A New Crop Insurance Design

By Gerald Van Tassell

When it comes to crop insurance across the U.S., regions at higher risk receive higher crop insurance subsides per acre – an equity than widens on a per bushel basis.

The current crop insurance design is based on a distance-based yield guarantee (DG) where subsidies are a percentage of premium rates. Comparing two hypothetical producers – one in Michigan and one in Texas – who both have a 200 bu./ac. expected yield with a 170 bu./ac. yield guarantee, but the Michigan producer has far less variability. Under a distance-based guarantee, the Texas producer receives more than four times the per acre subsidy.

Built on probability

A more equitable system would be a probability-based yield guarantee (PG) that factors in riskiness of the underlying distribution. Here’s how this system would look for the producer in Michigan and in Texas:

• under a 1 in roughly 6 year probability of loss, the Michigan producer would have a 180 bu./ac. coverage

  level and the Texas producer’s yield guarantee remains at 170 bu./ac.

• under the probability-based yield guarantee the Michigan producer receives 2/3 of the subsidies the Texas producer receives – that compares to just 1/4 of the subsidies under the current distance-based yield guarantee system