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Relaxing Heteroscedasticity Assumptions in Area-Yield Crop Insurance Rating

  • Ardian Harri
  • Keith H. Coble
  • Alan P. Ker
  • Barry J. Goodwin

This article focuses on the effect of differing heteroscedasticity assumptions on derived premium rates of area-yield crop insurance. Tests of the proportional and absolute heteroscedasticity assumptions are conducted using both in-sample and out-of-sample measures. Our results suggest that arbitrarily imposing a specific form of heteroscedasticity or homoscedasticity in insurance rate calculations limits actuarial soundness. Our results have practical implications for the federal crop insurance programs, as we reject the traditional rating assumptions for many cotton regions and lower-yielding/higher-risk corn and soybean counties but not in the heart of the Cornbelt. Copyright 2011, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/ajae/aar009
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Article provided by Agricultural and Applied Economics Association in its journal American Journal of Agricultural Economics.

Volume (Year): 93 (2011)
Issue (Month): 3 ()
Pages: 703-713

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Handle: RePEc:oup:ajagec:v:93:y:2011:i:3:p:703-713
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