On the Possibility of a Private Crop Insurance Market: A Spatial Statistics Approach

Authors

  • H. Holly Wang,

  • Hao Zhang


H. Holly Wang and Hao Zhang are assistant professors with the Department of Agricultural Economics and the Program in Statistics, Washington State University, respectively. The authors wish to thank the editor and two anonymous referees for their constructive comments and gratefully acknowledge the financial support from USDA-NRI and the Washington Agricultural Experiment Station and the assistance of two former graduate students, Joe Krogmeier and Binfan Ke.

Abstract

Risk theory tells us if an insurer can effectively pool a large number of individuals to reduce total risk, the insurer can then provide insurance by charging a premium close to the actuarially fair rate. However, a common belief exists that risk can be effectively pooled only when random loss is independent. Therefore crop insurance markets cannot survive without government subsidy because crop yields are not independent among growers. In this article, we take a spatial statistics approach to examine the effectiveness of risk pooling for crop insurance under correlation. We develop a method for evaluating the effectiveness of risk pooling under correlation and apply the method to three major crops in the United States: wheat, soybeans, and corn. The empirical study shows that yields for the three crops present zero or negative correlation when two counties are far apart, which complies with a weaker condition than independence, finite-range positive dependency. The results show that effective risk pooling is possible and reveal a high possibility of a private crop insurance market in the United States.

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