An economic and actuarial evaluation and comparative study of all-risk crop insurance programs in Manitoba

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Ye, Yongsheng
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This thesis conducts a comprehensive evaluation and a comparative study of crop insurance programs in Manitoba. The main purpose of the study is to investigate the most effective crop insurance program structures for both the government crop insurance corporation and the insured farmers. The major objective is to provide theoretical and empirical insights into some important issues with which a voluntary all-risk crop insurance is often confronted, and to seek some plausible solutions in two distinct ways: (1) to construct improved program designs including better actuarial structures, better premium ratemaking methodologies, and better coverage frameworks, and (2) to induce stronger program demand. The thesis contains three parts. An extensive economic literature review of general insurance and crop insurance is first conducted. The fundamentals of the actuarial aspect of insurance are outlined. The basic framework of insurance economics is introduced and discussed within the context of demand for and supply of insurance, A general public all-risk crop insurance model is then developed. The resource distortion effects of crop insurance program parameters are isolated and the resource neutrality conditions are derived... Parts two and three present some empirical results. In part two ( Chapter 3 ), three crop insurance programs are evaluated in terms of their effectiveness of yield risk reductions for more than 450 Manitoba farms... In part three (Chapter 4 ), theoretical and analytical issues in pure premium ratemaking for an all-risk crop insurance program are evaluated. Explicit actuarially fair rate formulas for normal yield distribution and beta yield distribution are presented... The Bayesian framework gives rise to some median rates and it is a very useful premium revision technique. It is also found that the current rate formula used by the Manitoba Crop Insurance Corporation is only partly justified and it could be improved by utilizing a formal Bayesian methodology. The chapter also demonstrates that an indemnity-truncated or deductible-shifted program needs to be considered by the insurance corporation. It is attractive for both the insurer and the insured in the sense that an equivalent or higher yield protection could be obtained by the insured and the program management cost savings could be very significant to the insurance agency.