Trade-offs between catastrophic assistance and subsidised insurance in European agriculture

Abstract

Risk management in agriculture is a major policy issue in current EU agriculture policy reforms. Public support systems may play two different roles, one as a device to deliver disaster assistance and another to enhance insurance for marketable risks. This paper contributes to the literature by analysing the trade-offs between providing catastrophic assistance and subsidizing insurance premiums. The goal of the study is to highlight policy options that are coherent in stabilizing income volatility while limiting distortions of public intervention. In this study, farmer incomes were first modelled using Monte Carlo simulation, and options were then ranked by applying the stochastic efficiency with respect to a function. The results suggest that, if catastrophic assistance is available, even higher insurance support is needed to make it a preferred option. The results highlight the fact that well defined and credible ex ante rules for the use of disaster assistance are essential to enable insurance markets to develop. One possibility would be to make a farmer’s eligibility for disaster aid conditional on his or her participation in the insurance programmes.