Cover for crop output against weather perils, marked by spatial correlation that makes it hard to insure without public support.
Crop insurance runs into the difficulty that characterizes weather perils: a drought or a frost does not strike one isolated farm but a whole region at the same time, so risk pooling, which presupposes independent risks, does not work. Strong adverse selection compounds this, the most exposed farmers being the keenest buyers, along with real moral hazard, since how a crop is managed after partial damage depends on the insured. The market is therefore organized everywhere around public support, whether premium subsidy, public reinsurance of the extreme layers, or a residual compensation scheme for uninsurable perils. Two forms coexist and answer different difficulties. Yield cover indemnifies the shortfall against the farm's historic yield and requires individual assessment. Index cover pays on an external measurement, rainfall or a satellite vegetation index, which removes assessment and moral hazard at the price of basis risk borne by the farmer.
The 2012 drought in the American Midwest gave rise, under the federal crop insurance program, to indemnities of around seventeen billion dollars, then the highest figure in the program's history.
crop insurance, assurance récolte, multirisque climatique, assurance rendement