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Presentation
Is Government Involvement Really Necessary: Implications for Systemic Risk and Crop Reinsurance Contracts
Economics Presentations, Posters and Proceedings
  • Xiaoguang Feng, Iowa State University
  • Dermot J. Hayes, Iowa State University
Document Type
Conference Proceeding
Conference
Crop Insurance and the 2014 Farm Bill Symposium
Publication Version
Published Version
Publication Date
10-1-2014
Conference Date
October 8–9, 2014
Geolocation
(38.2526647, -85.75845570000001)
Abstract

Agriculture is subject to substantial systemic risk of crop yield losses due to widespread natural disasters. The systemic risk has been a major obstacle for the development of private crop insurance markets. Driven by spatially correlated weather events, crop losses are highly correlated within a certain area. As a result, the portfolio insurance risk associated with the crop losses has been raised far above what it would be if individual losses were independent, as proposed by Miranda and Glauber (1997). For example, Miranda and Glauber (1997) find that the portfolio risk faced by U.S. crop insurers is about ten times larger than that of conventional insurance lines. Large portfolio risk requires high premium rates to cover the cost of bearing the systemic portfolio risk unless the cost is subsidized. Some national governments, such as the U.S., are willing to provide subsidies and reinsurance for crop insurance policies so that they are affordable to farmers. In this way, the cost of bearing the systemic risk has been transferred to governments. For those countries where there are no government subsidies, private crop insurers would have to charge high premiums, in order to hold large enough reserves for the potential systemic loss or purchase expensive international reinsurance. In this way, the cost of bearing the systemic risk is actually passed onto farmers eventually. Consequently, farmers are either buying extremely expensive insurance to get insured, or being exposed to huge crop loss risks.

Comments

Selected Paper prepared for presentation at the Agricultural & Applied Economics Association’s Crop Insurance and the 2014 Farm Bill Symposium, Louisville, KY, October 8-9, 2014.

Rights
Copyright 2014 by Xiaoguang Feng, Dermot J. Hayes. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies.
Copyright Owner
Xiaoguang Feng, Dermot J. Hayes
Language
en
Date Available
2015-03-21
File Format
application/pdf
Citation Information
Xiaoguang Feng and Dermot J. Hayes. "Is Government Involvement Really Necessary: Implications for Systemic Risk and Crop Reinsurance Contracts" Louisville, KY(2014)
Available at: http://works.bepress.com/dermot_hayes/19/