Premium Estimation Inaccuracy and the Actuarial Performance of the US Crop Insurance Program

This article explores the impact of the likely levels of inaccuracy associated with two main types of premium estimation methods, under different sample sizes, on the actuarial performance of the US crop insurance program. The analyses are conducted under several plausible assumptions about the insurer versus the producers’ estimates for their actuarially fair premiums. Significant differences are found due to estimation method and sample size, with the currently used procedures resulting in the worse actuarial performance. Several conclusions and recommendations are provided that could markedly reduce the amount of public subsidies needed to keep this program solvent.