The Influence of Distributional Assumptions on the Calculation of Crop Insurance Premia

Crop insurance premia are shown to be sensitive to the distributional assumptions used in their calculation. Premia calculations based on normal distributions and beta distributions are compared. The normal distribution overstates the probability of loss relative to the beta distribution, and causes premia to be higher. It is argued that use of the normal distribution in crop insurance premia calculation cannot be justified by appealing to a Central Limit Theorem because crop insurance loss events are not independent, and that distributions with flexible representation of skewness would be more appropriate for crop insurance premia calculation.