Self-insurance and multi-peril grassland crop insurance: the case of French suckler cow farms
Résumé
Purpose – From the perspectives of the probable replacement of the national calamity funds by multi-peril
grassland insurance, the purpose of this paper is to estimate demand for grassland production insurance.
Design/methodology/approach – A discrete stochastic programming model with a three-year
planning horizon was used to run simulations for farms raising suckler cows primarily with
grasslands. In this model, the annual area insured and some production decisions are optimized under
grasland yield uncertainty, with possible ex post production-system adjustments. The effects of
insurance loading cost (14 levels), insurance coverage level (three levels), risk aversion (two levels) and
stock levels (forage and animal stocks vary according to grassland yields and to farm management of
the previous years) were analyzed.
Findings – The results show that grassland insurance could be used as a flexible risk management
tool, when farm becomes vulnerable to fodder shortfall. According to previous years’ grassland yields
and to the subsequent states of hay stock and animal liveweight, the area insured could vary between
nearly the none and full. Farmers with low-average stocking rate and important hay storage capacity
have less incentive to buy grassland insurance. The author also demonstrates that for a given loading
cost, more insurance is purchased at a coverage level of 70 percent of average yield than at higher
coverage levels. The cost of self-insurance increases for important and rare losses while multi-peril
grassland insurance premium decreases. Higher levels of risk aversion also raise the quantity of
insurance subscribed. Eventually, insurance price is a key factor. Almost no insurance is bought for
loading costs greater than 1.1 under low-risk aversion and for loading costs greater than 1.3 under
moderate risk aversion.
Research limitations/implications – The willingness to pay for insurance could have been
overestimated for different reasons. First, basis risks have not been introduced in the simulation
framework. Although the Forage Production Index performed quite well, basis risks are high enough
to trigger inappropriate indemnifications in some cases. Consequences of these risks should be
estimated in further research. Second, other self-insurance options and public emergency measures
such as subsidized loan or reduction in social security contributions should also be considered to
assess and reduce farmers vulnerability to risks.
Practical implications – The launching of the multi-peril grassland insurance is likely to be
successful thanks to the 65 percent of public subsidies on insurance premiuml. However, considering
that the loading cost is likely to be high and that demand for grassland production insurance is rather
low, multi-peril grassland production insurance may struggle to continue unsubsidized.
Originality/value – This paper provides a framework that enables to estimate demand for grassland
production insurance factoring in substitution with self-insurance and taking into account successive risks.
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