Evaluating the potential of whole-farm insurance over crop-specific insurance policies

Abstract

The rationale of whole-farm insurance (WFI) is to pool all farm's insurable risks into a single policy. This paper compared separated multi-peril crop-specific insurance policies (CSI) with WFI. It first compared the loss ratios of frequent buyers of agricultural insurance in Spain to confirm whether data provide support for combining separate premia in WFI policies. Actuarial data showed that loss ratios are lower for farmers that sign up for different insurance groups or insure more than one crop. Secondly, using the records of farmers who bought CSI for three crops during 1993-2004, Monte-Carlo simulations were carried out to evaluate premium differences, revenue, and farmers' utilities (DARA-CRRA) of CSI and a WFI designed to cover the same risks than do the CSI policies. Results showed that premiums are reduced by 20% and farmer's certainty equivalents are slightly larger. Farmers would benefit from WFI and governments would enhance the efficiency of their insurance subsidies.