Farms' Economic Risk And Government-supported Agricultural Insurance

Recently, Thousands of domestic and foreign researches have been on Agricultural risk andAgricultural Insurance. Chinese government is also in great concern about Agricultural risk and theincome risk of famers. Many financial and insurance institutions start their business to mitigate theeconomic risks in rural area. And the government-supported Agricultural insurance is growing fast allover China. However, rare domestic researches had enough micro-based analysis of farm's behavior,and seldom of them used farm level data to empirically do the research.Considering the current research situation in China, this essay tries to use a new method, initiallydeveloped by OECD, to analyze the risks faced by farms. It first decomposes the income structure offarms and gains their risk resources– from crop yields, prices and input structure and factor prices.Then it uses the panel data of the crop operation of 342 farmers from different five villages in HenanProvince. The method is first to calculate the variability of each risk resources and their pairedcorrelations for each farm, then compare the mean of the indicators of farm level and aggregated levelto show the difference of the two assessment methods. The result shows that the risk assessment issignificantly different from farm level to aggregated level.The next part of the essay is to simulate the current government-supported crop insurance program inHenan province, which is initiated in June, 2010. The objective of the simulation is to assess theeconomic welfare effect of the program and government subsidy on the local farms. The essay usesthe theory of risk utility theory and power utility function, by calculating the difference of certaintyequivalence (CE) in different simulated circumstances, to evaluate whether and how much theprogram can give benefits to each farm. The assessment involves both feasibility and efficiency. Tojudge whether the program is feasible, the essay compares the difference of the CE between thecircumstances when a farm join and do not join the program. To judge whether the program isefficient, the essay compares the CE between the circumstances when the same government subsidy isused in the current insurance program and given to farms directly. On the basis of past similarresearches, the essay assumes that the coefficient of risk aversion of farms is 2.According to the different hypothesis of income correlation between farms,the essay develops threedifferent simulation methods. The first method assumes that each farm has heterogeneous riskcharacteristics and uses the time level data of each farm to calculate each farm's CE in differentsituations. The second method assumes that farms in each village have homogeneous riskcharacteristics and constitutes a standard farm in each village, uses the panel date in each village tocalculate the change of CE of each village's standard farm. The third method assumes that all thesample farms have homogeneous risk characteristics and constitutes a standard farm among all thefarms and calculate the change of CE of this standard farm to evaluate the average effect of theinsurance program.The result shows that under the subsidy of government, the current insurance program of Henanprovince is feasible but the effect among different farms and villages are different; and also that the program is not efficient. However, considering the data this essay uses, the result may be not reliable.The essay gives several reasons to show why the result might be wrong.