Premium subsidies and crop insurance demand in Brazil

Abstract

Purpose The purpose of this paper is to examine the effects of premium subsidies provided by the Brazilian government through the Rural Insurance Premium Subvention Program (PSR) on the quantity demanded for crop insurance by grains producers of southern Brazil. Design/methodology/approach A fixed effects model was applied to an unbalanced panel data of municipalities of southern Brazil considering the years between 2006 and 2015. Three measures of crop insurance demand were considered: level of total premiums, level of total premiums per hectare and level of total liability per hectare. Findings Results were in line with previous literature, suggesting the existence of a positive, although inelastic, effect of the subsidy level on the demand for crop insurance. However, unitary elasticity estimates were found for all grains when considered total premiums per hectare as crop insurance demand measure. Originality/value The investigation focuses on a crop insurance program conducted in a tropical developing country – a completely different background than previously analyzed in literature. In addition, Brazilian government considers the PSR as one of its most important agricultural programs and this paper is pioneer in empirically explain the huge public investments made to the PSR through the estimation of the effects of premium subsidies on the quantity demanded for crop insurance in Brazil.

Effect of the Government Intervention Program to the Crop Insurance Participation Level

“…Studies about the effect of the intervention program in addition to crop insurance premium subsidy have not been conducted. Therefore, considering the premium subsidy and other programs are part of the public intervention, this research confirmed the previous study conducted by Goodwin et al (2004) and Lavorato et al (2019) that showed premium subsidy has a positive effect on the crop insurance demand. In line with the positive impact, it is unavoidable that farmers will demand a higher subsidy than the current scheme, as confirmed by Ambarawati (2018).…”

“…This target only saves around 6% of Indonesia's total agricultural land, which amounts to 15 million hectares. Literature suggests the existence of a positive, although inelastic, effect of the subsidy level on demand for crop insurance (Goodwin et al 2004, Lavorato et al 2019. Meanwhile, higher premium subsidies induce more insurance coverage, lowering farmers' risk (Yu et al 2017).…”

Regional impacts of rural credit and rural insurance policies on crop area and productivity: evidence from São Paulo state, Brazil (2008 and 2017)

“…This approach is extended by Collins (1985), who explored the effects of increased farm income on balancing risk hypothesis, and also Featherstone et al (1988), who considered the likelihood of equity loss based on the leverage of the financial contracts. Lavorato et al (2020) found reciprocal positive feedback between insurance and credit policies, which corroborated the balancing risk hypothesis. More specifically, farmers would leverage loans as they reduce their business risk, with practices such as production diversification, hedging strategies and acquiring rural insurance.…”

“…As a consequence, government subvention can increase insurance supply, leading to stable farmer's revenues, which might increase agricultural production (Aimin, 2010;Backus et al, 1997). Lavorato et al (2020) found a positive effect of the premium subsidy on insurance demand in Brazil. Besides rural credit and rural insurance, Brazil's government also offers policies on agricultural commercialization, especially on price support.…”

“…, 1997). Lavorato et al. (2020) found a positive effect of the premium subsidy on insurance demand in Brazil.…”