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Can Crop Insurance Premiums Be Reliably Estimated?

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  • Ramirez, Octavio A.
  • Carpio, Carlos E.
  • Rejesus, Roderick M.

Abstract

This paper develops and applies a methodology to assess the accuracy of historical loss-cost rating procedures, similar to those used by the U.S. Department of Agriculture's Risk Management Agency (RMA), versus alternative parametric premium estimation methods. It finds that the accuracy of loss-cost procedures leaves much to be desired, but can be markedly improved through the use of alternative methods and increased farm-level yield sample sizes. Evidence suggests that the high degree of inaccuracy in crop insurance premium estimations through historical loss-cost procedures identified in the paper might be a major factor behind the need for substantial government subsidies to keep the program solvent.

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  • Ramirez, Octavio A. & Carpio, Carlos E. & Rejesus, Roderick M., 2011. "Can Crop Insurance Premiums Be Reliably Estimated?," Agricultural and Resource Economics Review, Cambridge University Press, vol. 40(1), pages 81-94, April.
    • Handle: RePEc:cup:agrerw:v:40:y:2011:i:01:p:81-94_00
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    Cited by:

    1. Ramirez, Octavio A. & Carpio, Carlos E., 2015. "Are the Federal Crop Insurance Subsidies Equitably Distributed? Evidence from a Monte Carlo Simulation Analysis," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 40(3), pages 1-19, September.
    2. Francis Tsiboe & Jesse Tack, 2022. "Utilizing Topographic and Soil Features to Improve Rating for Farm‐Level Insurance Products," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(1), pages 52-69, January.
    3. Ramirez, Octavio & Shonkwiler, J. Scott, 2016. "Some Comparative Statics for Evaluating the Performance of the US Crop Insurance Program," SCC-76 Meeting, 2016, March 17-19, Pensacola, Florida 233761, SCC-76: Economics and Management of Risk in Agriculture and Natural Resources.
    4. Gregory Colson & Octavio A. Ramirez & Shengfei Fu, 2014. "Crop Insurance Savings Accounts: A Viable Alternative to Crop Insurance?," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 36(3), pages 527-545.
    5. O'Connor, Claire, 2013. "Soil Matters: How the Federal Crop Insurance Program should be reformed to encourage low-risk farming methods with high-reward environmental outcomes," 2013 AAEA: Crop Insurance and the Farm Bill Symposium 156789, Agricultural and Applied Economics Association.
    6. Octavio A. Ramirez & Carlos A. Carpio, 2012. "Premium estimation inaccuracy and the actuarial performance of the US crop insurance program," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 72(1), pages 117-133, May.
    7. Ramirez, Octavio A. & Shonkwiler, J. Scott, 2017. "A Probabilistic Model of Crop Insurance Purchase Decision," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 42(1), pages 1-17, January.
    8. Yu, Jisang & Sumner, Daniel A. & Lee, Hyunok, 2021. "Premium rates and selection in specialty crop insurance markets: Evidence from the catastrophic coverage participation," Food Policy, Elsevier, vol. 101(C).
    9. Ramirez, Octavio A. & Carpio, Carlos E. & Collart, Alba J., 2014. "Producer Welfare Implications of the RMA’s “Shrinkage” Crop Insurance Premium Estimator," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 168367, Agricultural and Applied Economics Association.
    10. Ramirez, Octavio & Colson, Greg, 2013. "Premium Estimation Inaccuracy and the Distribution of Crop Insurance Subsidies," SCC-76 Meeting, 2013, March 14-16, Pensacola, Florida 152130, SCC-76: Economics and Management of Risk in Agriculture and Natural Resources.
    11. Ramirez, Octavio A., 2014. "Appendix I to: Crop Insurance Savings Accounts: A Viable Alternative to Crop Insurance?," Applied Economic Perspectives and Policy Appendices 162318, Agricultural and Applied Economics Association.
    12. Ramirez, Octavio & Colson, Gregory, 2013. "Premium Estimation Inaccuracy and the Distribution of Crop Insurance Subsidies across Participating Producers," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149690, Agricultural and Applied Economics Association.

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