Optimal Coverage Level Choice with Individual and Area Insurance Plans

Bulut, Harun; Collins, Keith; Zacharias, Thomas P.

doi:10.1093/ajae/aas068

Cited by 3 publications

(3 citation statements)

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“…With existing crop insurance policies already able to cover up to 85 percent of expected revenue for individual insurance plans and 90 percent for county insurance plans for major crops, our concern is whether a program like ARC, which is free and has a coverage band similar to the upper range of crop insurance coverage, provides added value to farmers or simply causes them to reduce crop insurance coverage, particularly at high coverage levels. Based on theoretical modeling, Bulut et al (2012) show that underpriced area plans replace a portion of fairly priced individual plan coverage demand, depending on the correlation between farm and area losses (in the absence of coverage level restrictions). Deterrents to reducing crop insurance coverage 398 AFR 74,3 in the presence of ARC are that area plans are a limited substitute for the risk protection of individual insurance plans due to yield basis risk, ARC payments and crop insurance indemnities are not offset against one another and ARC is subject to payment limits, while crop insurance has no such limits.…”

Section: Introductionmentioning

confidence: 99%

Designing farm supplemental revenue coverage options on top of crop insurance coverage

Bulut

Collins

2014

Agricultural Finance Review

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Purpose -The purpose of this paper is to use simulation analysis to assess farmer choice between crop insurance and supplemental revenue options as proposed during development of the Agricultural Act of 2014. Design/methodology/approach -The certainty equivalent of wealth is used to rank farm choices and assess the effects of supplemental revenue options on the crop insurance plan and coverage level chosen by the producer under a range of farm attributes. The risk-reducing effectiveness of the select programs is also examined through their impact on the farm revenue distribution. The dependence structure of yield and prices is modeled by applying copula techniques on historical data. Findings -Farm program supplemental revenue programs generally have no effect on crop insurance choices. Crop insurance supplemental revenue programs typically reduce crop insurance coverage at high coverage levels. An individual plan of crop insurance combined with a supplemental revenue insurance plan may substitute for incumbent area crop insurance plans. Originality/value -The analysis provides insights into farmers' possible choices by focussing on alternative crops and farm attributes and extensive scenarios, using current data, crop insurance plans and programs contained in the 2014 Farm Bill and related bills. The results should be of value to policy officials and producers in regards to the design and use of risk management tools.

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Section: Introductionmentioning

confidence: 99%

Designing farm supplemental revenue coverage options on top of crop insurance coverage

Bulut

Collins

2014

Agricultural Finance Review

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“…In addition to the work on the 2014 farm bill, there has been much work done on the potential for overlap in the 2008 farm bill (Heerman et al, 2016;Bulut, Collins, and Zacharias, 2012;Cooper and O'Donoghue, 2011;O'Donoghue et al, 2011;Cooper, 2010;Zulauf, Schnitkey, and Langemeier, 2010). Bulut, Collins, and Zacharias (2012) examine the interaction between crop insurance and other farm support programs and are more concerned with how producers will react to farm policy proposals, rather than what has already been enacted into public law. Related to this work, Cooper and O'Donoghue (2011) also explore whether receiving benefits from Despite facing a lower probability of crop loss, counties in the Corn Belt enroll in higher coverage levels (i.e., 80-85%).…”

Section: Introductionmentioning

confidence: 99%

Mitigating Price and Yield Risk Using Revenue Protection and Agriculture Risk Coverage

Biram

Coble

Harri

et al. 2022

J. Agric. Appl. Econ.

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This article evaluates Agriculture Risk Coverage (ARC) and Revenue Protection (RP) used in conjunction as an optimal risk management strategy for representative producers in the Corn Belt and Mississippi Delta. Using a simulation procedure to produce representative farm revenues, we find it is optimal under expected utility for producers to enroll in RP, despite having RP through ARC. Results are robust across alternative sampling methods and regions. These findings imply that ARC is better suited as a complementary program, and that it is optimal for a producer to enroll in higher coverage levels than we currently observe.

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“…11. Within the theoretical framework developed in Bulut et al (2012), a typical farmer's choice with respect to a supplemental area insurance plan (modeled after SCO, yet STAX application would be similar) is analyzed. The findings from this analysis lead to three lemmas and one proposition.…”

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confidence: 99%

US farmers’ insurance choices under budget heuristics

Bulut

2017

AFR

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Purpose Regional differences in crop insurance uptake have persisted over time. To partly explain this phenomenon, the purpose of this paper is to propose and evaluate a budget constraint (heuristic) effect within the standard expected utility theory (EUT) framework through simulation methods. Design/methodology/approach Within the EUT framework, a standard simulation model is used to gain insights into farm insurance decisions when a budget constraint is in effect. The budget constraint is modeled as it has been revealed through the data on farmers’ insurance expenditures. In the simulation analysis, certainty equivalent values are used to rank farm options subject to the revealed budget constraint. Findings A budget constraint effect within the EUT framework stands out in explaining the observed regional differences. The proposed explanation is consistent with the historical trends on the ratio of crop insurance expenditure to expected crop value, higher premium rates in regions with lower crop insurance uptake, and the limited turnout for the 2014 Farm Bill’s supplemental area-based crop insurance products. Farmers’ crop insurance choices are found to be mostly constrained-optimal. Originality/value This appears to be the first study taking the revealed preferences approach to farmers’ crop insurance choices in a simulation analysis. Some policy implications are drawn and future research avenues are suggested. The findings should be of considerable value to policymakers, academics, bankers, and producers in regard to the design and use of risk management tools.

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Optimal Coverage Level Choice with Individual and Area Insurance Plans

Cited by 3 publications

References 0 publications

Designing farm supplemental revenue coverage options on top of crop insurance coverage

Designing farm supplemental revenue coverage options on top of crop insurance coverage

Mitigating Price and Yield Risk Using Revenue Protection and Agriculture Risk Coverage

US farmers’ insurance choices under budget heuristics

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