Could the Government Manage Its Exposure to Crop Reinsurance Risk?

Dermot Hayes, Sergio Lence and Chuck Mason

Staff General Research Papers Archive from Iowa State University, Department of Economics

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

Date: 2003-10-01
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Published in Agricultural Finance Review, Fall 2003, vol. 63 no. 2, pp. 127-142

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Journal Article: Could the government manage its exposure to crop reinsurance risk? (2003)
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