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Infrequent Shocks and Rating Revenue Insurance: A Contingent Claims Approach

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  • Richards, Timothy J.
  • Manfredo, Mark R.

Abstract

Revenue insurance represents an important new risk management tool for agricultural producers. While there are many farm-level products, Group Risk Income Protection (GRIP) is an area-based alternative. Insurers set premium rates for GRIP on the assumption of a continuous revenue distribution, but discrete events may cause the actual value of insurance to differ by a significant amount. This study develops a contingent claims approach to determining the error inherent in ignoring these infrequent events in rating GRIP insurance. An empirical example from the California grape industry demonstrates the significance of this error and suggests an alternative method of determining revenue insurance premiums.

Suggested Citation

  • Richards, Timothy J. & Manfredo, Mark R., 2003. "Infrequent Shocks and Rating Revenue Insurance: A Contingent Claims Approach," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 28(2), pages 1-19, August.
  • Handle: RePEc:ags:jlaare:31094
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    References listed on IDEAS

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    6. Hull, John & White, Alan, 1995. "The impact of default risk on the prices of options and other derivative securities," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 299-322, May.
    7. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1997. "Budgetary and Producer Welfare Effects of Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1024-1034.
    8. Richards, Timothy J., 2000. "A Two-Stage Model Of The Demand For Specialty Crop Insurance," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(1), pages 1-18, July.
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    Cited by:

    1. repec:cup:agrerw:v:47:y:2018:i:03:p:452-476_00 is not listed on IDEAS
    2. Unknown, 2005. "Articles from Volume 1, Issue 2, 2005, Journal of International Agricultural Trade and Development," Journal of International Agricultural Trade and Development, Journal of International Agricultural Trade and Development, vol. 1(2).
    3. Calum G. Turvey, 2010. "Biography: Kiyosi Itô and his influence on the study of agricultural finance and economics," Agricultural Finance Review, Emerald Group Publishing, vol. 70(1), pages 5-20, May.
    4. Ho, Shuay-Tsyr & Ifft, Jennifer E. & Rickard, Bradley J. & Turvey, Calum G., 2018. "Alternative Strategies to Manage Weather Risk in Perennial Fruit Crop Production," Agricultural and Resource Economics Review, Cambridge University Press, vol. 47(03), pages 452-476, December.

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    Keywords

    Risk and Uncertainty;

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