Are the U.S. crop insurance premiums fair across regions and crops?
The loss ratios of crop insurance in the Corn Belt states are historically lower than other states, indicating misrating problems in the U.S. crop insurance programs. In this paper, we use spatial econometric models to analyze loss experience of corn, soybeans, and wheat in order to test the fairness of the ratemaking system. We find spatial dependence of loss ratios in corn and soybean programs. In addition, loss ratios are influenced by observable systematic factors that are not included in the ratemaking system such as yield trend, coefficient of variation of yield, premium weighted average coverage level and group policy participation index. Moreover, as we set Illinois as a base group, the significance of the state dummy variables shows that some states are comparatively overpriced, implying geographic unfairness in ratemaking. Furthermore, we find unbalanced net subsidy (net farmer gain) distribution at the county level and cross subsidization among states.
Baker, Purdue University.
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