Actuarial Fairness of Crop Insurance Rates with Constant Rate Relativities

Abstract

Increased availability and demand for low‐deductible crop insurance policies have increased focus on crop insurance rating methods. Actuarial fairness cannot be achieved if constant multiplicative factors are used to determine how premiums change as coverage levels increase. A comparison of premium rates generated by the factors used by the two most popular crop insurance products with those generated by a standard yield distribution shows that the popular insurance products overcharge for low‐deductible policies in most counties. This overpricing may explain why large premium subsidies were required to induce farmers to move from low‐deductible to high‐deductible policies beginning in 2001.