Multiple-peril crop insurance: successes and challenges

Abstract

Purpose -The purpose of this paper is to examine international experience with multiple-peril crop insurance (MPCI). Named peril crop insurance is available in most countries but MPCI is less common. While named peril insurance is widely successful, MPCI has a checkered history. In most cases, MPCI actuarial experience has been poor and large premium subsidies have been required to incentivize purchasing. Design/methodology/approach -International experience with MPCI is reviewed with a particular focus on the USA which has the largest MPCI program in the world. Rationales for government involvement in facilitating MPCI offers are examined and future challenges are explored. Findings -In most cases, MPCI actuarial experience has been poor and large premium subsidies have been required to incentivize purchasing. MPCI purchasing has increased dramatically in recent years but so have government expenditures to support MPCI programs. Significant challenges remain with providing cost-effective MPCI coverage for crop farmers. Originality/value -While previous articles have reviewed MPCI in the USA, this paper also considers experiences in other countries. Future challenges and research needs are described.

Canadian Business Risk Management: Private Firms, Crown Corporations, and Public Institutions

“…Yield guarantees are farm‐specific, indemnities are based on expected (at time of sign‐up) or harvest prices, a single rate is derived from loss experience by region and commodity, farm‐level surcharges and discounts based on farm‐specific historical claims are applied, and premium subsidies are generally around 60%. This is consistent with most forms of multiperil crop insurance in developed countries where guarantees are farm‐specific, premium rates are initially established based on aggregated loss experience and then adjusted based on farm‐specific characteristics, and premium subsidies tend to be in excess of 50% (Mahul and Stutley ; Barnett ; Smith and Glauber ). With respect to the United States in particular, U.S. producers can divide their farm into multiple units and choose to collect indemnities at the higher of the expected harvest price or realized harvest price whereas Canadian producers can do neither.…”

“…). Insurers can protect against moral hazard activities and fraud but monitoring and enforcement costs are generally prohibitive and remain a barrier to entry for private insurers (Barnett ).…”

“…With multiperil crop insurance producers can engage in moral hazard activities such as reducing costly inputs (see, e.g., Quiggin et al 1993;Babcock and Hennessy 1996;Smith and Goodwin 1996;Goodwin 2001;Goodwin and Smith 2003;Goodwin et al 2004). Insurers can protect against moral hazard activities and fraud but monitoring and enforcement costs are generally prohibitive and remain a barrier to entry for private insurers (Barnett 2014).…”

“…In Canada, total government premium subsidies in 2014 were almost $1.1 billion and A&O was an additional $276 million. Note there is a significant literature on subsidization in agricultural programs (see, e.g., Coble and Barnett 2013;Glauber 2013;Goodwin and Smith 2013;Barnett 2014).…”

Prospects for agricultural insurance in Europe

“…USA and Canada), crop insurance and to a smaller extent livestock insurance is the primary public policy mechanism for reducing farmers' exposure to yield and/or revenue risk (Mahul and Stutley, 2010). Globally, the USA has the largest market for multiple-peril crop insurance (MPCI) followed by China (Barnett, 2014). In Europe, the policy importance of agricultural insurance is different for several reasons.…”