Although the insurance premium loading doesn’t seem to affect the optimal coverage
level, it affects the farmer’s evaluation of the welfare improvement due to insurance. Higher
premium loading yields a smaller value of the insurance product in all portfolios..
As we take away the payment programs one by one, the change in CE discloses
information about the specific values of each program. For example, the difference between the
first two portfolios indicates a CCP value of $13.46 (62.28-48.82) to the farmer. We compute all
these values and report them in Table 6. Among the three government programs, the DP has a
highest value, while the CCP has a value close to the LDP. In total government programs
account for $57.47, which is more than 90% of the total value of the base portfolio ($62.68).
When we take away all government programs, the farmer relies on hedging and
insurance. He or she can still find a hedging path and rely on the highest 85% insurance coverage
to manage risks but achieves a much lower welfare level (CE=$4.81). The value of hedging can
be calculated when we consider another portfolio of only crop insurance and government
programs (CE=62.20). The difference between the CE of this last portfolio and that of the
comprehensive base portfolio ($62.28) yields $0.08. The low value of hedging is not too
surprising considering farmers’ low participation rates. However, the value is quite low even
though they hedge at a significant percentage. Compared to insurance and government programs,
futures is the only tool that does not receive any subsidy while paying a transaction cost.
Considering that insurance is limited to yield insurance, the value of hedging may go even lower
when revenue insurance is included. Correspondingly, when the value of CI is computed by
subtracting the total government programs’ value from this last value, it turns out to be $4.73
($62.20-$57.47) under 0% premium loading and $4.60 ($62.07-$57.47) under 30% premium
loading. These values are a lot less than the individual government programs but still
28
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