Policy Design of Multi-Year Crop Insurance Contracts with Partial Payments

Current crop insurance is designed to mitigate monetary fluctuations resulting from yield losses for a specific year. However, yield realization tendency can vary from year to year and may depend on the correlation of yield realizations across years. When the current single-year Yield Protection (YP) and Area Risk Protection Insurance (ARPI) contracts are extended to multiple periods, actuarially fair premium rate is expected to decrease as poor yield realizations in a year can be offset by another year’s better yield realizations. In this study, we first use simulations to demonstrate how significant premium savings are possible when coverage is based on the sum of yields across years rather than on a year-by-year basis. We then describe the design of a multi-year framework of crop insurance and model the insurance using a copula approach. Insurance terms are extended to more than a year and the premium, liability, and indemnity are determined by a multi-year term. Moreover, partial payment is provided at the end of each term to offset the possibility of significant loss in a single term. County-level data obtained from the U.S. Department of Agriculture are used to demonstrate the implementations of the proposed multi-year crop insurance. The proposed multi-year plan would benefit farmers by offering insurance guarantees across years for significantly lower costs.