The economics of crop hail insurance

The demand for crop hail insurance is examined in both static and dynamic models and both with and without all-risk crop insurance. Contrary to general results on optimal insurance with background risk, crop revenue uncertainty induces the fanner to decrease rather than increase coverage. The under-insurance results are strengthened when farmers are able to dynamically update their insurance portfolio as information about the value of the crop is revealed over time. When hail insurance is purchased along with all-risk crop insurance, two alternative approaches are examined and their efficiency properties compared.