A DERIVATIVE SECURITY APPROACH TO SETTING CROP REVENUE COVERAGE INSURANCE PREMIUMS

The nature of indemnities and reliance on futures price averaging during two distinct time intervals throughout the production year imply Crop Revenue Coverage (CRC) insurance behaves like an exotic put option. Treating this type of insurance as a derivative security, an analytical model is developed and an algorithm for solving the model to place a lower bound on insurance premiums is presented. Monte Carlo simulation, taking into account the path-dependent nature of an Asian-type option, is then used to determine lower-bound estimates for insurance premiums on corn gross revenue under specified price and yield distributions.Risk and Uncertainty,

Insurers and Insured Individuals Interaction as Basis for Persistent Agricultural Production Process

The paper is focused on the issue of determining correct insurance rates, which are a key point in the interaction between insurers and the insured from the authors' perspective. It should be noted that insurance is one of the tools supporting a continuous and uninterrupted production process, contributing to stability and persistence of achieved living standards. However, insurance rates determined incorrectly can cause either a downfall of insurance companies with insurance even worsening instability or unavailability of insurance services making pointless the instruments of ensuring stability. Insurance rates can be calculated in agricultural insurance on the base of conventional models, but rates might be understated in this case for an insurance company due to correlation of losses according to separate contracts. The authors propose a simulation model involving correlation of losses according to separate contracts to eliminate this shortcoming. Business activity outcomes of insured and non-insured farmers are analyzed. Simulation is carried out assuming the normalcy of crop yield distribution. Simulation relies on the approaches suggesting an insured event occurrence and losses arising according to separate insurance contracts. The final model results from the total probability formula. The developed model makes it possible to improve validity of insurance rates and affordability of insurance services for farmers without gaining in collapse risks of insurance companies

Insurers and Insured Individuals Interaction as Basis for Persistent Agricultural Production Process

The paper is focused on the issue of determining correct insurance rates, which are a key point in the interaction between insurers and the insured from the authors' perspective. It should be noted that insurance is one of the tools supporting a continuous and uninterrupted production process, contributing to stability and persistence of achieved living standards. However, insurance rates determined incorrectly can cause either a downfall of insurance companies with insurance even worsening instability or unavailability of insurance services making pointless the instruments of ensuring stability. Insurance rates can be calculated in agricultural insurance on the base of conventional models, but rates might be understated in this case for an insurance company due to correlation of losses according to separate contracts. The authors propose a simulation model involving correlation of losses according to separate contracts to eliminate this shortcoming. Business activity outcomes of insured and non-insured farmers are analyzed. Simulation is carried out assuming the normalcy of crop yield distribution. Simulation relies on the approaches suggesting an insured event occurrence and losses arising according to separate insurance contracts. The final model results from the total probability formula. The developed model makes it possible to improve validity of insurance rates and affordability of insurance services for farmers without gaining in collapse risks of insurance companies

A MODEL OF AGRICULTURAL INSURANCE IN EVALUATING ASYMMETRIC INFORMATION PROBLEMS

The main motivation for this paper is the recognition of the fact that asymmetric information is the form of moral hazard and adverse selection results in sizeable efficiency losses. These costs are passed back to producers in the form of excessively high premium rates and also passed back to the government via the crop insurance subsidy program. A secondary motivation stems from a recent debate in the literature regarding the specific effects of moral hazard on agricultural input use. Conventional wisdom suggests that moral hazard will induce producers to reduce input usage. A competing hypothesis has emerged which suggests that moral hazard may induce producers to increase their usage or risk increasing inputs. The main objective of this paper was to develop a model of agricultural insurance to understand why asymmetric information problems might exist and to compute and evaluate the relative program costs of agricultural insurance that can be attributed to moral hazard and adverse selection. These objectives are achieved by developing a theoretical model of agricultural insurance, and by conducting numerical simulations of the model. Simulation results indicated that insured farmers use less agricultural inputs than uninsured farmers in an attempt to maximize expected indemnities. Moral hazard was fould to be a significant problem only at higher coverage levels. Expected returns (in term of expected indemnities) to agricultural insurance were found to vary substantially between productivity (i.e., risk) types, and farmers were shown to recognize and respond to these differences. These results suggest that crop insurance is confronted with an adverse selection problem. Simulation results further indicated that program costs to a myopic insurer attributed to moral hazard and adverse selection could be substantial.Risk and Uncertainty,

Portfolio Allocation and Alternative Structures of the Standard Reinsurance Agreement

This paper examines how insurance companies participating in delivery of crop insurance would change patterns of portfolio allocation across reinsurance funds in reaction to the 2005 Standard Reinsurance Agreement. The returns of insurance companies under the SRA are calculated using a simulation model. An heuristic allocation rule is introduced in order to imitate portfolio allocation strategies of participating companies. The main conclusion of the analysis is that the bulk of changes in portfolio allocations are likely to be caused by the introduction of "retained net book quota share" reinsurance rather than adjustments in the cession limits and retention requirements for the Assigned Risk Fund.crop insurance, portfolio allocation strategies, reinsurance funds, Standard Reinsurance Agreement, Risk and Uncertainty,

Application of Computer Simulation Modeling to Evaluate Business Continuity Plans

Business continuity plans (BCP) help organizations plan for and withstand the occurrence of unexpected events that interrupt the normal operation of business. Managers typically develop several alternate plans to minimize the business impact of unexpected events. The problem for decision makers is that comparative evaluation of BCP is typically done using subjective judgments. This research uses a case study approach focusing on a single organization and a single business continuity application to propose the use of computer simulation as a tool for managers to identify and evaluate different BCP prior to committing resources. In the context of an insurance firm, a specific plan was evaluated using simulation methods. A simulation model was used to model the operational aspects of the call center in an insurance company. After the model was validated, it was used to answer questions about what-if scenarios. Results suggest that scenario analysis using simulated model enables managers to ask useful questions that can help evaluate the plan. Managers at the insurance company used the simulation model to determine the level of service required and evaluate business continuity strategies to achieve it