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Forward Contracts And Crop Insurance: Should Premiums Be Adjusted For Risk Management Practice?

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  • Sil, Jayashree

Abstract

Current premium rate-making methodology for the government-sponsored Multiple Peril Crop Insurance (MPCI) program adjusts premiums for farms engaging in certain cropping practices. These practices are production methods such as irrigation, fallow and double-cropping. Actuarial evidence has shown that such practices can separate farms into distinct risk classes. We suggest that risk-management tool is another category of practice which could be considered in setting premium rates. The present analysis shall focus on one risk management tool: cash forward contracts. Making this assessment requires that we use a key actuarial concept called loss cost ratio. Preliminary evidence (from sam ple moments of yield distributions) suggests that indeed the loss cost ratio may be lower in the presence of forward contracts when corn, wheat and soybeans are the insured crops.

Suggested Citation

  • Sil, Jayashree, 2002. "Forward Contracts And Crop Insurance: Should Premiums Be Adjusted For Risk Management Practice?," 2002 Annual meeting, July 28-31, Long Beach, CA 19638, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea02:19638
    DOI: 10.22004/ag.econ.19638
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    References listed on IDEAS

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    1. 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.
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    3. Keith H. Coble & Thomas O. Knight & Rulon D. Pope & Jeffery R. Williams, 1997. "An Expected-Indemnity Approach to the Measurement of Moral Hazard in Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 216-226.
    4. John K. Horowitz & Erik Lichtenberg, 1993. "Insurance, Moral Hazard, and Chemical Use in Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(4), pages 926-935.
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    Keywords

    Risk and Uncertainty;

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