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Could the Government Manage Its Exposure to Crop Reinsurance Risk?

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

Abstract

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

Suggested Citation

  • Hayes, Dermot J. & Lence, Sergio H. & Mason, Chuck, 2003. "Could the Government Manage Its Exposure to Crop Reinsurance Risk?," Staff General Research Papers Archive 11287, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:11287
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    Cited by:

    1. Joshua D. Woodard & Philip Garcia, 2008. "Basis risk and weather hedging effectiveness," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 68(1), pages 99-117, May.
    2. A. Ford Ramsey & Barry K. Goodwin, 2019. "Value-at-Risk and Models of Dependence in the U.S. Federal Crop Insurance Program," JRFM, MDPI, vol. 12(2), pages 1-21, April.
    3. Xuche Gong & David A. Hennessy & Hongli Feng, 2023. "Systemic risk, relative subsidy rates, and area yield insurance choice," American Journal of Agricultural Economics, John Wiley & Sons, vol. 105(3), pages 888-913, May.
    4. Hongyun Han & Ye Jiang, 2019. "Systemic Risks of Climate Events and Households’ Participation in Mariculture Mutual Insurance: A Case Study of Shrimp Producers in Zhejiang Province," Sustainability, MDPI, vol. 11(4), pages 1-24, February.
    5. Egelkraut, Thorsten M. & Garcia, Philip & Pennings, Joost M.E. & Sherrick, Bruce J., 2006. "Producers' Yield and Yield Risk: Perceptions versus Reality and Crop Insurance Use," 2006 Annual meeting, July 23-26, Long Beach, CA 21369, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. Woodard, Joshua D. & Garcia, Philip, 2008. "Weather Derivatives, Spatial Aggregation, and Systemic Risk: Implications for Reinsurance Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 33(1), pages 1-18, April.

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