Lecture 07-2007 - An Applied Sabbatical: Lecture VII I....

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An Applied Sabbatical: Lecture VII I. Basic Crop Insurance A. Nelson, Carl H. “The Influence of Distributional Assumptions on the Calculation of Crop Insurance Premia.” North Central Journal of Agricultural Economics 12(1)(Jan 1990): 71–8. 1. In the past, farmers received assistance during disasters (i.e., draught or floods) through access to concessionary credit. 2. Increasingly during the last 10 years of the 20th century agricultural policy in the United States shifted toward market-based crop insurance. 3. This insurance was supposed to be actuarially sound so that producers would make decisions that were consistent with maximizing economic surplus. 4. Following Nelson’s discussion, the loss of a crop insurance event could be parameterized as L AC AR  a) Where C is the level of coverage (i.e., the number of bushels guaranteed under the insurance policy, typically 10, 20, or 40 percent of some expected level of yield). b) A is the probability that level of yield. c) R is the expected value of the yield given that an insured event has occurred. d) L is the insurance indemnity or actuarially fair value of the insurance. 5. Given these definitions the insurance indemnity becomes     C L C y dF y  a) This loss is in yield space, it ignores the price of the output.
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This note was uploaded on 07/18/2011 for the course AEB 6933 taught by Professor Carriker during the Fall '09 term at University of Florida.

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Lecture 07-2007 - An Applied Sabbatical: Lecture VII I....

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