Almost Ideal Area Yield Crop Insurance Contracts

Abstract

Using yield data for a sample of 123 dryland wheat producers in Montana, the effects of three area yield contracts, including the contract currently offered by the United States Federal Crop Insurance Corporation and two individual yield contracts on individual farm yield variability, are examined. The results indicate that while the Federal Crop Insurance Corporation area yield contract provides all farmers in the sample with some protection against yield variability, a simpler, actuarially equivalent “almost ideal” area yield contract provides substantially larger reductions in yield variability. However, actuarially equivalent individual yield contracts provide levels of protection against yield variability similar to those obtained under the “almost ideal” area yield contract at much lower premiums.

Crop Insurance as a Tool for Price and Yield Risk Management

“…The literature relating to area yield insurance has largely centered around the "optimal" design and implementation of such a policy given insureds with varying correlation to the area yield (Miranda 1991, Smith, Chouinard, and Baquet 1994, Carriker et al 1991, Williams et al 1993. It has also proven an interesting case study, in that a program very much along the lines proposed has been widely piloted (Skees, Barnett, and Black 1997).…”

The Effectiveness of Area-Based Yield Crop Risk Insurance in China

“…With an aim to decrease basis risk and strengthen the effect of AYI contacts, Smith et al (1994) proposed an alternative AYI named almost ideal area yield insurance that allows farmers to choose their favorite trigger yield by selecting a non-negative value "a" times the expected yield in county level. After that, many researchers extended Smith et al's work in a more general expected utility framework and more specific situation (e.g ., Mahul 1999;Bourgeon and Chambers 2003).…”

A private management strategy for the crop yield insurer: A theoretical approach and tests

“…The first one concerns the relation between y j and Y T . We choose the most classical modeling used for example by Just et al (1999), by Mahul and Wright (2003) and by Smith et al (1994):…”

“…Therefore, if an insurer pools a portfolio of several crop insurance contracts, it will bear the systemic risk component. It does not usually have enough equity to face up to this risk (Smith et al, 1994). Miranda and Glauber (1997) argue that the systemic risk component is the major obstacle that prevents an independent private crop insurance industry from emerging.…”