An Evaluation of the Actuarial Fairness of the Yield Exclusion Policy Option in the Federal Crop Insurance Program

Abstract

This paper empirically evaluates the actuarial fairness of the Yield Exclusion policy option in the Federal Crop Insurance Program. The Yield Exclusion policy option was introduced in the 2014 Farm Bill, and allows producers to attain higher yield guarantees on FCIP crop insurance contracts through the elimination of low yields in their production history. This paper utilizes an empirical approach to calculate the extent to which premiums charged are excess of expected indemnities caused by applying Yield Exclusion to insurance policies. Premium-implied yield CDFs were derived, and used in the calculation these premium overcharges. These premium overcharges were then evaluated for five field crops, and evaluated on a geographic basis. In all, 438 insurance policies, varying by state, county, crop, crop type, and practice were utilized. It was determined that increases in premiums were in excess of the change in expected indemnities.