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

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  • H. Holly Wang
  • Hao Zhang
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    Abstract

    Risk 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. Copyright 2003 The Journal of Risk and Insurance.

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    Bibliographic Info

    Article provided by The American Risk and Insurance Association in its journal Journal of Risk & Insurance.

    Volume (Year): 70 (2003)
    Issue (Month): 1 ()
    Pages: 111-124

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    Handle: RePEc:bla:jrinsu:v:70:y:2003:i:1:p:111-124

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    Cited by:
    1. Vitor Ozaki, 2009. "Pricing farm-level agricultural insurance: a Bayesian approach," Empirical Economics, Springer, Springer, vol. 36(2), pages 231-242, May.
    2. Zhiwei Shen & Martin Odening & Ostap Okhrin, 2013. "Can expert knowledge compensate for data scarcity in crop insurance pricing?," SFB 649 Discussion Papers SFB649DP2013-030, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    3. Di Falco, Salvatore & Capitanio, Fabian & Adinolfi, Felice, 2011. "Natural Vs Financial Insurance in the Management of Weather Risk Exposure in the Italian Agriculture," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland, European Association of Agricultural Economists 114325, European Association of Agricultural Economists.
    4. Shen, Zhiwei & Odening, Martin, 2012. "Coping with Systemic Risk in Index-based Crop Insurance," 123rd Seminar, February 23-24, 2012, Dublin, Ireland, European Association of Agricultural Economists 122555, European Association of Agricultural Economists.
    5. Geoffroy Enjolras & Patrick Sentis, 2008. "The main determinants of insurance purchase. An empirical study on crop insurance policies in France," Working Papers, LAMETA, Universtiy of Montpellier 08-06, LAMETA, Universtiy of Montpellier, revised Apr 2008.
    6. Xu, Wei & Filler, Gunther & Odening, Martin & Okhrin, Ostap, 2009. "On the Systemic Nature of Weather Risk," 2009 Conference, August 16-22, 2009, Beijing, China, International Association of Agricultural Economists 51426, International Association of Agricultural Economists.
    7. Lambert, Dayton M. & Griffin, Terry W., 2004. "Analysis Of Government Farm Subsidies On Farmland Cash Rental Rates Using A Fixed Effect Spatial Distributed Lag Model And A Translog Cost Model," 2004 Annual meeting, August 1-4, Denver, CO, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 19977, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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