The effects of adverse selection and effective coverage levels on crop insurance participation

Abstract

The effects of crop insurance premium levels (adverse selection) and insurance coverage levels (effective coverage) on crop insurance participation are examined. A simulation of premium rates, coverage levels, and participation rates over time models the implications of random yield fluctuations using farm and county level data from Chouteau County, Montana, wheat producers. A statistical analysis measuring participation as a function of expected indemnity payments, effective coverage levels, and premium rates is conducted using cotton regional level data from the majority of the cotton producing states using a weighted ordinary least squares regression. The simulation shows that as rates increase (decrease) and coverage levels decrease (increase), participation levels decrease (increase). It also demonstrates that by indexing producers' insurable yields, participation rates stabilize. The regression results yield a significant, positive coefficient for the expected indemnity variable. However, contrary to expectations, the coefficient for effective coverage is insignificant and negative. The premium rate coefficient is insignificant and negative.