Systemic Risk in U.S. Crop and Revenue Insurance Programs
Chuck Mason, Dermot J. Hayes, Sergio H. Lence
March 2001 [01-WP 266]
Mason, C., D.J. Hayes, and S.H. Lence. 2001. "Systemic Risk in U.S. Crop and Revenue Insurance Programs." Working paper 01-WP 266. Center for Agricultural and Rural Development, Iowa State University.
This study estimates the probability density function of the Federal Risk Management Agency's (RMA) net income from reinsuring crop insurance for corn, wheat, and soybeans. Based on 1997 data, the authors estimate that there is a 5 percent probability that RMA will need to reimburse at least $1 billion to insurance companies, and that the fair value of RMA's reinsurance services to insurance firms equals $78.7 million. In addition, various hedging strategies are examined for their potential to reduce RMA's reinsurance risk. The risk reduction achievable by hedging is appreciable, but use of derivative contracts alone is clearly no panacea.