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Insuring Eggs in Baskets

The vast majority of crop and revenue insurance policies sold in the United States are single-crop policies that insure against low yields or low revenues for each crop grown on a particular farm. This practice of insuring one crop at a time runs counter to the traditional risk management practice of diversifying across several enterprises to avoid putting all of ones eggs in a single basket. This paper examines the construction of whole-farm crop revenue insurance programs to include livestock. The whole-farm insurance product covers crop revenues from corn and soybeans and livestock revenues from hog production. The results show that at coverage levels of 95 percent or lower, the fair insurance premiums for this product on a well-diversified Iowa hog farm are far lower than the fair premiums for the corn crop alone on the same farm. The calculation of premium rates for the whole-farm insurance product is derived from a method for imposing correlations first proposed by Iman and Conover in 1982.

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Paper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 03-wp339.

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Date of creation: Jul 2003
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Handle: RePEc:ias:cpaper:03-wp339
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  1. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1995. "Budgetary and Resource Allocation Effects of Revenue Assurance: Summary of Results, The," Center for Agricultural and Rural Development (CARD) Publications 95-bp7, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  2. 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.
  3. Keith H. Coble & Thomas O. Knight & Rulon D. Pope & Jeffery R. Williams, 1996. "Modeling Farm-Level Crop Insurance Demand with Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 439-447.
  4. Hart, Chad E. & Babcock, Bruce A. & Hayes, Dermot J., 2001. "Livestock Revenue Insurance," Staff General Research Papers 1932, Iowa State University, Department of Economics.
  5. Richard E. Just & Quinn Weninger, 1999. "Are Crop Yields Normally Distributed?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(2), pages 287-304.
  6. Olivier Mahul & Brian D. Wright, 2003. "Designing Optimal Crop Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(3), pages 580-589.
  7. Levy, Edmond, 1992. "Pricing European average rate currency options," Journal of International Money and Finance, Elsevier, vol. 11(5), pages 474-491, October.
  8. Turnbull, Stuart M. & Wakeman, Lee Macdonald, 1991. "A Quick Algorithm for Pricing European Average Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 377-389, September.
  9. Babcock, Bruce A. & Blackmer, A. M., 1992. "Value of Reducing Temporal Input Nonuniformities (The)," Staff General Research Papers 10587, Iowa State University, Department of Economics.
  10. Babcock, Bruce A. & Blackmer, Alfred M., 1992. "The Value Of Reducing Temporal Input Nonuniformities," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(02), December.
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