Optimal Coverage Level Choice with Individual and Area Insurance Plans

Abstract

We theoretically a farmer's optimal use of area and individual crop insurance when area and individual losses are positively but imperfectly correlated. If premium rates for both plans are actuarially fair, the farmer will demand full individual insurance and no area insurance. If area insurance is free and individual insurance is offered at an actuarially fair rate, area insurance replaces a portion of individual insurance demand. If individual insurance is offered as a wrap around the area plan at an actuarially fair rate and area insurance is free, the farmer will demand excess individual insurance and some area insurance.