Infrequent Shocks and Rating Revenue Insurance: A Contingent Claims Approach
By: Richards, Timothy J.; Manfredo, Mark R.
Richards, Timothy J.; Manfredo, Mark R., Infrequent Shocks and Rating Revenue Insurance: A Contingent Claims Approach, Journal of Agricultural and Resource Economics, Volume 28, Issue 2, August 2003, Pages 233-251
Revenue insurance represents an important new risk management tool for agricultural producers. While there are many farm-level products, Group Risk Income Protection (GRIP) is an area-based alternative. Insurers set premium rates for GRIP on the assumption of a continuous revenue distribution, but discrete events may cause the actual value of insurance to differ by a significant amount. This study develops a contingent claims approach to determining the error inherent in ignoring these infrequent events in rating GRIP insurance. An empirical example from the California grape industry demonstrates the significance of this error and suggests an alternative method of determining revenue insurance premiums.