Modelling the switch from hail insurance to antihail nets

Abstract

We analyse the impact of the antihail net promotion on the actuarial soundness of the hail insurance market. Specifically, we present a simple model showing that, in the presence of an imperfect insurance market, incentives for antihail nets could cause low-risk farmers to exit the insurance market more likely than high-risk ones. This induces a typical adverse selection problem. The theoretical model predictions are corroborated by an empirical investigation. Based on a fixed-effect conditional logit regression, we show that a higher per-hectare output value and a location strongly affected by hail both increase the chance that a plot is hedged through antihail nets.