Insuring Eggs in Baskets: Should the Government Insure Individual Risks?

The vast majority of crop and revenue insurance policies sold in North America are single-crop policies that insure against low yields or low revenues for each crop grown on a particular farm. This practice of insuring one crop at a time runs counter to the traditional risk management practice of diversifying across several enterprises to avoid putting all of one's eggs in a single basket. This paper examines the construction of a whole-farm crop revenue insurance program to include livestock price risk. The results show that at coverage levels of 95% or lower, the fair insurance premiums for this product on a well-diversified Iowa farm are far lower than the fair premiums for the corn crop alone on the same farm. The calculation of premium rates for the whole-farm insurance product is derived from a method for imposing correlations first proposed by Iman and Conover in 1982. The potential income transfer from crop insurance is also examined. We find that the income transfer due to the subsidization of single-commodity policies is greater than the total premium for whole-farm policies.