Examining the Role of the Crop Insurance Selling Agent (original) (raw)

The Market Structure for Crop Insurance and the Effects on Insurance Contracts

2017

In this paper, we examine how the market structure for crop insurance agent services impacts their pursuit of rents in the federal crop insurance program. Agents may attempt to influence producers' insurance choices to maximize total compensation. The ability of agents to exercise this influence likely depends on the level of competition among selling agents. We develop a signaling game model of producer-agent interaction from which we generate testable hypotheses for how risk, agent compensation mechanisms, and agent market power affect the amount of coverage selected by producers. Using a detailed, producer level dataset from five states, we find evidence that agent market power matters in the insurance coverage decisions of producers. These effects vary by region and compensation structure. In Iowa, we find that a 10percentage point increase in an agent's market share increases the premiums of policies they sell by an average of 0.36peracrewhileinWashington,thesameincreaseinmarketshareisassociatedwithadecreaseof0.36 per acre while in Washington, the same increase in market share is associated with a decrease of 0.36peracrewhileinWashington,thesameincreaseinmarketshareisassociatedwithadecreaseof0.11 per acre. In some cases, agent market power may help alleviate adverse selection problems in federal crop insurance by limiting the behavior of opportunistic producers.

The Tangled Web of Agricultural Insurance: Evaluating the Impacts of Government Policy

SSRN Electronic Journal, 2014

This paper examines how changes in major elements of the U.S. federal crop insurance program affect the structure of the agricultural insurance industry. We model interactions between farmers, insurance agents and insurance companies. Marginal changes in government policy (premium subsidy rate, A&O subsidy rate, and loading factor) affect the insurance premium rate, agent compensation rates, agent effort levels, and market demand for crop insurance. Farmers prefer a marginal increase in the premium subsidy rate, but the insurance companies' most preferred policy is a marginal increase in the A&O subsidy rate. We also evaluate the consequences of changes in crop prices.

The Government Sponsored Crop Insurance Program: Expected and Unexpected Consequences

2008

Synopsis It is very popular for governments to use linear proportional premium subsidies to increase the insurance penetration in the agriculture production sector. This paper describes a case in which the affordability issue of agriculture insurance is induced by high fixed transaction cost. It is found irrespective of the independency of the risk government intervention helps farmers become better off, as long as the insurance company is certain about its portfolio risk. However, ambiguous information and spatial correlation of catastrophic risk make quite difficult for the insurance companies to estimate and price insurance lines correctly. Consequently, the unobservable high exposure and insolvent probability induced by the intervention could unconsciously hurt stakeholders involved.

Inadvertent returns through crop insurance contract selection

2019

In this article, we examine if the interaction between crop insurance contract choice and producer characteristics, such as farm size and lease type, enable inadvertent crop insurance returns to producers beyond what the government intended. The crop insurance premium rate depends on historical county lost cost (indemnity/liability) by crop and practice plus an assortment of other factors such as the unit structure, discount factor and the capping factor. However, the rates are not individualized by producer characteristics such as farm size and lease type, leaving room for participants, agents and other actors to potentially extract higher insurance returns and higher government cost. We undertake a sequential approach for our analysis, first we test whether contract selection by a producer accurately predicts to true risk preferences. Risk preferences are computed at the producer level, using an analytically derived formula. Next, we examine the relationship between crop insurance returns and contract choice's interaction with producer characteristics. An instrumental variable approach is preferred to circumnavigate the problem of producer learning. Our empirical analysis, using unit level crop insurance data, reveals that risk preferences are indeed tied to contract choice and its interaction with farm characteristics such as farm size and lease type leads to variable crop insurance returns.

ADVERSE SELECTION IN THE MARKET FOR CROP INSURANCE

This paper examines the potential for adverse selection when farmers are offered a portfolio of insurance policies. We analyze the risk characteristics farmers who bought alternative insurance instruments in 1996-97. Inability to differentiate farmers according to risk types results in pooling equilibrium which may implicitly subsidize high risk farmers.

Information and Opportunistic Behavior in Federal Crop Insurance Programs

2008

Opportunistic behavior in crop insurance can arise due to asymmetric information between producers and the Federal Crop Insurance Corporation. Producers who insure fields using transitional yields based on county average yields or who select options such as buy-up coverage or revenue insurance may increase their return from crop insurance. Using field-level crop insurance contract data for several crops in five growing regions, we find evidence that producers can profit from using buy-up coverage, revenue insurance, and transitional yields and that the level of producer opportunism is crop but not necessarily land-quality specific and is greater due to premium subsidization.

Asymmetric Information and Profit Taking in Crop Insurance

Excess returns to producers insured by the Federal Crop Insurance Corporation can arise due to asymmetric information or from the design of the insurance programs. Using unique, unit-level crop insurance contract data for major crops in five growing regions, we find evidence that producers in most regions may profit by selecting optional units, buy-up coverage, or by using transitional yields to participate in the federal crop insurance program. We also find evidence that advantages increase with land resource heterogeneity. However, the results do not support hypotheses that producers profit by selecting revenue insurance nor that high levels of government "incompetence" exist in the design and administration of the crop insurance system.