April.
  6. Alan P. Ker & Barry K. Goodwin, 2000. "Nonparametric Estimation of Crop Insurance Rates Revisited," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(2), pages 463-478.
  7. Ramirez, Octavio A. & McDonald, Tanya U. & Carpio, Carlos E., 2010. "A Flexible Parametric Family for the Modeling and Simulation of Yield Distributions," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 42(02), May.
  8. Octavio A. Ram�rez & Tanya McDonald, 2006. "Ranking Crop Yield Models: A Comment," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(4), pages 1105-1110.
  9. Joseph W. Glauber, 2004. "Crop Insurance Reconsidered," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(5), pages 1179-1195.
  10. Octavio A. Ramirez & Sukant Misra & James Field, 2003. "Crop-Yield Distributions Revisited," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(1), pages 108-120.
  11. Ramirez, Octavio A. & McDonald, Tanya U., 2007. "An Empirically-Grounded Comparison of the Johnson System versus the Beta as Crop Yield Distribution Models," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 9814, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  12. Goodwin, Barry K., 1994. "Premium Rate Determination In The Federal Crop Insurance Program: What Do Averages Have To Say About Risk?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 19(02), December.
  13. Octavio A. Ram�rez, 1997. "Estimation and Use of a Multivariate Parametric Model for Simulating Heteroskedastic, Correlated, Nonnormal Random Variables: The Case of Corn Belt Corn, Soybean, and Wheat Yields," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 191-205.
  14. Barry J. Barnett & Dmitry V. Vedenov, 2007. "Is There a Viable Market for Area-Based Crop Insurance?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(2), pages 508-519.
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Citations

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Cited by:
  1. O'Connor, Claire, 2013. "Soil Matters: How the Federal Crop Insurance Program should be reformed to encourage low-risk farming methods with high-reward environmental outcomes," 2013 AAEA: Crop Insurance and the Farm Bill Symposium, October 8-9, Louisville, KY 156789, Agricultural and Applied Economics Association.
  2. Ramirez, Octavio & Colson, Gregory, 2013. "Premium Estimation Inaccuracy and the Distribution of Crop Insurance Subsidies across Participating Producers," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149690, Agricultural and Applied Economics Association.
  3. Octavio A. Ramirez & Carlos A. Carpio, 2012. "Premium estimation inaccuracy and the actuarial performance of the US crop insurance program," Agricultural Finance Review, Emerald Group Publishing, vol. 72(1), pages 117-133, March.
  4. Ramirez, Octavio & Colson, Greg, 2013. "Premium Estimation Inaccuracy and the Distribution of Crop Insurance Subsidies," SCC-76 Meeting, March 14-16, 2013, Pensacola, Florida 152130, SCC-76: Economics and Management of Risk in Agriculture and Natural Resources.

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