Studies from University of Guelph Further Understanding of Crop Insurance (Testing for distributional structural change with unknown breaks: application to pricing crop insurance contracts): Agriculture – Crop Insurance

Agriculture Daily

2024 JUN 05 (NewsRx) -- By a News Reporter-Staff News Editor at Agriculture Daily -- New research on crop insurance is the subject of a new report. According to news reporting originating from Guelph, Canada, by NewsRx correspondents, research stated, “Agriculture in developed countries is produced under heavily subsidized insurance.”

The news journalists obtained a quote from the research from University of Guelph: “The pricing of these insurance contracts, termed premium rates, directly influences farmers profits, their financial solvency, and indirectly, global food security. Changing climate and technology have likely caused significant shifting of mass in crop yield distributions and, if so, has rendered some of the historical yield data irrelevant for estimating premium rates. Insurance is primarily interested in lower tail probabilities and as such the detection of structural change in tail probabilities or higher moments is of great concern for the efficacy of crop insurance programs. We propose a test for structural change with an unknown break(s) which has power against structural change in any moment and can be tailored to a specific range of the underlying distribution. Simulations demonstrate better finite sample performance relative to existing methods and reasonable performance at identifying the break. The asymptotic distribution is shown to follow the Kolmogorov distribution.”

According to the news reporters, the research concluded: “Our proposed test finds structural change in most major U.S. field crop yields leading to significant premium rate differences. Results of an out-of-sample premium rating game indicate that incorporating structural change in crop yields leads to more accurate premium rates.”

For more information on this research see: Testing for distributional structural change with unknown breaks: application to pricing crop insurance contracts. Journal of the Royal Statistical Society Series C: Applied Statistics, 2024. The publisher for Journal of the Royal Statistical Society Series C: Applied Statistics is Oxford University Press (OUP).

A free version of this journal article is available at https://doi.org/10.1093/jrsssc/qlae020.

Our news editors report that additional information may be obtained by contacting Hanjun Lu, Department of Food Research, Agricultural and Resource Economics, University of Guelph, Guelph, Canada. Additional authors for this research include Alan P Ker.