This paper examines how insurance companies participating in delivery of crop insurance would change patterns of portfolio allocation across reinsurance funds in reaction to the 2005 Standard Reinsurance Agreement. The returns of insurance companies under the SRA are calculated using a simulation model. An heuristic allocation rule is introduced in order to imitate portfolio allocation strategies of participating companies. The main conclusion of the analysis is that the bulk of changes in portfolio allocations are likely to be caused by the introduction of retained net book quota share reinsurance rather than adjustments in the cession limits and retention requirements for the Assigned Risk Fund.

A central, but inadequately explored issue with respect to subsidized crop insurance programs concerns the costs of delivering insurance coverage to farmers. This study examines that issue in the context of the heavily subsidized US crop insurance program which has often been put forward as a model for agricultural insurance programs in other countries. US Government programs often rely on private firms to deliver income transfers or services, which then establish their own rent-seeking lobbies, which are shared with input suppliers. This rent dispersion process is examined in the context of the U.S. agricultural insurance industry, which receives as much as one third of the annual subsidies that support the federal crop insurance program. We find that as total payments to insurance companies increased between 2001 and 2009, an increasingly large share of the agricultural insurance industry’s rents accrued to insurance agents, although in markets where insurance companies possessed some oligopsony power, agent payments are smaller. The findings also suggest that the insurance industry (companies and independent agents) would almost surely provide the same service for substantially less than the gross revenues from the subsidies and underwriting gains they received.

Producers’ increased reliance on crop insurance has led to concerns about losses producers could incur that are not covered by crop insurance. In the current farm bill debate, several proposals that would be based on area (county) revenue and are intended to cover a portion of producers’ crop insurance deductibles, referred to as “shallow loss” programs, have been advanced. We analyze, using an empirically-based simulation model and a certainty equivalent criterion, how shallow loss coverages might affect optimal coverage levels of farm-level revenue insurance for a moderately risk-averse producer. Our analysis suggests that area-based revenue insurance designs have some potential for causing producers to reduce coverage levels for farm-level revenue insurance, though the marginal differences in the certainty equivalents are often relatively small on a percentage basis.

O of the purposes of U.S. agricultural programs has been to support or stabilize farm incomes by mitigating the effects of low crop prices and yields. Commodity programs such as the counter-cyclical payment and Marketing Loan programs have provided benefits or made payments to producers of several major field crops when crop prices fall short of expected or target levels. At the same time, the federal crop insurance program has provided support that has focused on yield shortfalls but has increasingly included revenue coverage. Several proposals to reform U.S. commodity programs have received attention in the 2007 farm bill debate (American Farmland Trust; National Association of Corn Growers; USDA). Generally, these proposals would alter or replace commodity price programs with programs that would make payments when revenues, that is, prices multiplied by yields, fall short of expected or target levels (Coble, Dismukes, and Thomas). Interest in revenue as the basis for farm programs is not new. In 1983, a national-level revenue program was studied as a way to control federal outlays for commodity programs (CBO). In the early 1990s, a regional-level revenue program was analyzed as a way to mitigate the need for supplemental, ad hoc disaster payments (Miranda and Glauber). More recently, a county-level revenue guarantee program has been promoted as providing protection when it is needed while reducing the chances that annual payments would exceed domestic commodity support limits allowed under the World Trade Organization Agreement on Agriculture (Babcock and Hart).

This research investigates the strategic behavior of private crop insurance firms reinsured by the USDA through the Standard Reinsurance Agreement. This arrangement allows the private firm to strategically allocate individual policies into different risk-sharing arrangements. Thus, firm earnings are conditioned upon accurately forecasting policy loss experience. Our analysis begins with models investigating the characteristics explaining the placement of policies into the assigned risk fund. Then a simulation model of the SRA is used to compare the post-SRA returns of actual firm allocations to two alternative allocation strategies based on a aggregate models and a policy-level econometric forecasting model.

Crop revenue insurance offers farmers a way to manage revenue variability that results from yield and price risks. Commodity-level revenue insurance, particularly for corn, soybeans, and wheat, has become a major part of the subsidized Federal crop insurance program. Whole-farm revenue insurance, based on combined revenue from all commodities produced on a farm, is a more broad-based approach, but is difficult to administer.

This study investigates the role of risk in farmers' acreage decisions in the Northcentral region by revisiting an earlier study by Chavas and Holt and tests the null hypothesis regadring the effects of wealth and draw out implications for farmers' risk attitudes. Estimated model results are used to examine counter-cyclical payments' production impact for major field crops.

Revenue variability at different levels of aggregation has been the focus of several proposals to reform U.S. commodity programs with the 2007 farm bill. In this paper, we estimate revenue variabilityyear-to-year deviations from expected revenuefor corn, soybeans, and cotton at four levels of aggregation: national, state, county and farm. We examine the factors that cause revenue variability and how differences across crops and regions would affect producers risks. We find that national-level revenue variability is nearly double national-level yield variability. Spatial disaggregation increases price and yield variability, but yield variability increases more rapidly than price and revenue variability. A hypothetical national-level revenue program would reduce risk at the average farm-level by slightly more than 8 percent for corn, about 7 percent for soybeans and about 21 percent for cotton. If one integrates farm-level revenue coverage with the national-level program the percent risk reduction more than doubles for both corn and soybeans. Although the increase in risk reduction between the simple national and the integrated program is proportionately less for cotton, the total risk reduction for cotton is the greatest among the three crops.

In recent farm policy debates, proposals for a whole-farm revenue safety net program have been put forward that could provide a farm-income safety net for a wide variety of farming activities. These proposals include income- stabilization accounts and whole-farm revenue insurance. Risk protection from income-stabilization accounts would depend on the reserves in individual accounts and the structure of program benefits. Experience with farm savings accounts in Canada and Australia suggests that lack of adequate account balances and buildup of balances beyond the level required for risk management can reduce program effectiveness. Whole-farm revenue insurance could overcome these problems since coverage would not depend on the farmer's ability to build an account balance and benefits would only be realized when the farmer suffers a drop in income. However, the complexity of factors affecting income variability raises questions about the feasibility of a whole-farm insurance plan.

This paper examines how insurance companies participating in delivery of crop insurance would change patterns of portfolio allocation across reinsurance funds in reaction to the 2005 Standard Reinsurance Agreement. The returns of insurance companies under the SRA are calculated using a simulation model. An heuristic allocation rule is introduced in order to imitate portfolio allocation strategies of participating companies. The main conclusion of the analysis is that the bulk of changes in portfolio allocations are likely to be caused by the introduction of "retained net book quota share" reinsurance rather than adjustments in the cession limits and retention requirements for the Assigned Risk Fund.

Agricultural production is inherently risky. Poor weather, pests, and diseases can reduce production levels. Americans have long supported government aid to farmers and ranchers facing such adverse events, though the best form of assistance has been open to debate. During the 1970s, standing disaster legislation protected major field crop producers who were enrolled in commodity programs. The Federal crop insurance program operated largely as a pilot program available for producers of selected crops in selected counties. In 1980, Congress passed the Federal Crop Insurance Act to strengthen the crop insurance program with the goal of replacing the costly disaster assistance programs. Since then, the U.S. Government has promoted crop insurance over disaster payments as a primary risk management tool. From the outset, policymakers recognized that participation—the purchase of crop insurance policies by producers—

An economic analysis is presented of the Standard Reinsurance Agreement (SRA), the contract governing the relationship between the Federal Crop Insurance Corporation and the private insurance companies that deliver crop insurance products to farmers. The paper outlines provisions of the SRA and describes the modeling methodology behind the SRA simulator, a computer program developed to assist crop insurers and policy makers in assessing the economic impact of the Agreement. The simulator is then used to analyze how the SRA affects returns from underwriting crop insurance. The results are presented in aggregate and also at the regional and individual company levels.

In a series of focus groups during 2001 and 2002, organic farmers from different regions of the United States identified a wide range of risks to their operations. The focus groups were facilitated by the University of Maryland in cooperation with a research team from USDA's Economic Research Service, to explore the risks faced by organic farmers, how they are managed, and needs for risk management assistance. Contamination of organic production from genetically modified organisms was seen as a major risk, particularly by grain, soybean and cotton farmers. Focus-group participants producing grains and cotton-many of whom knew about and had obtained crop insurance-raised concerns about coverage offered, including the need for insurance to reflect the higher prices received for organic crops. Most fruit and vegetable producers participating in the focus groups had little knowledge of crop insurance. When provided with basic information about crop insurance, operators of small fruit and vegetable farms were skeptical about its usefulness for their type of operation.