Testing the Possibility of Private Crop Insurance and Reinsurance Markets

Risk theory tells us if an insurer can effectively pool a large number of individuals to reduce the total risk, he then can provide the insurance by charging a premium close to the actuarially fair rate. There is a common belief that only when the random loss is independent, the risk can be effectively pooled, therefore because crop yield is not independent among growers crop insurance market cannot survive without government subsidy. In this paper, a weaker condition, asymptotic nonpositive correlation (a.n.c.), is presented as sufficient for effective risk pooling. US crop yield data are used to test the hypothesis and we cannot reject that US yields are a.n.c. As a result, private crop insurance/reinsurance markets are expected to be able to exist