Dmitry V. Vedenov, Mario J. Miranda, Robert Dismukes and Joseph W. Glauber
An economic analysis is presented of the Standard Reinsurance Agreement (SRA), the contract governing the relationship between the Federal Crop Insurance Corporation and the…
Abstract
An economic analysis is presented of the Standard Reinsurance Agreement (SRA), the contract governing the relationship between the Federal Crop Insurance Corporation and the private insurance companies that deliver crop insurance products to farmers. The paper outlines provisions of the SRA and describes the modeling methodology behind the SRA simulator, a computer program developed to assist crop insurers and policy makers in assessing the economic impact of the Agreement. The simulator is then used to analyze how the SRA affects returns from underwriting crop insurance. The results are presented in aggregate and also at the regional and individual company levels.
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Gabriel J. Power, Dmitry V. Vedenov and Sung‐wook Hong
The purpose of this paper is to analyze the effect of the 2008 Farm Bill's average crop revenue election (ACRE) program on the risk‐reducing effectiveness of crop insurance…
Abstract
Purpose
The purpose of this paper is to analyze the effect of the 2008 Farm Bill's average crop revenue election (ACRE) program on the risk‐reducing effectiveness of crop insurance products.
Design/methodology/approach
Three crop/region combinations are examined, representing regions with both high and low price‐yield correlation regions. Actual production history (APH) and crop revenue coverage (CRC) insurance instruments are considered separately under the 2002 Farm Bill and under ACRE. Monte Carlo simulations, combined with the copula approach, are used to simulate net wealth distributions and to calculate the corresponding expected utilities. The outcomes are evaluated using certainty‐equivalent wealth based on different risk premium assumptions.
Findings
Crop insurance contracts appear to be more effective under the 2002 Farm Bill than under ACRE, especially for crops characterized by low yield‐price correlation. CRC insurance is found to be more effective than APH insurance for all crop/region combinations considered.
Research limitations/implications
The paper only considers a static framework and farm‐level insurance contracts. Further research could investigate how ACRE affects decoupled income support, whether the results change if Supplemental Revenue Assistance is included, or how different the outcomes might be for multiple‐crop farms.
Practical implications
The results suggest that risk‐reducing effectiveness decreases under ACRE and that no reasonable adjustment to APH base price can make APH competitive with CRC for any crop/regions considered.
Originality/value
The risk‐reducing effectiveness of the 2008 Farm Bill's ACRE program is analyzed, and as a methodological contribution the copula approach is used to model the multivariate distribution of yields and prices.