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Impact of interest rates on the decision to insure in agricultural production

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  • Tarasov, Arthur

Abstract

This paper seeks to define the relationship between interest rates and decisions to insure among agricultural producers using the financial methodology. The choices are ultimately reduced to two options: to insure or to limit and absorb risk. Each choice produces a complex cash flow that is compared to the alternative and discounted by several factors. The difference between the options produces a quantitative measure of the financial incentive to insure. Some discounting factors of the cash flows follow the key interest rate to an extent for the latter to influence the decision to insure along with demand for insurance. The proposed method is tested on data from the emerging economy of Ukraine and the United States for the period 2002-2011. All participants of agricultural insurance markets can use the proposed methods to maximise efficiency. The research shows that ceteris paribus agricultural insurance requires bigger government subsidies to be viable under higher interest rates. Further empirical research is suggested.

Suggested Citation

  • Tarasov, Arthur, 2013. "Impact of interest rates on the decision to insure in agricultural production," Studies in Agricultural Economics, Research Institute for Agricultural Economics, vol. 115(1), pages 1-7, February.
    • Handle: RePEc:ags:stagec:146813
    DOI: 10.22004/ag.econ.146813
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    References listed on IDEAS

    as
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    4. Doherty, Neil A & Garven, James R, 1995. "Insurance Cycles: Interest Rates and the Capacity Constraint Model," The Journal of Business, University of Chicago Press, vol. 68(3), pages 383-404, July.
    5. Chao-Chun Leng & Ursina B. Meier, 2006. "Analysis of multinational underwriting cycles in property-liability insurance," Journal of Risk Finance, Emerald Group Publishing, vol. 7(2), pages 146-159, March.
    6. Anne Gron, 1994. "Capacity Constraints and Cycles in Property-Casualty Insurance Markets," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 110-127, Spring.
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