Tuesday, August 6, 2013

Crop insurance under climate change

How should crop insurance premiums adjust to a changing climate in order to remain actuarial fair?

Short answer:  Very slowly.

That seems pretty obvious to me, and hopefully to anyone who thinks about it for a few minutes, even if you think climate change is ultimately going to have big impacts.  Moreover, the way crop insurance premiums are already determined---as a function a farmer's own recent yield history---gradual adjustment of premiums will take place naturally.

So, what should USDA's Risk Management Agency do, if we think nasty crop outcomes like last year are going to be more frequent going forward?

Well, I'll abstain from making a recommendation, but I will say that if they do absolutely nothing, there will be no significant budgetary implications.

None of this is to say that there might not be other ways to improve crop insurance.

Update: So, if this issue is so unimportant, why do I mention it?  Because I'm seeing and hearing the question a lot, and my general sense is that energy and resources might be better spent on other issues.

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