I Learn, You Learn, We Gain Experience in Crop Insurance Markets

Abstract

The relevance and the impact of experience in insurance markets are underinvestigated. From Italian farm-level data we estimate a dynamic discrete-choice model of participation to investigate the role of experience. The methodology, coupled with exploratory analysis, allows one to compare how different sources of experience influence the crop insurance decision making process. We found that direct experience is a catalyst for insurance participation for medium and large farms. The experience indirectly acquired is also relevant, especially for small farms. Policy implications include the importance of information campaigns and of bolstering uptake to exploit the advantages of the inertia and spillover effects that emerge from experience.

Italian Subsidised Crop Insurance: What the Role of Policy Changes

“…In Italy, the market for subsidised crop insurance has low and heterogeneous uptake, with an adversely selective participation process (Santeramo, 2019). The limited adoption of insurance contracts, that characterised the period between 2004 and 2010, experienced a decline in the number of subscriptions since 2008; however, the insured areas and values increased respectively by 5% and 20% between 20105% and 20% between and 20155% and 20% between (ISMEA, 2018.…”

“…The insured values tend to be concentrated in northern regions, accounting for more than 80% of the insured value, and in a few crops (i.e., apple, corn, rice, grapes, tomatoes), covering more than half of the total insured value (ISMEA, 2018). The limited and heterogeneous participation is likely due to a lack of familiarity with the instrument (e.g., , to the complexity of the policy environment (Severini et al, 2017), to limited experience with crop insurance contracts (e.g., Santeramo, 2019), to behavioural aspects associated with risk aversion, ambiguity aversion, and time preferences 11 (e.g., Coletta et al, 2018). The adoption of insurance contracts is also related to risk management strategies, such as crop diversification (e.g., which farmers tend to consider an alternative to the insurance contracts (e.g., Santeramo et al, 2016).…”

“…Since 2004, the objective of risk management policies has been to shift from ex-post compensation to ex-ante risk management tools (Santeramo, 2019;Capitanio and De Pin, 2018) 17 . The share of single peril contracts decreased progressively.…”

“…We follow a standard expected utility profit-maximisation approach, subject to marketing and production constraints (e.g., type of insurance contracts, among others), with an optimal level of insurance demand function of producer's risk attitude (not directly observable) and other constraints (Goodwin, 1993;Santeramo 2019):…”

“…They differ from ex-post risk management tools that allow to manage the consequence of a risk "after" its expression (US) and Member States of the European Union (EU). Despite the allocation subsidies and the introduction of frequent policy reforms, the insurance market tends to have a persistently low and jeopardised demand (e.g., Santeramo et al, 2016;Santeramo, 2019). The low uptake of crop insurance contrasts with the potential economic benefits.…”