4.5 Article

Climate and agricultural risk: measuring the effect of ENSO on US crop insurance

Journal

AGRICULTURAL ECONOMICS
Volume 46, Issue 2, Pages 245-257

Publisher

WILEY
DOI: 10.1111/agec.12154

Keywords

G22; Q11; Q18; Q54; Climate; Cotton; Insurance; El Nino Southern Oscillation; ENSO

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Predictive models of climatic phenomena can aid in insurance program design and decision making. Extreme weather outcomes have been linked to the El Nino Southern Oscillation (ENSO), which globally impacts agricultural production. This study demonstrates that extreme ENSO events alter cotton yield distributions in the Southeastern United States. These impacts translate into economically meaningful effects on crop insurance premium rates. Commercial insurers can use publicly available information to determine if government-set premium rates are mispriced, and in turn extract economic rents via the federally mandated Standard Reinsurance Agreement. By ceding underpriced policies in El Nino and La Nina years, we find that private insurance companies can reduce paid indemnities by 10-15% on average.

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