nep-ias New Economics Papers
on Insurance Economics
Issue of 2011‒04‒16
nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Customizable Area Whole Farm Insurance (CAWFI) By Chalise, Lekhnath; Coble, Keith H.; Barnett, Barry J.
  2. Optimal Coverage Level Choice with Individual and Area Plans of Insurance By Bulut, Harun; Collins, Keith; Zacharias, Thomas P.
  3. Evaluation of Crop Insurance Yield Guarantees and Producer Welfare with Upward Trending Yields By Adhikari, Shyam; Knight, Thomas O.; Belasco, Eric J.
  4. Gauging the impact of a low-interest rate environment on German life insurers By Kablau, Anke; Wedow, Michael
  5. A Categorical Data Analysis on Risks in Agriculture By Uematsu, Hiroki; Mishra, Ashok K.
  6. Weather Derivatives as Risk Management Tool in Ecuador: A Case Study of Rice Production By Vedenov, Dmitry; Sanchez, Leonardo
  7. The Farm Level Impacts of Replacing Current Farm Programs with a Whole Farm Revenue Program By Raulston, J. Marc; Richardson, James W.; Outlaw, Joe L.; Knapek, George M.
  8. Flood Insurance Demand along the Gulf and Florida Coast By Lee, Jihyun; Petrolia, Daniel R.; Ferraez, Will T.
  9. Quality and Reputation: Is Competition Beneficial to Consumers? By Alessandro Fedele; Piero Tedeschi

  1. By: Chalise, Lekhnath; Coble, Keith H.; Barnett, Barry J.
    Abstract: The customizable area whole farm insurance (CAWFI) was designed and compared with no insurance program and currently available whole farm insurance based on farm level yield (CFWFI). The CAWFI yields higher certainty equivalents over no insurance program, but lower to CFWFI; CAWFI has fairly small indemnity compared with CFWFI.
    Keywords: Agricultural and Food Policy, Crop Production/Industries, Production Economics, Risk and Uncertainty,
    Date: 2011
  2. By: Bulut, Harun; Collins, Keith; Zacharias, Thomas P.
    Abstract: We theoretically examine a farmerâs coverage demand with area and individual insurance plans as either separate or integrated options. The individual and area losses are assumed to be imperfectly and positively correlated. With actuarially fair rates, the farmer will fully insure with the individual plan and demand no area insurance regardless of the plans being separate or integrated. Under separate plans, free area insurance and the fair rate for individual insurance, area insurance replaces a portion of individual insurance demand. Under integrated plans, free area insurance, and the fair rate for individual insurance, the farmer over-insures using both area and individual plans.
    Keywords: Agricultural risk, area plans of insurance, crop insurance, Agribusiness, Agricultural and Food Policy, Agricultural Finance, Crop Production/Industries, Demand and Price Analysis, Farm Management, Research Methods/ Statistical Methods, Risk and Uncertainty, D81, G22, Q12, Q18,
    Date: 2011–01–14
  3. By: Adhikari, Shyam; Knight, Thomas O.; Belasco, Eric J.
    Abstract: Actual Production History (APH) yields play a critical role in determining the coverage offered to producers by the Risk Management Agencyâs (RMA) Yield Protection, Revenue Protection, and Revenue Protection-Harvest Price Exclusion crop insurance products. The RMA currently uses the simple average of from 4 to 10 years of historical yields to determine the APH yield guarantee. If crop yields are trending upward, use of a simple average of historical yields introduces bias into the insurance offering. Using both county and individual insured unit data, we examine the producer impact of APH yield trends for Texas cotton and Illinois corn. Our findings indicate that biases due to using simple average APH yields when yields are trending upward reduce the expected indemnity and actuarially fair premium rate. Certainty equivalent differences are computed and used as a measure of the magnitude of welfare effect of trend-based biases in APH yields. The estimated welfare effect also varies significantly with different commonly used detrending approaches. This study demonstrates that producer welfare can be enhanced through proper treatment of yield trends in crop insurance programs.
    Keywords: Actual Production History, Crop Insurance, Yield Trend, Yield Guarantee, Production Economics, Risk and Uncertainty,
    Date: 2011
  4. By: Kablau, Anke; Wedow, Michael
    Abstract: A low interest rate environment can pose a key risk to the life insurance sector. A deteriorating return on investment holdings jeopardizes the guaranteed return on life insurance contracts. In this paper, we examine the effect of low interest rates on German life insurers by applying various adverse scenarios to a simple model of life insurers' balance sheets. A low return on investment can lead to a depletion of the bonus and rebate provisions. As a result, life insurers resilience may deteriorate. By way of this analysis, we can model approximately when the bonus and rebate provisions will be depleted. --
    Keywords: Life insurance,low-interest rate environment,financial stability
    JEL: G14 G21 G28
    Date: 2011
  5. By: Uematsu, Hiroki; Mishra, Ashok K.
    Abstract: This study compares farm operatorsâ risk perceptions and actual realization of risk attitudes revealed through off-farm labor, enterprise diversification, and use of contracts, crop insurance, and other types of insurance, using data from 2001 Agricultural Resource Management Survey (ARMS). Results from ordered logit model and multivariate probit models unexpectedly found that risk loving farmers are more likely to employ risk management strategies.
    Keywords: Risk, Agribusiness, Crop Production/Industries, Labor and Human Capital, Marketing, Production Economics, Risk and Uncertainty, D81, Q10, Q12,
    Date: 2011
  6. By: Vedenov, Dmitry; Sanchez, Leonardo
    Abstract: This paper analyzes efficiency of weather derivatives as insurance instruments for rice in Ecuador. Weather derivatives were constructed for each county/season combination. Complicated weather models were estimated for the index, and a copula approach was used to get the probability distributions. We find Risk-reducing efficiency varies across county and season.
    Keywords: agricultural risk management, index insurance, weather derivatives, copula approach, rice production, Agribusiness, Crop Production/Industries, Risk and Uncertainty, Q14, Q59,
    Date: 2011
  7. By: Raulston, J. Marc; Richardson, James W.; Outlaw, Joe L.; Knapek, George M.
    Abstract: This study evaluates the farm level economic impacts of implementing a whole farm revenue insurance program in lieu of current government program payments on agricultural producers in major production areas of the United States. Realizing a multitude of viable options exist, this study demonstrates one way a whole farm revenue coverage program could work at the farm level and makes comparisons between the current baseline situation and alternative levels of revenue coverage implementation.
    Keywords: agricultural policy, simulation, representative farms, government payments, crop insurance, revenue coverage, Agricultural and Food Policy,
    Date: 2011
  8. By: Lee, Jihyun; Petrolia, Daniel R.; Ferraez, Will T.
    Abstract: The objective of this research is to identify factors that influence both the decision (yes or no) and level of flood insurance among coastal homeowners in the southeast U.S. Recently flood damage has dramatically increased (Flood), and Crossett et al. (2004) report that coastal populations are growing. And in spite of rising costs of living in coastal areas, people are willing to pay more for access to ocean views and other natural amenities associated with coastal living (Bin and Kruse, 2006). Although the federal government provides flood insurance programs and encourages at-risk residents to insure their property from flood, rates of uptake remain low (Burby, 2001; Kunreuther, 2006; Landry and Jahan-Parvar, 2009). The National Flood Insurance Program (NFIP) was created to provide often subsidized premiums to cover losses which private insurance markets failed to offer. However, as Kunreuther et al.(1978) argue, many people do not bother to prepare, and have a low willingness to pay for coverage, even if subsidized (Kunreuther 1996). However, of those who have previously experienced flooding, they tend to insure their properties more (McClelland, Schulze, and Coursey 1993). Based on previous literature, we identified key factors to establish testable hypotheses regarding effect on flood insurance demand. These include: income, previous flood experience, the presence of a mortgage, home location (both flood zone status and distance from the shore), participation in CRS, the distance from the coast, the house construction year as well as measures of respondent risk preferences and perceptions. Data on flood coverage level and the above explanatory variables were obtained via revealed-preference online survey method, contracted through Knowledge Networks (KN) during August-September 2010. We chose to contract with KN for several reasons. First, they are, to our knowledge, the only survey firm that can legitimately say they have a true probability based sample for an online survey because they recruit by phone and/or mail (randomly selected using random-digit dialing (RDD) or by using address-based sampling); additionally they provide internet access to households that do not have it. KN was also contracted to overcome the typical of low response rate when surveying the general public. KN uses an online panel (called the âKnowledge Panelâ). KN Panel members that were homeowners were sampled from 95 counties in Gulf Coast and Florida Atlantic Coast counties in AL, FL, LA, MS, and TX, with an 47% response rate (720 observations), with 67% from FL, 24% from TX, 5% from LA, and 4% collectively from AL and MS. As expected, insurance purchase is positively affected by the individualâs risk perception, their risk preference, whether or not they have a mortgage, flood zone residence, their income, CRS, previous flood experience, and the year of construction of house. Coefficients of mortgage and risk perception, income, flood zone are significant at 0.05 the level. Additionally, the coefficient of distance from the coast is only significant at the 0.1 level.
    Keywords: Flood Insurance, Risk, Insurance Demand, Environmental Economics and Policy, Risk and Uncertainty,
    Date: 2011
  9. By: Alessandro Fedele (Department of Economics, Università di Brescia); Piero Tedeschi (DISCE, Università Cattolica)
    Abstract: In this paper we develop a model of product quality and firms' reputation. If quality is not verifiable and there is repeated interaction between firms and consumers, we show that reputation emerges as a means of disciplining the former to deliver high quality. In order to that, we also prove that competitive firms can extract some rent in producing high quality, thus providing a solution to Stiglitz (1989) puzzle, alternative and complementary to Hörner's (2002) one. Positive profit are generated in equilibria characterized by the emergence of a social norm which prescribes a minimum quality level. Moreover, we demonstrate that more concentrated industry structures deliver better quality and higher social and consumer welfare. This finding should induce cautiousness in enhancing competition when product quality is at stake. We derive our results in the specific context of after-sales service quality provided by insurance companies. Yet, we argue that our analysis is of general applicability.
    Keywords: quality, reputation, Bertrand competition, insurance contracts.
    JEL: L13 D82 D81 C73
    Date: 2010–10

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