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The Influence of Distributional Assumptions on the Calculation of Crop Insurance Premia


  • Carl H. Nelson


Crop insurance premia are shown to be sensitive to the distributional assumptions used in their calculation. Premia calculations based on normal distributions and beta distributions are compared. The normal distribution overstates the probability of loss relative to the beta distribution, and causes premia to be higher. It is argued that use of the normal distribution in crop insurance premia calculation cannot be justified by appealing to a Central Limit Theorem because crop insurance loss events are not independent, and that distributions with flexible representation of skewness would be more appropriate for crop insurance premia calculation.

Suggested Citation

  • Carl H. Nelson, 1990. "The Influence of Distributional Assumptions on the Calculation of Crop Insurance Premia," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 12(1), pages 71-78.
  • Handle: RePEc:oup:revage:v:12:y:1990:i:1:p:71-78.

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    Cited by:

    1. Douadia, Bougherara & Laurent, Piet, 2018. "On the role of probability weighting on WTP for crop insurance with and without yield skewness," Working Papers SMART - LERECO 18-08, INRA UMR SMART-LERECO.
    2. Li, Lisha, 2015. "Three essays on crop yield, crop insurance and climate change," ISU General Staff Papers 201501010800005371, Iowa State University, Department of Economics.
    3. Zeytoon Nejad Moosavian, Seyyed Ali, 2017. "Flexible Modeling of Multivariate Risks in Pricing Margin Protection Insurance: Modeling Portfolio Risks with Mixtures of Mixtures," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258104, Agricultural and Applied Economics Association.

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