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Systemic Risk In U.S. Crop And Revenue Insurance Programs

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  • Mason, Chuck
  • Hayes, Dermot J.
  • Lence, Sergio H.

Abstract

This study estimates the probability density function of the Federal Risk Management Agency's (RMA) net income from reinsuring crop insurance for corn, wheat, and soybeans. Based on 1997 data, the authors estimate that there is a 5 percent probability that RMA will need to reimburse at least $1 billion to insurance companies, and that the fair value of RMA's reinsurance services to insurance firms equals $78.7 million. In addition, various hedging strategies are examined for their potential to reduce RMA's reinsurance risk. The risk reduction achievable by hedging is appreciable, but use of derivative contracts alone is clearly no panacea.
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Suggested Citation

  • Mason, Chuck & Hayes, Dermot J. & Lence, Sergio H., 2001. "Systemic Risk In U.S. Crop And Revenue Insurance Programs," 2001 Regional Committee NC-221, October 1-2, 2001, McLean, Virginia 132389, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
    • Handle: RePEc:ags:nc2001:132389
    DOI: 10.22004/ag.econ.132389
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    File URL: https://ageconsearch.umn.edu/record/132389/files/MASON2001.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Octavio A. Ramírez, 1997. "Estimation and Use of a Multivariate Parametric Model for Simulating Heteroskedastic, Correlated, Nonnormal Random Variables: The Case of Corn Belt Corn, Soybean, and Wheat Yields," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 191-205.
    3. Mario J. Miranda & Joseph W. Glauber, 1997. "Systemic Risk, Reinsurance, and the Failure of Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 206-215.
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    Cited by:

    1. Vedenov, Dmitry V., 2002. "Estimating Returns Under Standard Reinsurance Agreement," 2002 Annual meeting, July 28-31, Long Beach, CA 19720, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Vedenov, Dmitry V. & Miranda, Mario J. & Dismukes, Robert & Glauber, Joseph W., 2004. "Economic Analysis of the Standard Reinsurance Agreement," 2004 Annual meeting, August 1-4, Denver, CO 20345, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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    Keywords

    Agricultural Finance; Risk and Uncertainty;

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