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Systemic Risk In U.S. Crop And Revenue Insurance Programs

  • Mason, Chuck
  • Hayes, Dermot J.
  • Lence, Sergio H.

This study estimates the probability density function of the Federal Risk Management Agency's (RMA) net income from reinsuring crop insurance for corn, wheat, and soybeans. Based on 1997 data, the authors estimate that there is a 5 percent probability that RMA will need to reimburse at least $1 billion to insurance companies, and that the fair value of RMA's reinsurance services to insurance firms equals $78.7 million. In addition, various hedging strategies are examined for their potential to reduce RMA's reinsurance risk. The risk reduction achievable by hedging is appreciable, but use of derivative contracts alone is clearly no panacea.

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File URL: http://purl.umn.edu/132389
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Paper provided by Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition in its series Proceedings: 2001 Regional Committee NC-221, October 1-2, 2001, McLean, Virginia with number 132389.

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Date of creation: Oct 2001
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Handle: RePEc:ags:nc2001:132389
Contact details of provider: Web page: http://www.agfin.ifas.ufl.edu/
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  1. Babcock, Bruce A. & Hennessy, David A., 1996. "Input Demand Under Yield and Revenue Insurance," Staff General Research Papers 794, Iowa State University, Department of Economics.
  2. Octavio A. Ram�rez, 1997. "Estimation and Use of a Multivariate Parametric Model for Simulating Heteroskedastic, Correlated, Nonnormal Random Variables: The Case of Corn Belt Corn, Soybean, and Wheat Yields," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 191-205.
  3. Mario J. Miranda & Joseph W. Glauber, 1997. "Systemic Risk, Reinsurance, and the Failure of Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 206-215.
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