Lecture31-2004 - Lecture XXI Crop Insurance I. Valuing Crop...

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Lecture XXI Crop Insurance I. Valuing Crop Yield Insurance A. The general concept of insurance is the construction of an instrument or gamble that pays the purchaser in the event of some adverse occurrence. 1. Frequently purchased insurance contracts include life insurance that pays in the event of the holders death, car insurance that pays in the case of an accident, catastrophic health insurance that pays in the event of a major medical event such as cancer, etc. 2. Each of these contracts specifies a payable event, an indemnity (the amount to be paid on the event), and a premium (the amount paid for insurance contract). 3. Under commercial insurance arrangements the premium charged for the insurance is generally considered to be actuarially sound. Specifically, the expected indemnity payments are exactly equal to premiums charged. a. If the premiums exceeded the expected indemnity payments then insurance firms would earn abnormal profits. These abnormal profits would be bid out of the market by new firms entering the insurance arena.
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Lecture31-2004 - Lecture XXI Crop Insurance I. Valuing Crop...

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