Optimal Climate Crop Insurance Strategy: Contrasting Insurer and Farmer Interests
Victor E. Cabrera
Agricultural Science Center at Clovis
New Mexico State University
Full Paper (PDF Format, File Size: 165K)
Predictability of seasonal climate variability associated with El Niño Southern Oscillation (ENSO) suggests a potential to reduce farmer and insurer risks by selecting best crop insurance products conditioned to expected seasonal climate forecasts. This study finds out the best crop insurance products conditioned to ENSO phases from the stand point of view of an insurer, and contrast them with those of farmer’s best options. This study addresses synergies and conflicts of interest between insurer and farmer and how climate information would make them more alike or more different.
Conclusions and Discussion
Gains of insurer in the long run were directly related to the amount of received premium, indicating that at higher coverage, although more frequent indemnity payments, the balance of premium less indemnity is greater than with lower coverage. Year to year, ENSO-based climate variability impacts moderately insurer gains according to crop insurance contracts. In addition, at higher risk levels, gains are more stable by decreasing moderately crop insurance coverage.
Insurer and farmer might have conflict of interests regarding crop insurance selection, although best selections are not completely opposite. If both parties are interested in relax their best selections, farmer and insurer can attain long term sustainability. Using ENSO-based climate forecast has an impact on these decisions. However, only the insurer has the capacity to change the underwritten crop insurance policy contracts and the mission to help farmers attain economic stability. Consequently, the insurer would have greater connotation in resolving these potential conflict of interests, even though farmers are not willing to change their best selections.
Insurer loss ratio target of 1.075 (premium received vs. indemnity payment) is substantially higher than what was found in this study of 0.32. This fact indicates that there is room for decreasing subsidies and/or decreasing farmer’s premiums and still safely attain the target loss ratio. A voice of caution is that this study only used large temporal distributions. Further study is recommended to include spatial distributions.
(Contact Victor E. Cabrera)