SYSTEMIC RISK, REINSURANCE, AND THE FAILURE OF CROP INSURANCE MARKETS

Without affordable reinsurance, private crop insurance markets are doo med to fail because systemic weather effects induce high correlation a mong farm-level yields, defeating insurer efforts to pool risks across farms. Using an empirical model of the U.S. crop insurance market, we find that U.S. crop insurer portfolios are twenty to fifty times risk ier than they would be otherwise if yields were stochastically indepen dent across farms, We also find that area yield reinsurance contracts would enable crop insurers to cover most of their systemic crop loss r isk, reducing their risk exposure to levels typically experienced by m ore conventional property liability insurers.