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Actuarial Fairness of Crop Insurance Rates with Constant Rate Relativities

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  • Babcock, Bruce
  • Hart, Chad E.
  • Hayes, Dermot J.

Abstract

Increased availability and demand for low-deductible crop insurance policies have increased focus on crop insurance rating methods. Actuarial fairness cannot be achieved if constant multiplicative factors are used to determine how premiums change as coverage levels increase. A comparison of premium rates generated by the factors used by the two most popular crop insurance products with those generated by a standard yield distribution shows that the popular insurance products overcharge for low-deductible policies in most counties. This overpricing may explain why large premium subsidies were required to induce farmers to move from low-deductible to high-deductible policies beginning in 2001.

Suggested Citation

  • Babcock, Bruce & Hart, Chad E. & Hayes, Dermot J., 2004. "Actuarial Fairness of Crop Insurance Rates with Constant Rate Relativities," ISU General Staff Papers 200401010800001321, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genstf:200401010800001321
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    1. 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.
    2. Bruce A. Babcock & David A. Hennessy, 1996. "Input Demand under Yield and Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 416-427.
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    2. Jing Yi & Henry L. Bryant & James W. Richardson, 2020. "How do premium subsidies affect crop insurance demand at different coverage levels: the case of corn," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 45(1), pages 5-28, January.
    3. Tack, Jesse, 2013. "A Nested Test for Common Yield Distributions with Applications to U.S. Corn," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 38(1), pages 1-14, April.
    4. Mitchell, Paul D., 2004. "Nutrient Best Management Practice Insurance and Farmer Perceptions of Adoption Risk," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 36(3), pages 657-673, December.
    5. Yi, Jing & Richardson, James & Bryant, Henry, 2016. "How Do Premium Subsidies Affect Crop Insurance Demand at Different Coverage Levels: the Case of Corn," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 236249, Agricultural and Applied Economics Association.
    6. Delbridge, Timothy A. & King, Robert P., 2016. "How Important is the T-Yield? An Analysis of Reforms to Organic Crop Insurance," Staff Papers 244732, University of Minnesota, Department of Applied Economics.
    7. O'Donoghue, Erik, 2014. "The Effects of Premium Subsidies on Demand for Crop Insurance," Economic Research Report 178405, United States Department of Agriculture, Economic Research Service.
    8. Mitchell, Paul D. & Knight, Thomas O., 2008. "Economic Analysis of Supplemental Deductible Coverage as Recommended in the USDA's 2007 Farm Bill Proposal," Agricultural and Resource Economics Review, Cambridge University Press, vol. 37(1), pages 117-131, April.
    9. Paloch Suchato & Taro Mieno & Karina Schoengold & Timothy Foster, 2022. "The potential for moral hazard behavior in irrigation decisions under crop insurance," Agricultural Economics, International Association of Agricultural Economists, vol. 53(2), pages 257-273, March.
    10. Mitchell, Paul D. & Knight, Thomas O., 2007. "Economic Analysis of Supplemental Deductible Coverage as Recommended in the USDA’s 2007 Farm Bill Proposal," Staff Papers 92125, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.
    11. Bozic, Marin & Newton, John & Thraen, Cameron S. & Gould, Brian W., 2012. "Livestock Gross Margin Insurance for Dairy: Designing Margin Insurance Contracts to Account for Tail Dependence Risk," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124718, Agricultural and Applied Economics Association.
    12. Rejesus, Roderick M. & Marra, Michele C. & Roberts, Roland K. & English, Burton C. & Larson, James A. & Paxton, Kenneth W., 2013. "Changes in Producers' Perceptions of Within-Field Yield Variability after Adoption of Cotton Yield Monitors," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 45(2), pages 295-312, May.
    13. Tack, Jesse B., 2013. "The Effect of Climate on Crop Insurance Premium Rates and Producer Subsidies," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149817, Agricultural and Applied Economics Association.
    14. Roderick M. Rejesus & Barry K. Goodwin & Keith H. Coble & Thomas O. Knight, 2010. "Evaluation of the reference yield calculation method in crop insurance," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 70(3), pages 427-445, November.
    15. Hungerford, Ashley, 2014. "Systemic Risk in Wheat Yields," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 169376, Agricultural and Applied Economics Association.
    16. Lu, Yue & Ramirez, Octavio A. & Rejesus, Roderick M. & Knight, Thomas O. & Sherrick, Bruce J., 2008. "Empirically Evaluating the Flexibility of the Johnson Family of Distributions: A Crop Insurance Application," Agricultural and Resource Economics Review, Cambridge University Press, vol. 37(1), pages 79-91, April.
    17. Yang, Juan & Mitchell, Paul D. & Gray, Michael & Steffey, Kevin, 2007. "Unbalanced Nested Component Error Model and the Value of Soil Insecticide and Bt Corn for Controlling Western Corn Rootworm," Staff Paper Series 510, University of Wisconsin, Agricultural and Applied Economics.
    18. Ozaki, Vitor Augusto & Olinda, Ricardo & Faria, Priscila Neves & Campos, Rogerio Costa, 2014. "Estimation of the Agricultural Probability of Loss: evidence for soybean in Paraná Stats," Brazilian Journal of Rural Economy and Sociology (Revista de Economia e Sociologia Rural-RESR), Sociedade Brasileira de Economia e Sociologia Rural, vol. 52(1), pages 1-16, March.
    19. Heidelbach, Olaf, 2006. "Efficiency of Selected Risk Management Instruments - An Empirical Analysis of Risk Reduction in Kazakhstani Crop Production," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25243, International Association of Agricultural Economists.
    20. Joseph Cooper & Carl Zulauf & Michael Langemeier & Gary Schnitkey, 2012. "Implications of within county yield heterogeneity for modeling crop insurance premiums," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 72(1), pages 134-155, May.
    21. Nolan, Elizabeth & Santos, Paulo, 2012. "Insurance premiums and GM traits," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 125942, International Association of Agricultural Economists.
    22. Chambers, Robert G., 2006. "Some Empirical Implications of State-Contingent Production Models," 2006 Conference (50th), February 8-10, 2006, Sydney, Australia 137789, Australian Agricultural and Resource Economics Society.

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