Cooperative and Area Yield Insurance: A Theoretical Analysis

The purpose of this paper it to theoretically investigate the potential benefits that arise from a cooperative selling a government subsidized area-yield contract (i.e., the Group Risk Plan). The indemnities in area-yield contracts are triggered by a geographically determined yield (e.g, a country-wide yield average) instead of the more conventional individual actual production history. Therefore, an area-yield contract would be appropriate for managing the cooperative's systemic throughput risk. The cooperative would also capture some of the substantial government subsidies that are normally given to a private insurance company. Our primary finding is that farmers should be indifferent when considering the decisions to purchase area-yield insurance from a private company or encompass that business in their cooperative. We derive this result from the specific case of costless insurance and assume a Pareto Optimal contract. Under these assumptions, the government subsidies that the cooperative would hope to capture are simply a net deduction in their premiums. In other words, the benefit they capture from the subsidies in the same when they purchase the insurance from an outside firm or internally.