Weather-based adverse selection and the US crop insurance program: The private insurance company perspective

Surprisingly, investigations of adverse selection have focused only on farm ers. Conversely, this article investigates if insurance companies, not farm ers, can generate excess rents from adverse selection activities. Current p olitical forces fashioning crop insurance as the cornerstone of U.S. agricu ltural policy make our analysis particularly topical. Focusing on Fl Nino/L a Nina and winter wheat in Texas, we simulate out-of-sample reinsurance dec isions during the 1978 through 1997 crop years while reflecting the realiti es imposed by the risk-sharing arrangement between the insurance companies and the federal government. The simulations indicate that economically and statistically significant excess rents may be garnered by insurance compani es through weather-based adverse selection.