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Estimation of Insurance Deductible Demand Under Endogenous Premium Rates

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  • Joshua D. Woodard
  • Jing Yi

Abstract

Government‐subsidized insurance is ubiquitous, yet estimation of demand in such markets remains challenging. The premium charged for a given deductible is determined by actuarial construction; thus, observed choice‐pairs are endogenous leading to biased estimation under standard econometric approaches. A theoretical model and simulation study are developed, and a new identification strategy proposed. An empirical application using Federal Crop Insurance Program—a $100 billion/year program—data reveals that demand is quite elastic after accounting for this endogeneity. Mistreatment of such endogeneity is likely partly responsible for pervasive faulty findings of inelastic insurance demand in related applications. Policy implications are also discussed.

Suggested Citation

  • Joshua D. Woodard & Jing Yi, 2020. "Estimation of Insurance Deductible Demand Under Endogenous Premium Rates," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 477-500, June.
    • Handle: RePEc:bla:jrinsu:v:87:y:2020:i:2:p:477-500
    DOI: 10.1111/jori.12260
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    3. Tim Philippi & Jörg Schiller, 2024. "Abandoning disaster relief and stimulating insurance demand through premium subsidies," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 91(2), pages 339-382, June.
    4. Tsiboe, Francis & Turner, Dylan, 2023. "Econometric Identification of Crop Insurance Participation," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 52(3), May.
    5. Fabio G., Santeramo & Ilaria, Russo & Emilia, Lamonaca, 2022. "Italian subsidised crop insurance: what the role of policy changes," MPRA Paper 115299, University Library of Munich, Germany.
    6. Hu, Bin & Hu, Yan-Ping, 2024. "Pricing models for small and micro loan portfolio insurance," International Review of Financial Analysis, Elsevier, vol. 96(PA).
    7. Belasco, Eric J., 2020. "WAEA Presidential Address: Moving Agricultural Policy Forward: Or, There and Back Again," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 45(3), September.
    8. Hu, Bin & Hu, Yan-Ping, 2024. "A pricing model system for small and micro loan insurance considering limited claims," International Review of Financial Analysis, Elsevier, vol. 93(C).
    9. Nusrat Akber & Kirtti Ranjan Paltasingh & Ashok K. Mishra, 2025. "Does crop insurance ensure food security for Indian farmers? Evidence from a nationally representative survey," Agribusiness, John Wiley & Sons, Ltd., vol. 41(1), pages 217-237, January.

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