Screening Ability of Private Insurers in the Federal Crop Insurance Program

Sangkyun Park, (2019) "Screening ability of private insurers in the federal crop insurance program", Agricultural Finance Review, Vol. 79 Issue: 1, pp.107-118.

Posted: 23 Mar 2017 Last revised: 30 Jan 2019

Date Written: March 22, 2017

Abstract

In the Federal crop insurance program, the Federal Government prices insurance policies, shares the underwriting risk with private insurers, and allows private insurers to choose their risk share for each policy. This paper finds a strong negative relationship between the underwriting loss rate and the private insurers’ risk share. This finding suggests that the Federal Government substantially misprices some policies and that private insurers are capable of detecting the mispricing and use the screening advantage to increase their profits. The screening advantage holds both in good crop years and bad crop years. Private insurers appear to take advantage of both their private information and shortcomings in the Government’s pricing model that produce systematic errors. Notably, high-risk policies appear to be underprice, and low-risk policies appear to be overpriced. Based these findings, the current risk-sharing arrangement between the Federal Government and private insurers is costly to the Government, while producing little value. The screening advantage of private insurers, which enable them to increase their profits, plays no role in the pricing process.

Keywords: crop insurance, private information, asymmetric information, public private partnership

JEL Classification: Q14, G22, H81, D82

Suggested Citation

Park, Sangkyun, Screening Ability of Private Insurers in the Federal Crop Insurance Program (March 22, 2017). Sangkyun Park, (2019) "Screening ability of private insurers in the federal crop insurance program", Agricultural Finance Review, Vol. 79 Issue: 1, pp.107-118., Available at SSRN: https://ssrn.com/abstract=2939080 or http://dx.doi.org/10.2139/ssrn.2939080

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