amount of A&O subsidy the companies obtain, although increased sales would involve increased operating cots A change in the catastrophic loading factor, has the following effects: β, The first term in the derivative, is strictly negative as long as the loss ratio, remains k, less than one, reflecting the adverse effect of an increase in premium rates on the amount of liability purchased. An increase in by raising the total premium rate will p, β, unambiguously increase revenues if is constant because there is no impact on the loss L ratio or the A&O subsidy. The second term, is strictly positive, reflecting the direct impact of an increase in the loading factor on premium earned by the companies on each policy. However, if the marginal effect on quantity of coverage purchased of a change in the paid by farmers is small then almost surely the direct impact on the total premium rate will exceed any revenue losses associated with a decline in liability and the associated potential increase in the loss ratio. If an increase in, or introduction of a positive catastrophic loading factor is accompanied by an increase in premium subsidy rates then the net effect of the joint changes in and s β on the price paid by farmers for coverage can be negative. Such was the case under the terms of the 1994 Crop Insurance Reform Act when the 13.64% catastrophic loading factor was introduced but, at the same time, the average premium subsidy rate was increased from 30% to 50%. Prior to the 1994 CIRA, as = 0.3 and = 0, (1 + (1 -0.3)r = 0.7r. s pf = s)(1 = β – β)r After the reform, = 0.5 and = 0.1364, (1 + 0.5682 Thus s pf = 0.5)(1 0.1364)r = r. β – the joint changes in and substantially reduced thereby increasing program s pf, β participation, and lowering loss ratios. The combined effects of these policy changes L, increased the revenues of the crop insurance companies while also increasing farmers’ economic well-being. Thus the 1994 Crop Insurance Reform Act is perhaps a classic
amount of A&O subsidy the companies obtain, although increased sales would involve increased operating cots A change in the catastrophic loading factor, β, has the following effects: The first term in the derivative, is strictly negative as long as the loss ratio, k, remains less than one, reflecting the adverse effect of an increase in premium rates on the amount of liability purchased. An increase in β, by raising the total premium rate p, will unambiguously increase revenues if L is constant because there is no impact on the loss ratio or the A&O subsidy. The second term, is strictly positive, reflecting the direct impact of an increase in the loading factor on premium earned by the companies on each policy. However, if the marginal effect on quantity of coverage purchased of a change in the paid by farmers is small then almost surely the direct impact on the total premium rate will exceed any revenue losses associated with a decline in liability and the associated potential increase in the loss ratio. If an increase in, or introduction of a positive catastrophic loading factor is accompanied by an increase in premium subsidy rates then the net effect of the joint changes in β and s on the price paid by farmers for coverage can be negative. Such was the case under the terms of the 1994 Crop Insurance Reform Act when the 13.64% catastrophic loading factor was introduced but, at the same time, the average premium subsidy rate was increased from 30% to 50%. Prior to the 1994 CIRA, as s = 0.3 and β = 0, pf = (1 – s)(1 + β)r = (1 -0.3)r = 0.7r. After the reform, s = 0.5 and β = 0.1364, pf = (1 – 0.5)(1 + 0.1364)r = 0.5682 r. Thus the joint changes in s and β substantially reduced pf, thereby increasing program participation, L, and lowering loss ratios. The combined effects of these policy changes increased the revenues of the crop insurance companies while also increasing farmers’ economic well-being. Thus the 1994 Crop Insurance Reform Act is perhaps a classic
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