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Empirically Evaluating the Flexibility of the Johnson Family of Distributions: A Crop Insurance Application

  • Lu, Yue
  • Ramirez, Octavio A.
  • Rejesus, Roderick M.
  • Knight, Thomas O.
  • Sherrick, Bruce J.

This article examines the flexibility of the Johnson system of distributions by assessing its per-formance in terms of modeling crop yields for the purpose of setting actuarially fair crop in-surance premiums. Using data from corn farms in Illinois coupled with Monte Carlo simula-tion procedures, we found that average crop insurance premiums computed on the basis of the Johnson system provide reasonably accurate estimates even when the data are normal or come from a non-normal distribution other than the Johnson system (i.e., a beta). These results sug-gest that there is potential for using the Johnson system to rate previously uninsured crops that do not have historical insurance performance data upon which to base premium calculations.

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

Volume (Year): 37 (2008)
Issue (Month): 1 (April)

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Handle: RePEc:ags:arerjl:44740
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  1. Stokes, Jeffrey R., 2000. "A Derivative Security Approach To Setting Crop Revenue Coverage Insurance Premiums," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(01), July.
  2. 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.
  3. Babcock, Bruce A. & Hart, Chad E. & Hayes, Dermot J., 2004. "Actuarial Fairness of Crop Insurance Rates with Constant Rate Relativities," Staff General Research Papers 11283, Iowa State University, Department of Economics.
  4. Keith H. Coble & Thomas O. Knight & Rulon D. Pope & Jeffery R. Williams, 1997. "An Expected-Indemnity Approach to the Measurement of Moral Hazard in Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 216-226.
  5. 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.
  6. Bailey Norwood & Matthew C. Roberts & Jayson L. Lusk, 2004. "Ranking Crop Yield Models Using Out-of-Sample Likelihood Functions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(4), pages 1032-1043.
  7. Zanini, Fabio C. & Sherrick, Bruce J. & Schnitkey, Gary D. & Irwin, Scott H., 2001. "Crop Insurance Valuation Under Alternative Yield Distributions," 2001 Conference, April 23-24, 2001, St. Louis, Missouri 18953, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
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