Crop Insurance and the Pricing of Risk-Reducing Practices: Evidence from Rotational Complexity

Abstract

Under the Federal Crop Insurance Program, the Actual Production History (APH)–based Continuous Rating Formula (CRF) adjusts producer premiums mainly to unit-level average yield history, not unit-specific downside tail risk. We study how this structure prices risk-reducing practices whose insurance benefit is yield stabilization rather than mean-yield gains. We develop a CRF-consistent mean–tail decomposition and define a producer-facing pricing gap as expected indemnities from the full predictive yield distribution minus producer-paid CRF premiums. Applying the framework to rotational complexity in Illinois corn, we find that higher-complexity scenarios substantially reduce downside shortfalls while causing only modest mean-yield changes. Expected indemnities fall as lower-tail risk declines, but producer-paid premiums respond mainly to the APH mean and do not fall commensurately. Shapley decompositions show that gap changes are driven primarily by the tail channel, especially under dry conditions and higher coverage. The results highlight how APH-based rating can under-reward downside-risk-reducing practices.