Is there a relation between risk rate and the insurance premium in agricultural insurances?An application to the citrus sector

Abstract

Agricultural insurance has an essential role as a tool for risk reduction. This is especially important in a changing and uncertain environment as in agriculture. Insurance acts as a compensating mechanism of loss and risk transference between insured and insurer. This paper aims to find if there is a concluding relationship amongst the rates applied by insurance companies; the insurance premium applied to the insured farmers; the real risk level that farms face and the indemnifications that farmers get after a disaster. There were 418 citrus tree farms analysed in Murcia region (Spain) in the period 2002-2006. They were in the line called «Multicultivo de Cítricos y Complementario» (Citrus Multi-crop and Complementary). The correlation coefficients of the different analyses are close to zero (between 0.047 and 0.053). This indicates no relation between the real risk and the rate that insurance companies use. The rate is almost a constant, with no dependence on the risk of suffering damage. The main conclusion is that the present agricultural insurance system is not discriminating enough and the settlement of insurance premiums that insurance companies apply does not maintain any relation to the essential element that should direct an insurance contract: the risk that a disaster has occurred.