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Index-based insurance of gross margin in agriculture – key challenges

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  • Sulewski, Piotr
  • Was, Adam

Abstract

The paper attempts at assessment of usefulness of the index-based insurance of gross margin compared to traditional production insurances. The analysis used FADN data and was limited to the example of winter wheat. The conducted simulations showed that the category of gross margin is characterized by higher variability than yields or prices, thus the costs of its insurance expressed as fair premium would be higher than the costs of traditional production insurance. However, the major problem in case of index-based insurances is still the basic risk related to the possibility that part of the insured will not receive compensation even though they incurred losses. The conducted analyses showed that the assumption of the index basing on the average drop in yields in a voivodeship would result in major percentage of errors as regards payment and refusal of payment of the compensation compared to individual insurance. Structuring of the system of index-based insurances would require collecting data – to construct indices – from areas of much smaller territorial coverage.

Suggested Citation

  • Sulewski, Piotr & Was, Adam, 2018. "Index-based insurance of gross margin in agriculture – key challenges," Problems of Agricultural Economics 276382, Institute of Agricultural and Food Economics - National Research Institute (IAFE-NRI).
  • Handle: RePEc:ags:iafepa:276382
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    File URL: http://ageconsearch.umn.edu/record/276382/files/Sulewski%2C%20Was.pdf
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    References listed on IDEAS

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    1. Carlo Cafiero & Fabian Capitanio & Antonio Cioffi & Adele Coppola, 2007. "Risk and Crisis Management in the Reformed European Agricultural Policy," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 55(4), pages 419-441, December.
    2. Michael Carter & Ghada Elabed & Elena Serfilippi, 2015. "Behavioral economic insights on index insurance design," Agricultural Finance Review, Emerald Group Publishing, vol. 75(1), pages 8-18, May.
    3. Barnett, Barry J. & Black, J. Roy & Hu, Yingyao & Skees, Jerry R., 2005. "Is Area Yield Insurance Competitive with Farm Yield Insurance?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 30(2), pages 1-17, August.
    4. Hans P. Binswanger-Mkhize, 2012. "Is There Too Much Hype about Index-based Agricultural Insurance?," Journal of Development Studies, Taylor & Francis Journals, vol. 48(2), pages 187-200, February.
    5. Bozic, Marin & Newton, John & Thraen, Cameron S. & Gould, Brian W., 2012. "Livestock Gross Margin Insurance for Dairy: Designing Margin Insurance Contracts to Account for Tail Dependence Risk," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124718, Agricultural and Applied Economics Association.
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    Keywords

    Agricultural Finance; Farm Management; Political Economy;

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