Evaluating Producer Welfare Benefits of Whole-Farm Revenue Insurance

Agricultural insurance is by far the most popular risk management tool used in Iran. Despite many years of experience, Iran’s current insurance policy has not managed to protect all producers in the sector. The basic principle of whole-farm insurance consists of pooling all the insurable risks of a farm into a single policy and overcoming most of the major impediments to existing policies. This study aimed to evaluate the benefits of whole-farm insurance (WFI) in Zanjan province of Iran. This study employed historical farm-level and county-level data from 1982 to 2021 to estimate yield and price density functions and predict future values. Parametric and non-parametric approaches were utilized to calculate farmers’ expected compensation and guaranteed and simulated revenues. The premium rates were then calculated using the PQH simulation and Cholesky decomposition and compared under three scenarios: the single-crop, double-crop, and triple-crop options. Finally, farmers’ welfare benefits were compared under the three scenarios with the no-insurance case. The results demonstrate that WFI provides lower loss ratios compared to yield insurance and crop-specific insurance. Furthermore, producer welfare can be improved when they insure at least one crop compared to no-insurance. For example, the welfare benefits of insuring wheat, barley, alfalfa, wheat–barley, wheat–alfalfa, barley–alfalfa, and barley–alfalfa in terms of cost reduction to producers at 75% coverage are 8.8, 1.8, 2.9, 1.2, 0.9, and 1.8, respectively. Therefore, we recommend that the Iranian Agricultural Insurance Fund adopts WFI as a new risk management tool. This policy has the potential to decrease insurance premiums and administrative costs while improving the certainty equivalents and benefits to farmers through crop insurance.