Crop Insurance

Question 1

Define Insurance

Answer 1

A contract in which an insurer provides a guarantee of compensation for specified loss or damage suffered by an insuree in return for a specified premium

Question 2

What are the two types of crop insurance

Answer 2

Single-peril: Protects against a specific type of risk, like fire, theft, or flood.
Multi-peril: Bundles multiple types of coverages into one policy to protect against a variety of risks

Question 3

What are the issues with single peril insurance

Answer 3

High admin and operating costs
Correlated risk
relatively low willingness to pay

Question 4

How much can a producer choose for their average yield for crop insurance

Answer 4

50%, 60%, 70%
Under the crop averaging program, you can increase coverage to 90% and reduce the risk

Question 5

When does crop insurance end up having to pay for losses?

Answer 5

When the yield falls below the chosen level of coverage (that’s why 90% reduces the risk)

Question 6

List some uninsurable causes of crop loss

Answer 6

Management skills like:
- Poor seed quality
- Excess weeds
- Preventable insect/disease damage

Question 7

In what ways does the government help with insurance premiums?

Answer 7

• Pay for administration costs
• Pay 60% of the producers premium

Question 8

Describe the “twin problems” for insurance

Answer 8

Moral Hazard (Hidden action): When an insurer takes on additional hidden risk after taking insurance - not applying pesticide when you have crop insurance

Adverse Selection (hidden information): Those who are riskier are more likely to take insurance and their riskiness is unobservable by the insurer - farmers with poor land quality are more likely to buy insurance

Question 9

As of 2023, how did producer premiums change with respect to moral hazards

Answer 9

Producer premiums are now adjusted based on previous claims relative to the risk area of the individual crop

Question 10

What does AgriStability protect

Answer 10

Net margins

Question 11

If a producer’s net margin falls below ___ reference margin, they receive a payment of $__ for every $1.00 below their reference margin

Answer 11

0.7
$0.80 for every $1.00 below

Question 12

How is an individual’s reference margin calculated?

Answer 12

Olympic’s average of the last 5 years of net margins: take the average after dropping the lowest and highest

Question 13

Climate change will potentially make crop insurance more:

Answer 13

• valuable to producers
• expensive for producers and government
• Difficult to price accurately