Progress 09/10/97 to 09/30/04
Outputs
The project completed with the development of SRA-SIM a large-scale stochastic simulation model of the federal Government's Standard Reinsurance Agreement for crop insurance. The simulator was then used to analyze how the SRA affects returns from underwriting crop insurance, both at the regional and individual company levels. The simulator was also used to examine intersting counterfactual scenarios, including the pooling of SRA into one national reinsurance pool rather than separate state pools. The simulator was also used to analyze how private crop insurance companies currently allocate their books of business among reinsurance funds established under the Standard Reinsurance Agreement. The findings were used to derive a simple heuristic allocation rule that companies can use to both increase their expected rates of return and decrease their variability.
Impacts
Our stochastic simulation model of the Standard Reinsurance Agreement was used by policymakers in the Economic Research Service and the Dept of Agriculture Office of the Chief Economist to assess the impact of changes in the structure of the SRA in the recent round of negotiations between the federal government and the US crop insurance industry. Our reearch findings also have provided insights into how crop insurers can allocate their portfolios among the different reinsurance funds so as to minimize their risk.
Publications
- Vedenov, Dmitry V., Mario J. Miranda, Robert Dismukes, and Joseph W. Glauber. 2004. "Portfolio Allocation under the Standard Reinsurance Agreement", under review, Journal of Agricultural and Resource Economics.
- Vedenov, Dmitry V., Mario J. Miranda, Robert Dismukes, and Joseph W. Glauber. 2004. "Economic Analysis of the Standard Reinsurance Agreement". under review, Agribusiness Finance Review.
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Progress 01/01/03 to 12/31/03
Outputs
Over the preceding year, my collaborators and I have written two manuscripts summarizing our findings from the research conducted under this project. We have submitted one manuscript for publication consideration at the American Journal of Agricultural Economics that is now undergoing its second review. A second manuscript is undergoing final revisions and will be submitted to the same journal within the next few months. Both manuscript summarize our findings regarding the impact of the Standard Reinsurance Agreement on the books of business of all major crop insurers in the USA.
Impacts
Our findings should be of interest not only to the crop insurance industry but also federal policy makers. Our findings provide an estimate of the subsidy implicit in the SRA and also reveals regional variations in the effectiveness of the SRA at reducing the riskyness of crop insurer portfolios.
Publications
- No publications reported this period
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Progress 01/01/02 to 12/31/02
Outputs
The Agricultural Risk Policy Simulator has been used to assess the implications of changes in the structure of the Standard Reinsurance Agreement. Recent research using the model has examined the implications of alternative regional configurations for the SRA, including the forming a single inter-state, national SRA. Recent research has also explored alternative heuristics for the allocation of agricultural insurance contracts across the various available funds.
Impacts
The model has been updated to be used as the government's primary analytical tool when negotiating new a reinsurance agreement with the private crop insurance industry in 2003. Recent research has demonstrated that regional rather than state-level agreements can provide better risk protection at a lower cost to private crop insurers. Recent research has also demonstrated that simple heuristic allocation schemes can substantially reduce the risk exposure of crop insurers relative to current allocation practices.
Publications
- No publications reported this period
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Progress 01/01/01 to 12/31/01
Outputs
Over the preceding year, project members 1) examined crop insurance market under asymmetric information, and the potential for adverse selection when a portfolio of yield and revenue insurance products are offered to farmers; 2) examined factors that influence a farmer's decision to participate or not to participate in agricultural insurance programs using Neural Networks method; 3) examined potential tradeoffs and complementarities that exist between inter-year self-insurance involving saving and borrowing and intra-year market insurance employing annual price and yield risk contracts and futures and options contracts; 4) compared the dollar plan with other insurance plans, including APH, CRC, and RA, to gain insights on its ability to provide risk protection; 4) analyized analyze production, marketing, and financial risk of selected industries in the context of dynamic technological change, production specialization, fewer larger farms, coordinated production and
marketing, and greater market orientation and globalization of agriculture; 5) developed analytical Risk Evaluation Matrix framework to illustrate the risks generated by biotechnology through the production, marketing, and processing system; 6) compared the relative variability of returns from program and non program crops and to compare the results across markets and compared intra-year revenue variability with inter-year revenue variability.
Impacts
Addressed concern among policy makers that as the number of insurance products available to farmers increases, the adverse selection problem could potentially worsen and, therefore, increase the private and public cost of the federal crop insurance program. Came to a better understanding of how self-insurance interacts with risk contracts depending on the cost of credit, the subjective discount rate, and the degree of risk aversion, shedding light on why participation in crop insurance programs may be low. Developed better understanding of how new technologies, economies of scale, and the rising cost of labor relative to capital are driving the nation to fewer and larger farms, shedding light on optimal government policies to help family farmers. Developed insights useful in negotiating global agreements on health and biosafety standards and labeling of GM products, which are crucial in alleviating consumer concerns in both importing and domestic markets. Shed light
on the role of public policy aimed at reducing risk to farmers.
Publications
- Shiva S. Makki. ForCrop Insurance: Inherent Problems and Innovative Solutions. In Agricultural Policy for the 21st Century, eds. Luther Tweeten and Stanley Thompson, Iowa State University Press, forthcoming 2002.
- Shiva S. Makki and Agapi Somwaru. Asymmetric Information in the Market for Crop yield and Revenue Insurance Products. Technical Bulletin 1892, Economic Research Service, April 2001.
- Shiva S. Makki and Agapi Somwaru. Demand for Yield and Revenue Insurance Products. Agricultural Outlook, December 1999:17-20.
- Shiva S. Makki and Agapi Somwaru. Farmers' Participation in Crop Insurance Markets: Creating the Right Incentives. American Journal of Agricultural Economics, 83(August 2001):662-667.
- Shiva S. Makki, Agapi Somwaru, and Joy Harwood. Participation in crop Insurance Program: What are Important Factors. The Journal of Agricultural Lending, Volume 14(2) (Winter 2001):30-38.
- Shiva S. Makki and Agapi Somwaru. A Dynamic Analysis of Farmers Participation in Agricultural Risk Insurance Market. Report to RMA forthcoming 2002.
- Shiva S. Makki and Mario J. Miranda. Self-Insurance and Utility of Standard Risk Management Contracts. Research Report submitted to The World Bank, Washington, DC, March, 2001. The report will appear as a chapter in a book on Risk Management in Agriculture published by the World Bank.
- Shiva S. Makki, Agapi Somwaru, and Joy Harwood. Biotechnology in Agriculture: Implications for Farm-level Risk Management. Journal of Agribusiness, Volume 19(1) (Spring 2001):51-67.
- Shiva S. Makki and Agapi Somwaru. Evidence of Adverse Selection in Crop Insurance Markets. Journal of Risk and Insurance, forthcoming 2002.
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Progress 01/01/00 to 12/31/00
Outputs
Examined a variety of issues including: 1) the role of self-insurance as an alternative to crop insurance and price futures and options; 2) the characteristics of crop producers who enter into marketing contracts; 3) the potential utility of rainfall and degree-day weather derivatives for hedging US crop yield risk, with application to Iowa corn.
Impacts
All of these studies will help us understand whether traditional insurance instruments are effective in improving the welfare of agricultural producers.
Publications
- No publications reported this period
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Progress 01/01/99 to 12/31/99
Outputs
This year, I have devoted my research to the role of savings and self insurance as an alternative to traditional crop insurance. Dynamic decision models under uncertainty suggest that insurance has been overvalued by traditional risk models. Savings, self insurance, and negative price-yield correlations, which are ignored in traditional models, all mitigate the value of insurance that indemnifies for crop losses or price losses alone.
Impacts
Research indicates that wealth and age of farmers and location of farms can have a profound impact on the value that farmers place on traditional multiple peril crop insuranc products.
Publications
- MAKKI, S. and M.J. MIRANDA. 'Self-Insurance and the Utility of Standard Risk Management Contracts.' Working Paper, Department of Agricultural, Environmental, and Development Economics, The Ohio State University, 1999.
- MIRANDA, M.J. and S. MAKKI. 'A Critique of Agricultural Risk Models.' Presented at the Symposium on The Farm Safety Net: What's in it for Agricultural Insurance, Annual Conference of the American Agricultural Economics Association, Nashville, Tennessee, August, 1999.
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Progress 01/01/98 to 12/31/98
Outputs
This research has focused on the impact of self-insurance on the demand for standard risk management tools, including options, futures, and insurance contracts. The research has been based on a dynamic model of savings and production, extending existing studies into an intertemporal framewor. Our models allow for autocorrelation in prices and cross corrrelations in prices and yields, and permits us to analyze the optimal response to riks at different wealth levels and stages of the life cycle.
Impacts
Research has established that self insurance can substantially reduce the demand for standard risk management contracts among wealthier individuals, explaining the low demand for such instruments among farmers generally.
Publications
- Makki, Shiva and Mario, J. Miranda. "Self-Insurance and the Optimality of Standard Risk Management Instruments", 1999.
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