Three Essays on Systemic Risk and Rating in Crop Insurance Markets
Woodard, Joshua D.
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https://hdl.handle.net/2142/83005
Description
Title
Three Essays on Systemic Risk and Rating in Crop Insurance Markets
Author(s)
Woodard, Joshua D.
Issue Date
2008
Doctoral Committee Chair(s)
Sherrick, Bruce J.
Department of Study
Agricultural and Consumer Economics
Discipline
Agricultural and Consumer Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Language
eng
Abstract
The third essay examines the actuarial implications of the Loss Cost Ratio (LCR) ratemaking methodology employed by the Federal Government for setting base rates for the program, and identifies specific conditions required for the LCR methodology to result in unbiased rates. Specifically, constant relative risk through time and other restrictive requirements are required. These requirements are tested against a unique farm-level data set. The results indicate that the conditions required for the LCR to produce unbiased rates are violated for a large number of actual farmers. Implications include that the current ratemaking produces biased rates that are 75%-180% in excess of actuarially fair premiums in Illinois. A simple correction function is proposed and illustrated.
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