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Evaluation of the reference yield calculation method in crop insurance

Author

Listed:
  • Roderick M. Rejesus
  • Barry K. Goodwin
  • Keith H. Coble
  • Thomas O. Knight

Abstract

Purpose - This article seeks to examine the reference yield calculation method used in crop insurance rating and provides recommendations that could potentially improve actuarial performance of the Federal crop insurance program. Design/methodology/approach - Conceptual, numerical, and statistical analysis is utilized to evaluate the reference yield calculation method used in the US Federal crop insurance program. Findings - The results suggest that reference yields, which at the time of this study are calculated using National Agricultural Statistics Service (NASS) data, do not accurately represent the average actual yields of the insured pool of producers in the Federal crop insurance program. In addition, it is found that not regularly updating these NASS-based reference yields exacerbates this problem because these reference yields do not appropriately represent the current state of technological progress. Practical implications - The empirical analysis leads this paper to recommend a reference yield calculation procedure that utilizes county-average yields from the risk management agency (RMA) participation database and an approach that uses spatially aggregated average yields in cases when data for a particular county are sparse. Originality/value - No previous study has investigated the reference yield calculation method in the Federal crop insurance program using both RMA and NASS data sets. Moreover, this study contributes to the small literature that examines various aspects of the actual production history (APH) rating platform and suggests refinements to improve actuarial performance.

Suggested Citation

  • Roderick M. Rejesus & Barry K. Goodwin & Keith H. Coble & Thomas O. Knight, 2010. "Evaluation of the reference yield calculation method in crop insurance," Agricultural Finance Review, Emerald Group Publishing, vol. 70(3), pages 427-445, November.
  • Handle: RePEc:eme:afrpps:v:70:y:2010:i:3:p:427-445
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    References listed on IDEAS

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    1. Knight, Thomas O. & Coble, Keith H., 1999. "Actuarial Effects of Unit Structure in the U.S. Actual Production History Crop Insurance Program," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 31(03), pages 519-535, December.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
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    Cited by:

    1. Octavio A. Ramirez & Carlos A. Carpio, 2012. "Premium estimation inaccuracy and the actuarial performance of the US crop insurance program," Agricultural Finance Review, Emerald Group Publishing, vol. 72(1), pages 117-133, May.

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