Journal Article

Actuarial Fairness of Crop Insurance Rates with Constant Rate Relativities

Bruce A. Babcock, Chad E. Hart and Dermot J. Hayes

in American Journal of Agricultural Economics

Published on behalf of Agricultural and Applied Economics Association

Volume 86, issue 3, pages 563-575
Published in print August 2004 | ISSN: 0002-9092
Published online August 2004 | e-ISSN: 1467-8276 | DOI: http://dx.doi.org/10.1111/j.0002-9092.2004.00601.x
Actuarial Fairness of Crop Insurance Rates with Constant Rate Relativities

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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.

Keywords: crop insurance; moral hazard; premium rates; rating methods; subsidies; G220; Q180

Journal Article.  6733 words.  Illustrated.

Subjects: Agricultural Economics ; Insurance

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