Economics at your fingertips  

Premium estimation inaccuracy and the actuarial performance of the US crop insurance program

Octavio Ramirez and Carlos A. Carpio

Agricultural Finance Review, 2012, vol. 72, issue 1, 117-133

Abstract: Purpose - The purpose of this paper is to explore the impact of the levels of inaccuracy associated with three different premium estimation methods, one of which attempts to mimic the protocol currently used by the Risk Management Agency (RMA), on the actuarial performance of the US crop insurance program. Design/methodology/approach - The analyses are conducted using empirically-grounded simulation and other computational methods, under various plausible assumptions about the producer's risk aversion behavior and knowledge of his/her actuarially fair premium. Findings - Regardless of the assumed producer knowledge and behavior, it is concluded that the persistently high government subsidy levels required to keep the program solvent could be solely explained by the inaccuracy in the RMA's premium estimates. In other words, the observed need for large subsidies does not necessarily imply that the program is systematically favoring less efficient farmers or particular crops or production areas. Also, contrary to the commonly accepted “adverse selection” argument, it is shown that farmers having more information about their actuarially fair premiums than the insurer is not the reason why high subsidies are needed. Actuarial performance, however, could be improved by using the more elaborate methods exemplified in the paper, as well as larger sample sizes for premium estimation. Originality/value - The paper provides conclusions and recommendations that could substantially reduce the amount of public subsidies needed to keep the US crop insurance program solvent.

Keywords: United States of America; Agriculture; Subsidies; Agricultural subsidies; Crop insurance premiums; Risk Management Agency; Loss-cost procedures (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

Downloads: (external link) ... RePEc&WT.mc_id=RePEc (text/html)
Access to full text is restricted to subscribers

Related works:
Working Paper: Premium Estimation Inaccuracy and the Actuarial Performance of the US Crop Insurance Program (2011) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from
Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
http://emeraldgroupp ... /journals.htm?id=afr

Access Statistics for this article

Agricultural Finance Review is currently edited by Professor Calum G. Turvey

More articles in Agricultural Finance Review from Emerald Group Publishing
Bibliographic data for series maintained by Virginia Chapman ().

Page updated 2022-09-27
Handle: RePEc:eme:afrpps:v:72:y:2012:i:1:p:117-133