IDEAS home Printed from https://ideas.repec.org/a/oup/ajagec/v86y2004i3p563-575.html
   My bibliography  Save this article

Actuarial Fairness of Crop Insurance Rates with Constant Rate Relativities

Author

Listed:
  • Bruce A. Babcock
  • Chad E. Hart
  • Dermot J. Hayes

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. Copyright 2004, Oxford University Press.

Suggested Citation

  • Bruce A. Babcock & Chad E. Hart & Dermot J. Hayes, 2004. "Actuarial Fairness of Crop Insurance Rates with Constant Rate Relativities," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(3), pages 563-575.
    • Handle: RePEc:oup:ajagec:v:86:y:2004:i:3:p:563-575
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/j.0002-9092.2004.00601.x
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    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.
    3. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lee, Dong Won & Diersen, Matthew A. & Janssen, Larry & Gustafson, Cole R., 2006. "Premium Subsidy Changes and Demand for Crop Insurance," 2006 Agricultural and Rural Finance Markets in Transition, October 2-3, 2006, Washington, DC 133086, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
    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. 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.
    6. 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.
    7. 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.
    8. Ozaki, Vitor Augusto & Olinda, Ricardo & Faria, Priscila Neves & Campos, Rogério Costa, 2014. "Estimation of the Agricultural Probability of Loss: evidence for soybean in Paraná State," Revista de Economia e Sociologia Rural (RESR), Sociedade Brasileira de Economia e Sociologia Rural, vol. 52(1), January.
    9. 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.
    10. 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.
    11. 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.
    12. 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.
    13. 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.
    14. Jisang Yu & Edward D. Perry, 2024. "Premium subsidies and selection in the federal crop insurance program," Journal of Agricultural Economics, Wiley Blackwell, vol. 75(1), pages 280-297, February.
    15. 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.
    16. 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.
    17. 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.
    18. 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.
    19. 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.
    20. Hungerford, Ashley, 2014. "Systemic Risk in Wheat Yields," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 169376, Agricultural and Applied Economics Association.
    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. 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.
    23. 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.
    24. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chad E. Hart & Dermot J. Hayes & Bruce A. Babcock, 2006. "Insuring Eggs in Baskets: Should the Government Insure Individual Risks?," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 54(1), pages 121-137, March.
    2. Agarwal, Sandip Kumar, 2017. "Subjective beliefs and decision making under uncertainty in the field," ISU General Staff Papers 201701010800006248, Iowa State University, Department of Economics.
    3. Arora, Gaurav & Agarwal, Sandip K., 2020. "Agricultural input use and index insurance adoption: Concept and evidence," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304508, Agricultural and Applied Economics Association.
    4. Adeyemi Esuola & Michael Hoy & Zahirul Islam & Calum G. Turvey, 2007. "Evaluating the effects of asymmetric information in a model of crop insurance," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 67(2), pages 341-356, November.
    5. Hennessy, David A., 2011. "Modeling Stochastic Crop Yield Expectations with a Limiting Beta Distribution," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 36(1), pages 1-15, April.
    6. Singerman, Ariel & Hart, Chad E. & Lence, Sergio H., 2012. "Revenue Protection for Organic Producers: Too Much or Too Little?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(3), pages 1-20.
    7. Xiaodong Du & David A. Hennessy & Cindy L. Yu, 2012. "Testing Day's Conjecture that More Nitrogen Decreases Crop Yield Skewness," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(1), pages 225-237.
    8. Chuck Mason & Dermot J. Hayes & Sergio H. Lence, 2002. "Systemic risk in U.S. crop reinsurance programs," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 63(1), pages 23-39, December.
    9. Mason, Charles Edwin, IV, 2000. "Estimation and attenuation of reinsurance risk in the crop insurance market," ISU General Staff Papers 2000010108000013703, Iowa State University, Department of Economics.
    10. Makki Shiva S. & Somwaru Agapi L., 2007. "Assessing Adverse Selection in Crop Insurance Markets: An Application of Parametric and Nonparametric Methods," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 2(1), pages 1-22, May.
    11. Chen, Xiaomei & Wang, H. Holly & Makus, Larry D., 2007. "Production Risk and Crop Insurance Effectiveness: Organic Versus Conventional Apples," SCC-76 Meeting, 2007, March 15-17, Gulf Shores, Alabama 9381, SCC-76: Economics and Management of Risk in Agriculture and Natural Resources.
    12. Lichtenberg, Erik, 2002. "Agriculture and the environment," Handbook of Agricultural Economics, in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 2, chapter 23, pages 1249-1313, Elsevier.
    13. Shukla, Sumedha & Arora, Gaurav & Agarwal, Sandip K., 2022. "Estimation of crop yield density conditional on input choices for smallholder farms using a BetaIV framework," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322580, Agricultural and Applied Economics Association.
    14. Singerman, Ariel, 2011. "Price Analysis, Risk Assessment and Insurance for Organic Crops," ISU General Staff Papers 201101010800001065, Iowa State University, Department of Economics.
    15. Sengupta, Sanchita, 2010. "Three Essays in Environmental and Agricultural Issues," ISU General Staff Papers 201001010800002848, Iowa State University, Department of Economics.
    16. Nauges, Céline & Bougherara, Douadia & Koussoubé, Estelle, 2021. "Fertilizer use and risk: New evidence from Sub-Saharan Africa," TSE Working Papers 21-1266, Toulouse School of Economics (TSE).
    17. Mwita Erick Marwa & John Mburu & Rao Elizaphan James Oburu & Okeyo Mwai & Susan Kahumbu, 2024. "Impact of ICT Based Extension Services on Dairy Production and Household Welfare: The Case of iCow Service in Kenya," Journal of Agricultural Science, Canadian Center of Science and Education, vol. 12(3), pages 141-141, April.
    18. Zanini, Fabio C. & Irwin, Scott H. & Schnitkey, Gary D. & Sherrick, Bruce J., 2000. "Estimating Farm-Level Yield Distributions For Corn And Soybeans In Illinois," 2000 Annual meeting, July 30-August 2, Tampa, FL 21720, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    19. Britz, Wolfgang & Linda, Arata, "undated". "How Important Are Crop Shares In Managing Risk For Specialized Arable Farms? A Panel Estimation Of A Programming Model For Three European Regions," 56th Annual Conference, Bonn, Germany, September 28-30, 2016 244801, German Association of Agricultural Economists (GEWISOLA).
    20. Ahumada, Omar & Rene Villalobos, J. & Nicholas Mason, A., 2012. "Tactical planning of the production and distribution of fresh agricultural products under uncertainty," Agricultural Systems, Elsevier, vol. 112(C), pages 17-26.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:ajagec:v:86:y:2004:i:3:p:563-575. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/aaeaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.