The Effects of Crop Yield Insurance Designs on Farmer Participation and Welfare

Abstract

The performance of individual farm yield and area yield crop insurance programs is evaluated for a representative Iowa corn farm using numerical optimization of expected utility and simulation techniques. Several different contract design features are studied, including the nature of the yield index which triggers insurance payouts, alternative restrictions on coverage levels, and alternative pricing structures. Performance is evaluated in terms of impacts on farmer participation and welfare and is examined in a portfolio setting where futures and options are also available to farmers. The relative performance of different crop insurance designs is found to be particularly sensitive to restrictions on coverage levels, the size of premium loadings, and the degree to which individual farm yields are correlated with area yields. Copyright 1998, Oxford University Press.

Hedging price risk in the presence of crop yield and revenue insurance

“…For instance, the WTR of the crop insurance contract i in the case where no insurance and hedging tools are available, denoted Performance associated to risk management strategy rm1 with respect to another risk management strategy rm2 where some instruments are not available is measured by the WTR for rm1 in the case where rm2 is at the producer's disposal. It is important to notice that contrary to a widespread belief (see, for example, Wang et al, 1998) there is no theoretical basis to state that the WTR measure is additive. 16 For example, the addition of futures and straddles to the portfolio where insurance is available is not equal to difference between the WTR of insurance, futures and straddles when no hedging tools are available, and the WTR of insurance when no hedging and insurance contracts are available.…”

“…The insured producer can also buy or sell futures and options on futures. Contrary to recent empirical studies (see, for example, Wang et al, 1998;Coble, Heifner and Zuniga, 2000), options contracts available at different strike prices can be jointly used with futures.…”

Spatial Pattern of Yield Distributions: Implications for Crop Insurance

“…Day 1965;Gallagher 1987;Nelson and Preckel 1989;Taylor 1990;Moss and Shonkwiler 1993;Tirupattur, Hauser, and Chaherli, 1996;Ramirez 1997;Wang et al 1998;Goodwin and Ker 1998;Just and Weninger 1999;Stokes 2000;Chen and Miranda 2004;Ker and Coble 2003;Chen and Miranda 2006;Harri et al 2008;Zhu et al 2008;Zhu et al 2009). A variety of yield modeling approaches have been proposed, including parametric, semiparametric (Ker and Coble 2003), and nonparametric (Goodwin and Ker 1998) methods.…”

Poverty Traps and Climate Risk: Limitations and Opportunities of Index-Based Risk Financing

“…This type of basis risk exists with many risk-management instruments (e.g., hedging using futures or options contracts or even with loss-adjusted crop insurance when mistakes are made in estimating yield potential). Various studies have empirically examined the effectiveness of IBRTPs in the presence of basis risk (Black, Barnett, and Hu 1999;Vedenov and Barnett 2004;Barnett et al 2005;Deng, Barnett, and Vedenov 2007;Turvey 2001;Martin, Barnett and Coble 2001;Deng et al 2007;Wang et al 1998). The findings from these studies are mixed.…”