Participation patterns of the rainfall index insurance for pasture, rangeland and forage programme
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Participation patterns of the rainfall index insurance for pasture, rangeland and forage programme Brittney Goodrich1 · Jisang Yu2 · Monte Vandeveer3 Received: 3 January 2019 / Revised: 20 August 2019 / Accepted: 21 August 2019 / Published online: 20 November 2019 © The Author(s) 2019
Abstract Using a novel policyholder-level data set, we analyse participants’ choices of 2-month index intervals in the Rainfall Index for Pasture, Rangeland and Forage (RIPRF) insurance programme. We first provide a conceptual model that illustrates participation patterns of the rainfall index insurance. We then connect these predicted patterns to some empirical evidence from the policyholder-level data set, which is a subset of data provided by the USDA Risk Management Agency for all RI-PRF participants in Nebraska and Kansas during the years 2013–2017. Because the correlations between forage yield and precipitation and the expected premium subsidy vary by month, different degrees of risk aversion may predict distinctively different choices of the 2-month intervals. Using cluster analysis, we group the participants with similar allocation patterns across the 2-month intervals. We observe that the number of participants displaying relatively low levels of risk aversion increase over time. We connect this to the fact that premium subsidies and producer returns associated with non-growing season (risk-increasing) months are often greater than those for growing season (risk-reducing) months, and this has important implications for policy design. Our findings suggest that more research in this area could assist policymakers in keeping the RI-PRF programme in line with its objective of reducing risk for livestock producers. Keywords Index insurance · RI-PRF programme · Expected utility theory · Cluster analysis
* Brittney Goodrich [email protected] 1
Department of Agricultural and Resource Economics, University of California, Davis, CA, USA
2
Department of Agricultural Economics, Kansas State University, Manhattan, KS, USA
3
Department of Agricultural Economics and Southwest Research and Extension Center, Kansas State University, Manhattan, KS, USA
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Introduction Rainfall Index for Pasture, Rangeland and Forage (RI-PRF) is an insurance product developed to provide livestock producers with a tool to mitigate drought risk. RI-PRF is in the U.S. Federal Crop Insurance Program, though it differs from crop insurance products for traditional commodities, partly because of its nature as an index insurance product and also regarding the participants’ additional decision of the time of year to insure. The RI-PRF programme is based on rainfall indices that are calculated using precipitation measured over 2-month intervals within a specified grid area. Participants must choose 2-month intervals and allocate their insurance coverage across the various intervals selected. When the realised precipitations for the given grid in the selected 2-month intervals are lower than the participant-chos
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