Survey of Adverse Selection in Agricultural Insurance Case Study of Isfahan City

One of the main problems of agricultural insurance is adverse selection. Thus, the purpose of this study is survrey of adverse selection in agriculturel insurance. In this study a sample of 102 farmers who cultivated barley in Isfahan in year 2009-2010 were selected and define a model for Iran crop insurance by using certainty equivalent and preference functional including three incentives of risk-aversion, subsidy and asymmetric information for insured farmers. By comparing these incentives and effect of insurance on mean and variance of returns, the existence of adverse selection is determined. The results show that risk aversion is a minor part of farmers’ incentives, while subsidy and asymmetric information are the main part of farmers’ incentives towards demanding crop insurance. In other words, farmers don’t consider crop insurance as a tool for reducing the risk. The factor which absorb farmers to crop insurance is the subsidy paid by government. Also, asymmetric information causes farmers to benefit from the insurers’ lack of knowledge. Consequently, we conclude that there is adverse selection in Iranian crop insurance market. Based on the findings, the improvement of the governmental financial support to farmers, reforms in insurance rate-making, farmers risky classification and culture improvement to overcome the phenomena of adverse selection is suggested.

JEL Classification: G22, Q14, D82

Keywords:
Adverse Selection, Asymmetric Information, Agricultural Insurance, Risk Aversion, Subsidy