The effects of optional units on crop insurance indemnity payments

Abstract

The federal government supports numerous agricultural programs including Multiple Peril Crop Insurance (MPCI). Currently, the Risk Management Agency of the United States Department of Agriculture is legally required to determine actuarially sound premiums for MPCI. A variety of producer and production characteristics affect expected MPCI indemnity payments and thereby actuarially sound premiums. Qualifying producers may choose to split their cropland into "optional units." For the purposes of calculating crop insurance indemnity payments, the Risk Management Agency considers each optional unit a separate insurance contract. This thesis investigates whether the number of optional units a farmer is eligible to insure affects expected per acre indemnity payments. Using regression analysis and Monte Carlo simulations, this thesis statistically tests whether the number of optional units insured, separately or consolidated into a single parcel, affects expected indemnities per acre. The predictions are that the number of optional units insured separately does not affect expected indemnities per acre and that the number of optional units consolidated into a single parcel does affect expected per acre indemnities. This thesis finds a per acre premium decrease for farmers who insure available optional units as a single parcel and that the decrease in the premium be positively related to the number of optional units consolidated. In addition, this thesis finds the RMA's practice of increasing per acre premiums for farmers who separately insure two or more optional units versus the premium per acre for farmers who insure a single optional unit.