| Summary: | In the beginning of the 2007 crop year, the Federal Crop Insurance Corporation
(FCIC) launched the Pasture, Rangeland, Forage Rainfall Index Pilot Program (PRF-RI)
for six states. This insurance is an index and not individual insurance. Risk Management
Agency officials claim that PRF-RI insurance mitigates the risk because index and
forage production move in the same direction. Therefore when the index is low there is
the expectation that production will also be low. PRF-RI is a pilot program and ranchers
are skeptical as to whether or not it is viable to purchase the insurance.
The objective of this research was to determine the economic benefits of rainfall
insurance in selected counties in Texas and estimate the probability of indemnities under
different types of coverage levels and index intervals.
Historical rainfall indices were simulated for all index intervals and a
multivariate empirical distribution of rainfall indices were used. The model was run for
alternative scenarios on the available coverage levels (90%, 85%, 80%, 75%, 70%) and
relevant premium rates. Each scenario resulted in an estimate of the insurance benefits variable probability density function for a particular coverage level. Stochastic
Dominance with Respect to a Function (SDRF), Stochastic Efficiency with Respect to a
Function (SERF), and StopLight chart were used to rank the benefits of alternative
coverage levels.
The results indicated that for all regions tested, the best alternative when
purchasing PRF-RI was to buy the 90% coverage level. Probabilities of earning net
indemnities decreased at lower coverage levels. December-January is a critical time
period that should be taken into consideration by the ranchers. The results indicated also
that insurance returns depend on the region where the policy is purchased. In southern
and eastern parts of Texas net indemnities appeared to be significantly less and have
lower probabilities of being positive than in West Texas. Ranchers from West Texas
may be able to significantly benefit from the insurance.
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