The use of crop diversification in agricultural yield insurance products

Abstract

Crop production is exposed to many sources of biotic and abiotic risks, such as extreme weather, pests, and diseases. Crop diversification and crop insurance are both important risk management strategies for farmers. The two strategies are usually considered separately. Here, we propose to exploit potential synergies by including crop diversification in multiple crop yield insurance designs. We provide an ex-ante analysis to compare multiple-yield insurance, which covers the different crops together as a bundle, with single-yield insurances. To this end, we use historical farm-level yield observations for winter wheat, winter barley, winter rapeseed, sugar beet and grain maize in German agriculture (N = 113,463 historical farm-level yield observations during 1995–2019) and assess the implications for risk reduction, fair insurance premiums, and expected utility. In our analysis, we refer to the area-weighted and price-weighted revenues as the underlying for both insurance scenarios. We show that multiple-yield insurance is particularly attractive for highly risk-exposed farms because multiple-yield insurance has lower fair insurance premiums compared to insuring each crop separately. Moreover, the certainty equivalents in the multiple-yield insurance scenario are often higher than those in the single-yield insurances scenario, especially when the premium loadings are high. In addition, the fact that broader crop rotations and diversification are rewarded with lower premiums under multiple-yield insurance offers the potential to combine the overarching policy goals of agricultural risk management and diversification of agricultural landscapes.