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Accounting for Weather Probabilities in Crop Insurance Rating

Author

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  • Coble, Keith H.
  • Miller, Mary Frances
  • Rejesus, Roderick M.
  • Boyles, Ryan
  • Goodwin, Barry K.
  • Knight, Thomas O.

Abstract

The US crop insurance program previously used a simple average of equally weighted historical loss cost data to serve as the backbone for estimating crop insurance premium rates. This article develops a procedure for weighting the historical loss cost experience based on longer time-series weather information and improve statistical validity of estimated premium rates. It was determined that the best weather data to account for weather probabilities in crop insurance premium rating is the National Climatic Data Center’s Time Bias Corrected Divisional Temperature-Precipitation-Drought Index data, also called the Climate Division Data. Using fractional logit and out-of-sample competitions, weather variables can be selected to construct an index that would allow proper assessment of the relative probability of weather events that drive production losses and to construct proper “weather weights” that can be applied when averaging historical loss cost data to calculate rates. A variable width binning approach with equal probabilities was determined as the best approach for classifying each year in the shorter historical loss cost data used for rating. When the weather weighting approach described above is applied, we find that for apples, barley, cotton, potatoes, rice, and spring/winter wheat, the weather weighted average loss costs at the national level tend to be smaller than the calculated average loss costs without weather weighting. However, for corn, cotton, sorghum, and soybeans, the weather weighted average loss costs at the national level tend to be larger. Around 51% of the counties have weather weighted average loss costs lower than the average loss costs without weather weighting

Suggested Citation

  • Coble, Keith H. & Miller, Mary Frances & Rejesus, Roderick M. & Boyles, Ryan & Goodwin, Barry K. & Knight, Thomas O., 2013. "Accounting for Weather Probabilities in Crop Insurance Rating," 2013 AAEA: Crop Insurance and the Farm Bill Symposium, October 8-9, Louisville, KY 156825, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaeaci:156825
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    References listed on IDEAS

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    1. Vincent H. Smith & Barry K. Goodwin, 1995. "The Economics of Crop Insurance and Disaster Aid," Books, American Enterprise Institute, number 53374.
    2. Esmeralda A. Ramalho & Joaquim J.S. Ramalho & José M.R. Murteira, 2011. "Alternative Estimating And Testing Empirical Strategies For Fractional Regression Models," Journal of Economic Surveys, Wiley Blackwell, vol. 25(1), pages 19-68, February.
    3. Beach, Robert H. & Thomson, Allison M. & McCarl, Bruce A., 2010. "Climate Change Impacts On Us Agriculture," Proceedings Issues, 2010: Climate Change in World Agriculture: Mitigation, Adaptation, Trade and Food Security, June 2010, Stuttgart- Hohenheim, Germany 91393, International Agricultural Trade Research Consortium.
    4. Julia I. Borman & Barry K. Goodwin & Keith H. Coble & Thomas O. Knight & Rod Rejesus, 2013. "Accounting for short samples and heterogeneous experience in rating crop insurance," Agricultural Finance Review, Emerald Group Publishing, vol. 73(1), pages 88-101, May.
    5. Jesse Tack & Ardian Harri & Keith Coble, 2012. "More than Mean Effects: Modeling the Effect of Climate on the Higher Order Moments of Crop Yields," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(5), pages 1037-1054.
    6. Papke, Leslie E & Wooldridge, Jeffrey M, 1996. "Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 619-632, Nov.-Dec..
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    More about this item

    Keywords

    Crop Insurance; Premium Rating; Weather Weighting; Agricultural and Food Policy; Risk and Uncertainty; G22; Q10; Q18;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • Q10 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - General
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy

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