How do premium subsidies affect crop insurance demand at different coverage levels: the case of corn
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How do premium subsidies affect crop insurance demand at different coverage levels: the case of corn Jing Yi1 · Henry L. Bryant2 · James W. Richardson2 Received: 7 July 2018 / Accepted: 17 July 2019 © The Geneva Association 2019
Abstract This study explores the relationship between the demand for federal corn insurance and premium subsidies at each coverage level using county-level data. The study shows that the elasticities of demand with respect to per U.S. dollar net premium vary across insurance plans, coverage levels, and regions. The results indicate that corn producers in riskier regions are more sensitive to premium changes for crop insurance. However, the heterogeneity of demand was overlooked in the majority of existing insurance demand studies, which could result in biased conclusions. In addition, this study estimates the changes in producers’ corn insurance purchases if premium subsidy rates were to be reduced by 10 percentage points. The expected change in corn revenue insurance demand at the 75% coverage level in the Southern Plains (− 12.182%) would be three times greater than it is at the 80% coverage level in the Corn Belt (− 4.167%) with a 10 percentage point reduction in premium subsidy rates, similar to the corn yield insurance demand. Keywords Crop insurance · Premium subsidies · Demand · Coverage level · Demand heterogeneity
* Jing Yi [email protected] Henry L. Bryant h‑[email protected] James W. Richardson [email protected] 1
Dyson School of Applied Economics and Management, Cornell University, Ithaca, USA
2
Department of Agricultural Economics, Texas A&M University, College Station, USA
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J. Yi et al.
Introduction The U.S. Federal Crop Insurance Program (FCIP) is the central piece of the farm safety net that provides farmers with protection against agricultural risks. To encourage participation, federal premium subsidies have been increased through several policies to reduce producers’ premium payments (producer premium = gross premium − premium subsidy). Figure 1 shows the insured acres and the federal premium subsidies for corn from 1989 to 2013. Although participation experienced significant increases with higher premium subsidies, this programme has been criticised as inefficient because of the heavy government expenses (see Figure 1) and its poor actuarial performance (Glauber 2004). Figure 2 presents the loss ratio (the ratio of indemnities to gross premium) and adjusted loss ratio (the ratio of indemnities to producer premium) for the FCIP over all crops. On average, the adjusted loss ratio is 2.07 over the period
Fig. 1 Federal premium subsidies and insured acres for the U.S. Corn Crop Insurance Program. Source USDA, Risk Management Agency, Summary of Business files, 1989–2014
Fig. 2 Loss ratio and adjusted loss ratio for the U.S. Crop Insurance Program. Source Glauber and Collins (2002)
How do premium subsidies affect crop insurance demand at…
2000–2013, implying that producers tend to collect USD 2.07 in indemnity payments for each do
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