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Weather-Based Adverse Selection And The U.S. Crop Insurance Program: The Private Insurance Company Perspective

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  • Ker, Alan P.
  • McGowan, Pat

Abstract

Surprisingly, investigations of adverse selection have focused only on farmers. Conversely, this article investigates if insurance companies, not farmers, can generate excess rents from adverse selection activities. Currently political forces fashioning crop insurance as the cornerstone of U.S. agricultural policy make our analysis particularly topical. Focusing on El Nino/La Nina and winter wheat in Texas, we simulate out-of-sample reinsurance decisions during the 1978 through 1997 crop years while reflecting the realities imposed by the risk-sharing arrangement between the insurance companies and the federal government. The simulations indicate that economically and statistically significant excess rents may be garnered by insurance companies through weather-based adverse selection.

Suggested Citation

  • Ker, Alan P. & McGowan, Pat, 2000. "Weather-Based Adverse Selection And The U.S. Crop Insurance Program: The Private Insurance Company Perspective," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(2), pages 1-25, December.
    • Handle: RePEc:ags:jlaare:30907
    DOI: 10.22004/ag.econ.30907
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    References listed on IDEAS

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    1. Goodwin, Barry K. & Ker, Alan P., 1998. "Revenue Insurance: A New Dimension in Risk Management," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 13(4), pages 1-4.
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    6. 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(2), pages 1-14, December.
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    8. Baquet, Alan E. & Skees, Jerry R., 1994. "Group Risk Plan Insurance: An Alternative Management Tool for Farmers," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 9(01), pages 1-4.
    9. Ker, Alan P. & Coble, Keith H., 1998. "On Choosing A Base Coverage Level For Multiple Peril Crop Insurance Contracts," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(2), pages 1-18, December.
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