Systemic Risk, Reinsurance, and the Failure of Crop Insurance Markets

Without affordable reinsurance, private crop insurance markets are doomed to fail because systemic weather effects induce high correlation among farm-level yields, defeating insurer efforts to pool risks across farms. Using an empirical model of the U.S. crop insurance market, we find that U.S. crop...

Full description

Saved in:
Bibliographic Details
Published in:American journal of agricultural economics 1997-02, Vol.79 (1), p.206-215
Main Authors: Miranda, Mario J., Glauber, Joseph W.
Format: Article
Language:English
Subjects:
Adverse selection
Agricultural economics
Agricultural production
Agriculture
Contracts
Corn
Crop economics
Crop insurance
Crops
Economic models
Failure
Farm management
Farmers
Farms
G220
Government subsidies
Homeowners insurance
Indemnity
Indemnity insurance
Insurance
Insurance industry
Insurance premiums
Insurance providers
Market
market failure
Moral hazard
Q140
Random variables
Reinsurance
Risk
Risk management
Simulation
Systemic risk
Weather
Citations: Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Without affordable reinsurance, private crop insurance markets are doomed to fail because systemic weather effects induce high correlation among farm-level yields, defeating insurer efforts to pool risks across farms. Using an empirical model of the U.S. crop insurance market, we find that U.S. crop insurer portfolios are twenty to fifty times riskier than they would be otherwise if yields were stochastically independent across farms. We also find that area yield reinsurance contracts would enable crop insurers to cover most of their systemic crop loss risk, reducing their risk exposure to levels typically experienced by more conventional property liability insurers.
ISSN:0002-9092
1467-8276
DOI:10.2307/1243954