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Testing the Possibility of Private Crop Insurance and Reinsurance Markets

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  • Wang, H. Holly
  • Krogmeier, Joseph L.

Abstract

Risk theory tells us if an insurer can effectively pool a large number of individuals to reduce the total risk, he then can provide the insurance by charging a premium close to the actuarially fair rate. There is a common belief that only when the random loss is independent, the risk can be effectively pooled, therefore because crop yield is not independent among growers crop insurance market cannot survive without government subsidy. In this paper, a weaker condition, asymptotic nonpositive correlation (a.n.c.), is presented as sufficient for effective risk pooling. US crop yield data are used to test the hypothesis and we cannot reject that US yields are a.n.c. As a result, private crop insurance/reinsurance markets are expected to be able to exist.

Suggested Citation

  • Wang, H. Holly & Krogmeier, Joseph L., 1999. "Testing the Possibility of Private Crop Insurance and Reinsurance Markets," 1981-1999 Conference Archive 285750, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:nc8191:285750
    DOI: 10.22004/ag.econ.285750
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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, September.
    2. Jerry R. Skees & J. Roy Black & Barry J. Barnett, 1997. "Designing and Rating an Area Yield Crop Insurance Contract," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 430-438.
    3. Marshall, John M, 1974. "Insurance Theory: Reserves versus Mutuality," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 476-492, December.
    4. 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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