Revisiting the demand for agricultural insurance: the case of Spain

Abstract

This paper seeks to characterize the factors that explain crop insurance participation. A stylized model of insurance demand, with a simple setup of one crop. CARA preferences, yield insurance, and PDfs for revenue and yeild with moment‐generating functions, provides a number of hypotheses about the incentives to contract crop insurance. In the empirical model, we use the actual insurance records of 41,660 Spanish farmers and 12 years of data to estimate six probit models for the insuring versus non‐insuring choice, based on individual loss ratios and the dispersion of indemnities, together with idiosyncratic and geographical variables. Results suggest that adverse selection is not a major source of inefficiency in the Spanish insurance system, nor is it the primary motivation to contract crop insurance. Premium subsidies are the leading factor that increases the probability of using insurance. Conclusions are applicable to very diverse farms in Spain.