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Implications of within county yield heterogeneity for modeling crop insurance premiums

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Author Info

  • Joseph Cooper
  • Carl Zulauf
  • Michael Langemeier
  • Gary Schnitkey

Abstract

Purpose – Farm level data are essential to accurate setting of crop insurance premium rates, but their time series tends to be too short to allow them to be the sole data source. County level data are available in longer time series, however. The purpose of this paper is to present a methodology to make full use of the information inherent in each of these data sets. Design/methodology/approach – The paper uses a novel application of statistical tools for using farm and county level yield data to generate farm level yield densities that explicitly incorporate within county yield heterogeneity while accounting for systemic risk and other spatial or intertemporal correlations among farms within the county. Findings – The empirical analysis shows that current approaches used by the Risk Management Agency to individualize premiums for a farm result in substantial mispricing of crop insurance premiums because they do not adequately capture farm yield variability and yield correlations between farms. The new premium setting method is empirically shown to substantially reduce government subsidies for crop insurance premiums. Originality/value – The paper demonstrates how to extract more information from available data when setting crop insurance premiums, which allows the government to more closely tailor premiums to the farm than do current approaches.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Agricultural Finance Review.

Volume (Year): 72 (2012)
Issue (Month): 1 (March)
Pages: 134-155

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Handle: RePEc:eme:afrpps:v:72:y:2012:i:1:p:134-155

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Related research

Keywords: Agriculture; Copulas; Corn; Crop yield; Crops; Federal crop insurance; Insurance premiums; Monte Carlo simulation; Multivariate density functions; Soybeans; United States of America;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  1. Paul Embrechts, 2009. "Copulas: A Personal View," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 639-650.
  2. 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.
  3. 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.
  4. 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.
  5. Bruce A. Babcock & Chad E. Hart & Dermot J. Hayes, 2004. "Actuarial Fairness of Crop Insurance Rates with Constant Rate Relativities," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(3), pages 563-575.
  6. Calm G. Turvey, 1992. "An Economic Analysis of Alternative Farm Revenue Insurance Policies," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 40(3), pages 403-426, November.
  7. Richard E. Just & Linda Calvin & John Quiggin, 1999. "Adverse Selection in Crop Insurance: Actuarial and Asymmetric Information Incentives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 834-849.
  8. Thomas O. Knight & Keith H. Coble & Barry K. Goodwin & Roderick M. Rejesus & Sangtaek Seo, 2010. "Developing Variable Unit-Structure Premium Rate Differentials in Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(1), pages 141-151.
  9. 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.
  10. Agulló, Jose & Croux, Christophe & Van Aelst, Stefan, 2008. "The multivariate least-trimmed squares estimator," Journal of Multivariate Analysis, Elsevier, vol. 99(3), pages 311-338, March.
  11. Vitor Ozaki & Barry Goodwin & Ricardo Shirota, 2008. "Parametric and nonparametric statistical modelling of crop yield: implications for pricing crop insurance contracts," Applied Economics, Taylor & Francis Journals, vol. 40(9), pages 1151-1164.
  12. Cooper, Joseph C., 2009. "Payments under the Average Crop Revenue Program: Implications for Government Costs and Producer Preferences," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 38(1), April.
  13. Barry K. Goodwin & Alan P. Ker, 1998. "Nonparametric Estimation of Crop Yield Distributions: Implications for Rating Group-Risk Crop Insurance Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 139-153.
  14. Keith H. Coble & Robert Dismukes, 2008. "Distributional and Risk Reduction Effects of Commodity Revenue Program Design ," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(3), pages 543-553.
  15. Michael Popp & Margot Rudstrom & Patrick Manning, 2005. "Spatial Yield Risk Across Region, Crop and Aggregation Method," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 53(2-3), pages 103-115, 06.
  16. Joseph C. Cooper, 2010. "Average Crop Revenue Election: A Revenue-Based Alternative to Price-Based Commodity Payment Programs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(4), pages 1214-1228.
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Citations

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Cited by:
  1. Gerlt, Scott & Westhoff, Patrick, 2013. "Analysis of the Supplemental Coverage Option," 2013 AAEA: Crop Insurance and the Farm Bill Symposium, October 8-9, Louisville, KY 156704, Agricultural and Applied Economics Association.
  2. Zulauf, Carl R. & Demircan, Vecdi & Scnhitkey, Gary & Barnaby, Art & Ibendahl, Gregg & Herbel, Kevin, 2013. "Examining Contemporaneous Farm and County Losses Using Farm Level Data," 2013 AAEA: Crop Insurance and the Farm Bill Symposium, October 8-9, Louisville, KY 157812, Agricultural and Applied Economics Association.
  3. Cooper, Joseph C. & Delbecq, Benoit A. & Davis, Christopher G., 2012. "Fiscal and Farm Level Consequences of “Shallow Loss” Commodity Support," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124199, Agricultural and Applied Economics Association.

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