Research Reports
A Study on Impact Analysis of Crop Insurance Program on Agricultural Production
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AuthorKim, Meebok
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Publication Date2015.11.30
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Original
Research Background
Since the crop insurance program was first introduced for apple and pear in 2001, ranges of the program have been continuously extended to mitigate damages from unforeseen natural disasters. In line with the extension, a size of that program, represented by the size of insurance premium, also has increased. From the perspective of participants, the program has been said to substantially provide a safety net in favor of producers. Put together, the crop insurance program, in spite of its relatively short history, may be evaluated to contribute for farm management and restoration.
A continuous growth of the program is partly owed to the fact that this program enables participants to be prepared in advance against unexpected losses. An increased importance of the program is reflected in terms of size of the relevant budgets; the program’s budget size has been rapidly increased from 16.6 billion KRW (local currency) in 2001 to 270.1 billion KRW in 2014 (approximately by 16 times).
The crop insurance program, however, can not be free from critiques. That is, the program could suffer from adverse selection and/or moral hazard, which are said to be common problems in insurance concerns. Subsidizing about 50% of premium, the government might increase the probability of such adverse effects’ being present. Besides, especially in the agricultural sector, possibility of distorting production-decision-making is said to be one of unintended effects.
In this aspect, it is imperative to 1) analyze if the expansion of the crop insurance program really leads to production-related distortion and/or any unintended effects stem from introduction of the program, and 2) evaluate the performance of that program throughout past 15 years.
Research Methodology
This study largely depends on in-depth data analysis. Main data include Farm Household Economy Survey (2008~2012 and 2013), and a variety of data provided by NH Life Insurance, the Ministry of Agriculture, Food and Rural Affairs, and so on. In addition to data analysis, this study conducts a survey and case studies to supplement and underpin its findings. Especially, the survey, targeting both participants and non-participants, aims to improve the key findings.
Conclusion and Implication of Research
Unfortunately, the crop insurance program has not been implemented long enough to allow to distinguish the prior- and post-effects of the program introduction. To address this problem, this study hires rice (introduced in 2009) as a proxy variable for “breaking-point.” Actually, analyzing 2008~2012 data reveals that, following the introduction of crop insurance on rice, participation rates began rising. In this study, a quantitative method is conducted, setting program-participating households as a treatment group, to analyze the program effects. The results, even if not statistically significant, are in favor of the program’s having farm-household income stabilization effects. Future studies are required to address some limitations of this methodology.
According to Coefficient of Variations (CV) analysis, it is found that income level, farm size, and income instability affect producers’ decision making on program participation. However, effectiveness and magnitude of program participation vary across commodities and over time. It is to be noted that the income stabilization effect is remarkable out of the livestock sector. A relatively higher income CV among participants (crop sector) is somewhat unexpected, which may be partly because farmers with higher income CV are more induced to join the program. It implies that changing the government-subsidy level and introducing various options are necessary to enhance the program performance.
Another key finding in this study is that the crop insurance program has moderate or slight effect on production in terms of production-distortion. Agricultural programs in general may affect producers’ decision making, which can be represented by changes in planted acres. However, an empirical analysis indicates that participation itself does not have significant effect on producer’s decision making at farm level. However, at aggregate or national level, the presence of the program might have different effects on total planted acres. Unlike the crop sector, joining the program has significant effects on production in the livestock sector. For instance, producers joining the insurance program are more likely to enlarge his/her herd size.
As is shown, no single common pattern is found between crop and livestock sectors, and even in the crop sector. That is, a deeper investigation regarding program design, option development, and expected effects is in need. Moreover, more attention should be paid to such fields as differentiating the government subsidy rates.
Researchers: Kim Meebok, Rhew Chanhee, and Kim Yunjin
Research Period: 2015. 1. ～ 2015. 8.
E-mail Address: mbkim@krei.re.kr
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