A decision framework for optimal crop reinsurance selection

Purpose – In the USA, private insurance companies serve as an integral part of the delivery and risk sharing of the federal crop insurance program. Governed by the Standard Reinsurance Agreement (SRA), private crop insurance companies must designate an eligible crop insurance contract to the assigned risk, developmental, or commercial funds. While the SRA restricts the private sector delivery system in a number of ways, the assignment of contracts to crop insurance funds, however, is left solely to the discretion of individual crop insurance companies. Thus, as to the companies' profitability viewpoint, the optimal selection of the crop insurance funds is the most important task. Therefore, the purpose of this paper is to provide a decision framework for crop insurance companies to make optimal decisions regarding the purchases of crop reinsurance. This information and framework may also be useful for crop insurance firms in China when considering crop reinsurance decisions. Design/methodology/approach – The paper studied three commonly used parametric loss distributions and presented a general guideline to choose the most profitable fund within the company's risk bearing level. Findings – The paper finds many important features in the commonly used loss distributions, which are useful to maximize the company's underwriting returns. Originality/value – The paper provides a general decision framework for optimally ceding risks to reinsurance. While this paper focused on agricultural insurance decisions by firms, the concept could be applied to general reinsurance decisions.