A Probabilistic Model of the Crop Insurance Purchase Decision

This study proposes a probabilistic model of the individual crop insurance purchase decision that explicitly recognizes that neither the producer nor the insurer knows the exact value of the actuarially fair premium (AFP) underlying the desired policy. The model is used to explore the impact of key features of the insurer and producer AFP estimates on the probability that the producer will purchase insurance and other important indicators of program performance. The model is applied to assessing the merits of alternative premium estimation methods and to shed light on some major factors affecting the performance of the U.S. crop insurance program.