Screening ability of private insurers in the federal crop insurance program

Abstract

Purpose The purpose of this paper is to scrutinize the structure of the federal crop insurance program and test whether participating private insurers screen insurance buyers better than the federal agency. Design/methodology/approach This paper regresses the claim payout on the risk share of private insurers in insurance pools and other relevant variables. The claim payout should be negatively related with the private insurers’ risk share if private insurers screen insurance buyers better than the federal agency. Findings The payout rates are significantly lower for reinsurance funds with higher risk shares of AIPs, and the relationship between the two variables is not affected much by the aggregate yield (similar relationship in good crop years and bad crop years). Practical implications The federal government could improve the effectiveness and the efficiency of the crop insurance program by restructuring its delivery system. Originality/value The novel contributions of this paper include estimating the economic significance of private insurers’ screening advantage and showing that the economic significance is similar in good crop years and bad crop years.