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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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    References listed on IDEAS

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    1. 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(2), pages 1-13, December.
    2. 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.
    3. 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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