Crop Insurance under Catastrophic Risk

John Duncan and Robert Myers ()

American Journal of Agricultural Economics, 2000, vol. 82, issue 4, 842-855

Abstract: We develop a new insurance model that shows how catastrophic risk affects the nature and existence of a crop insurance market equilibrium. A reservation preference level is used to characterize long-run equilibrium when catastrophic risk makes insurance companies risk responsive. Catastrophic risk is shown to increase premiums, reduce farmer coverage levels and, under some conditions, lead to a complete breakdown of the crop insurance market. Reinsurance can help facilitate an equilibrium and/or increase participation, particularly if the reinsurance is subsidized. The analysis has important implications for the design and management of crop insurance and reinsurance programs. Copyright 2000, Oxford University Press.

Date: 2000
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