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For more information about the Department of Agricultural and Resource Economics, and about training and career opportunities, please contact:

Undergraduate:
ugarec@ag.arizona.edu
Phone: (520) 621-6244

Graduate:
garec@ag.arizona.edu
Phone: (520) 621-2421

Related Links:

USDA-FCIC's Risk Management Agency

Crop Insurance
Calculating Farmers' Odds of Disaster

The rate you pay for your car insurance depends on how risky you appear to your insurance company. They estimate this risk not only on your driving record, but by looking at the categories you fit into--your age, your sex, your marital status. Federal crop insurance programs also attempt to estimate risks when insuring farmers, but this is a significantly more challenging exercise.

Federally regulated crop insurance programs have been a part of U.S. agricultural policy since the 1930s. In the most common program, private insurance companies sell policies backed by the federal government. The policies protect farmers against yield losses resulting from all risks, including weather shocks and pest damages. It is difficult to calculate how much risk there is for a particular farm. While car insurance companies estimate risks by comparing you to thousands of drivers with similar characteristics, this strategy doesn't work well with farmers. There is relatively little historical data on any farmer and a wide variance between operations.

Agricultural economists are working to make crop insurance premiums more accurate. The rates are set by the Risk Management Agency, a division of USDA that administers the publicly subsidized program. The method for setting rates is based on the farmer's past production history. Unfortunately, this past data may not be enough to accurately estimate the farmer's risk. Using econometrics and different statistical methods, researchers are looking at how to best extract information out of existing data and how to use information from other farms.

Faculty Involvement
Alan Ker has researched different methodologies for setting crop insurance rates. Some of his work has been implemented into the Risk Management Agency's rate setting process.

Student Involvement
Pat McGowan, M.S. graduate, has conducted research on weather-based adverse selection in the US crop insurance program.

Additional Readings
Goodwin, B.K., and A.P. Ker. "Revenue Insurance: A New Dimension in Risk Management." Choices (Fourth Quarter, 1998):24-27.

Ker, AP "Private Insurance Companies and the US Crop Insurance Program." Choices (Third Quarter, 1999).

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