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Article
Publication date: 20 August 2018

Rui Zhou, Johnny Siu-Hang Li and Jeffrey Pai

The purpose of this paper is to examine the reduction of crop yield uncertainty using rainfall index insurances. The insurance payouts are determined by a transparent…

Abstract

Purpose

The purpose of this paper is to examine the reduction of crop yield uncertainty using rainfall index insurances. The insurance payouts are determined by a transparent rainfall index rather than actual crop yield of any producer, thereby circumventing problems of adverse selection and moral hazard. The authors consider insurances on rainfall indexes of various months and derive an optimal insurance portfolio that minimizes the income variance for a crop producer.

Design/methodology/approach

Various regression models are considered to relate crop yield to monthly mean temperature and monthly cumulative precipitation. A bootstrapping method is used to simulate weather indexes and corn yield in a future year with the correlation between precipitation and temperature incorporated. Based on the simulated scenarios, the optimal insurance portfolio that minimizes the income variance for a crop producer is obtained. In addition, the impact of correlation between temperature and precipitation, availability of temperature index insurance and geographical basis risk on the effectiveness of rainfall index insurance is examined.

Findings

The authors illustrate the approach with the corn yield in Illinois east crop reporting district and weather data of a city in the same district. The analysis shows that corn yield in this district is negatively influenced by excessive precipitation in May and drought in June–August. Rainfall index insurance portfolio can reduce the income variance by up to 51.84 percent. Failing to incorporate the correlation between temperature and precipitation decreases variance reduction by 11.6 percent. The presence of geographical basis risk decreases variance reduction by a striking 24.11 percent. Allowing for the purchase of both rainfall and temperature index insurances increases variance reduction by 13.67 percent.

Originality/value

By including precipitation shortfall into explanatory variables, the extended crop yield model explains more fluctuation in crop yield than existing models. The authors use a bootstrapping method instead of complex parametric models to simulate weather indexes and crop yield for a future year and assess the effectiveness of rainfall index insurance. The optimal insurance portfolio obtained provides insights on the practical development of rainfall insurance for corn producers, from the selection of triggering index to the demand of the insurance.

Details

Agricultural Finance Review, vol. 78 no. 5
Type: Research Article
ISSN: 0002-1466

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Article
Publication date: 22 November 2011

Milton Boyd, Jeffrey Pai, Qiao Zhang, H. Holly Wang and Ke Wang

The purpose of this paper is to explain the factors affecting crop insurance purchases by farmers in Inner Mongolia, China.

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Abstract

Purpose

The purpose of this paper is to explain the factors affecting crop insurance purchases by farmers in Inner Mongolia, China.

Design/methodology/approach

A survey of farmers in Inner Mongolia, China, is undertaken. Selected variables are used to explain crop insurance purchases, and a probit regression model is used for the analysis.

Findings

Results show that a number of variables explain crop insurance purchases by farmers in Inner Mongolia. Of the eight variables in the model, seven are statistically significant. The eight variables used to explain crop insurance purchases are: knowledge of crop insurance, previous purchases of crop insurance, trust of the crop insurance company, amount of risk taken on by the farmer, importance of low crop insurance premium, government as the main information source for crop insurance, role of head of village, and number of family members working in the city.

Research limitations/implications

A possible limitation of the study is that data includes only one geographic area, Inner Mongolia, China, and so results may not always fully generalize to all regions of China, for all situations.

Practical implications

Crop insurance has been recently expanded in China, and the information from this study should be useful for insurance companies and government policy makers that are attempting to increase the adoption rate of crop insurance in China.

Social implications

Crop insurance may be a useful approach for stabilizing the agricultural sector, and for increasing agricultural production and food security in China.

Originality/value

This is the first study to quantitatively model the factors affecting crop insurance purchases by farmers in Inner Mongolia, China.

Details

China Agricultural Economic Review, vol. 3 no. 4
Type: Research Article
ISSN: 1756-137X

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Article
Publication date: 11 May 2010

Jeffrey S. Pai and Milton S. Boyd

In the USA, private insurance companies serve as an integral part of the delivery and risk sharing of the federal crop insurance program. Governed by the Standard…

Abstract

Purpose

In the USA, private insurance companies serve as an integral part of the delivery and risk sharing of the federal crop insurance program. Governed by the Standard Reinsurance Agreement (SRA), private crop insurance companies must designate an eligible crop insurance contract to the assigned risk, developmental, or commercial funds. While the SRA restricts the private sector delivery system in a number of ways, the assignment of contracts to crop insurance funds, however, is left solely to the discretion of individual crop insurance companies. Thus, as to the companies' profitability viewpoint, the optimal selection of the crop insurance funds is the most important task. Therefore, the purpose of this paper is to provide a decision framework for crop insurance companies to make optimal decisions regarding the purchases of crop reinsurance. This information and framework may also be useful for crop insurance firms in China when considering crop reinsurance decisions.

Design/methodology/approach

The paper studied three commonly used parametric loss distributions and presented a general guideline to choose the most profitable fund within the company's risk bearing level.

Findings

The paper finds many important features in the commonly used loss distributions, which are useful to maximize the company's underwriting returns.

Originality/value

The paper provides a general decision framework for optimally ceding risks to reinsurance. While this paper focused on agricultural insurance decisions by firms, the concept could be applied to general reinsurance decisions.

Details

China Agricultural Economic Review, vol. 2 no. 2
Type: Research Article
ISSN: 1756-137X

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Article
Publication date: 3 May 2016

Rui Zhou, Johnny Siu-Hang Li and Jeffrey Pai

The application of weather derivatives in hedging crop yield risk is gaining more interest. However, the further development of weather derivatives – particularly…

Abstract

Purpose

The application of weather derivatives in hedging crop yield risk is gaining more interest. However, the further development of weather derivatives – particularly exchange-traded – in the agricultural sector has been impeded by concerns over their hedging performance. The purpose of this paper is to develop a new framework to derive the optimal hedging strategy and evaluate hedging effectiveness.

Design/methodology/approach

This framework incorporates a stochastic temperature model, a crop yield model, a risk-neutral pricing method and a profit optimization procedure. Based on a large number of simulated scenarios, the authors study crop yield hedge for a future year. The authors allow the hedger to choose from different types of exchange-traded weather derivatives, and examine the impact of various factors on the optimal hedging strategy.

Findings

The analysis shows that hedging objective, pricing method and geographical location of the hedged exposure all play important roles in choosing the best hedging strategy and assessing hedging effectiveness.

Originality/value

This framework is forward-looking, because it focusses on the crop yield hedge for a future year rather than on the historical hedging effectiveness often studied in literature. It utilizes the most up-to-date information related to temperature and crop yield, and hence produces a hedging strategy which is more relevant to the year under consideration.

Details

Agricultural Finance Review, vol. 76 no. 1
Type: Research Article
ISSN: 0002-1466

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Article
Publication date: 5 May 2015

Jia Lin, Milton Boyd, Jeffrey Pai, Lysa Porth, Qiao Zhang and Ke Wang

The purpose of this paper is to explain the factors affecting farmers’ willingness to purchase weather index insurance for crops in China, in the Province of Hainan, and…

Abstract

Purpose

The purpose of this paper is to explain the factors affecting farmers’ willingness to purchase weather index insurance for crops in China, in the Province of Hainan, and to also provide additional background information on weather index insurance.

Design/methodology/approach

A survey of 134 farmers was undertaken in Hainan, China, regarding their willingness to purchase weather index insurance. A probit regression model was used, and a number of variables were included to explain willingness of farmers to purchase weather index insurance.

Findings

In total, 11 of 15 variables in the model are found to be statistically significant in explaining farmers’ willingness to purchase weather index insurance.

Research limitations/implications

First, farmers’ interest in weather index insurance may be limited due to basis risk. Second, some farmers may not sufficiently understand weather index insurance and so may not purchase it, and a considerable portion of farmers may also require a subsidy if they are to purchase weather insurance.

Practical implications

Weather index insurance may provide a lower cost alternative than traditional crop insurance, however, basis risk remains a main challenge.

Originality/value

This is the first study to quantitatively study the factors affecting the willingness of farmers to purchase weather index insurance for agriculture in the province of Hainan, China.

Details

Agricultural Finance Review, vol. 75 no. 1
Type: Research Article
ISSN: 0002-1466

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Article
Publication date: 26 July 2013

Milton Boyd, Jeffrey Pai and Lysa Porth

The purpose of this research is examine the development of livestock mortality insurance, and associated challenges, in order to provide an improved understanding…

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656

Abstract

Purpose

The purpose of this research is examine the development of livestock mortality insurance, and associated challenges, in order to provide an improved understanding regarding the operation of livestock mortality insurance.

Design/methodology/approach

In a many countries, livestock mortality insurance has been either unavailable or underdeveloped. A descriptive analysis is provided regarding the background and development of livestock mortality insurance, along with an example.

Findings

Livestock mortality insurance is considerably more complex than crop insurance, and some of the complexities of livestock mortality insurance include multi‐stage production, consequential losses, occasional large event losses, animal health management, moral hazard, and adverse selection.

Originality/value

This study provides background and development information regarding livestock mortality insurance, and also highlights a number of important differences between livestock mortality insurance and crop insurance.

Details

Agricultural Finance Review, vol. 73 no. 2
Type: Research Article
ISSN: 0002-1466

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Abstract

Details

China Agricultural Economic Review, vol. 3 no. 4
Type: Research Article
ISSN: 1756-137X

Content available
Article
Publication date: 5 May 2015

Assistant Professor Lysa Porth and Professor ßKen Seng Tan

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2

Abstract

Details

Agricultural Finance Review, vol. 75 no. 1
Type: Research Article
ISSN: 0002-1466

Open Access
Article
Publication date: 18 May 2016

Jeffrey Mullen

Abstract

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Mental Illness, vol. 8 no. 1
Type: Research Article
ISSN: 2036-7465

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Article
Publication date: 1 August 2000

Patrick Xavier

Examines Spain’s problems in implementing regulatory reform and offers suggestions for addressing them. Hopes to be instructive to other countries embarking on regulatory…

Abstract

Examines Spain’s problems in implementing regulatory reform and offers suggestions for addressing them. Hopes to be instructive to other countries embarking on regulatory reform. Concludes that other countries should concentrate on problems on implementation that they are likely to face and should be prepared for.

Details

info, vol. 2 no. 4
Type: Research Article
ISSN: 1463-6697

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