Systemic risk, reinsurance, and the failure of crop insurance markets

Without affordable reinsurance, private crop insurance markets are doomed to fail because systemic weather effects induce high correlation among 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 riskier than they would be otherwise if yields were stochastically independent across farms, We also find that area yield reinsurance contracts would enable crop insurers to cover most of their systemic crop loss risk, reducing their risk exposure to levels typically experienced by more conventional property liability insurers.