Farm-level crop yield distribution estimated from country-level crop damage

Abstract

Commercial yield insurances are not available for Finnish farmers. However, local legislation and the Common Agricultural Policy (CAP) in the EU are moving towards commercial yield insurances. The crop damage compensation (CDC) programme implemented in Finland will expire within a few years and CAP rules suggest premium support of up to 65% for commercial yield insurances. Regardless of these major changes, Finnish insurance companies have not yet shown great interest in supplying insurance schemes. We strongly believe that this is due to uncertainty over the yields to be insured. Asymmetric information is a well-established phenomenon in the insurance industry. In yield insurances, it results from farmers having better knowledge of their yields than insurance companies. This paper estimates the unknown and latent farm-level crop yield distribution that is consistent with the indemnity frequency realized under the CDC programme implemented in Finland. The frequency of granted indemnity payments reveals the underlying yield density function interest among potential yield insurance companies. The estimated yield distribution is normalized to and compared with the aggregate level yield distribution as well as farm-level observations from various sources. The results reveal that no unambiguous answer exits for insurance company needs.