The Tangled Web of Agricultural Insurance: Evaluating the Impacts of Government Policy

Abstract

This paper examines how changes in major elements of the U.S. federal crop insurance program affect the structure of the agricultural insurance industry. We model interactions between farmers, insurance agents and insurance companies. Marginal changes in government policy (premium subsidy rate, A&O subsidy rate, and loading factor) affect the insurance premium rate, agent compensation rates, agent effort levels, and market demand for crop insurance. Farmers prefer a marginal increase in the premium subsidy rate, but the insurance companies' most preferred policy is a marginal increase in the A&O subsidy rate. We also evaluate the consequences of changes in crop prices.

The US federal crop insurance program: a case study in rent seeking

“…As Pearcy and Smith (2015) point out, while that may make sense in the context of a single county-based insurance product, in the aggregate it does not. Extreme loss events are already included in the data used by RMA and the agency’s contractors to establish many actuarially fair premium rates.…”

“…These specifically concern changes in the rules governing risk sharing and the use of Assigned Risk pool and, prior to the 2011 SRA, the Development Pool, into which the companies could assign individual farm policies that were assessed to be at high risk of experiencing losses. More detailed discussions of these issues are provided by Smith et al (2016) and Pearcy and Smith (2015).…”

Neoclassical Approach to Traditional Business Insurance – Introduction to the Theory of Agricultural Insurance

“…The segmentation of the demand side of the insurance market by risk is also crucial because the companies with an indifferent attitude, which, according to literature, are supposed to dominate, function differently from the risk averse or risk preferring person (Pearcy and Smith, 2015;Rotschild and Stiglitz, 1976;Spinnewijn, 2017).…”

Evaluation of farm programmes in the 2014 us farm bill

“…Luckstead and Devadoss (2016) use their model of a representative Kansas dryland wheat farm to simulate the impact of a removal of crop insurance premium subsidies on farmers' benefits and find that under several scenarios combining different risk management programmes, farmers would keep making a net benefit over the baseline by enrolling in crop insurance even without government premium subsidy. Pearcy and Smith (2015) develop a theoretical model of relationships between economic agents involved in crop insurance programmesthe federal government, farmers, insurance agents and insurance companiesand use it to investigate the impact of a marginal increase in A&O subsidies given to insurance companies. In the model, higher A&O subsidies result in an increase in the compensation rates given to the independent agents in charge of brokering insurance contracts for the companies.…”