Rate Making for Farm‐Level Crop Insurance: Implications for Adverse Selection

Abstract

Abstract This research identifies two problems in the new Federal Crop Insurance that may cause adverse selection: ( a ) the relationship between rate making and expected yields for individual farmers, and ( b ) the bias introduced in coverage protection when trends are not used to establish expected yields. A theoretical investigation using the normality assumption demonstrates the potential severity of these problems, and empirical results from farm‐level data lend further support. As crop insurance changes to individualized methods of protection, these issues will be particularly important for developing rates.