PREMIUM RATE DETERMINATION IN THE FEDERAL CROP INSURANCE PROGRAM - WHAT DO AVERAGES HAVE TO SAY ABOUT RISK

This article reviews actuarial procedures used to calculate premium ra tes in the federal crop insurance program. Average yields are used as an important indicator of risk under current rating practices. The str ength and validity of this relationship is examined using historical y ield data drawn from a large sample of Kansas farms. The results indic ate that assumed relationships between average yields and yield variat ion are tenuous and imply that rating procedures that rely on average yields may induce adverse selection.