Catastrophic yield risks and the demand for crop insurance in Finland

The emphasis in crop damage compensation in the EU is moving from government-run programmes and disaster relief to insurances based on public private partnership (PPP). Before 2015 member states had the opportunity to finance crop insurance premium subsidies from national budget under Article 68 of Pillar one regulation. From 2015 onwards, member states have had the option to co-finance premium subsidies with the EU under the conditions defined in the regulation (EU) No 1305/2013 on support for rural development. A publicly funded and administered Crop Damage Compensation (CDC) scheme was designed to cover yield losses in Finland. As a result of European Commission objection and obvious deficiencies in the CDC system, the programme was abolished in the end of 2015. The objetives of this thesis were to 1) study farmers preferences and willingness to pay (WTP) for crop insurance attributes, 2) reveal the effects of the price anchoring problem in crop insurance, 3) provide guidelines for government disaster relief in combination with crop insurances, 4) investigate the factors underlying crop insurance uptake and 5) study the feasibility of index crop insurance based on area yields in Finland. The research results were expected to benefit farmers, the government and insurance companies. An extensive farm survey was conducted to reveal Finnish farmers demand and WTP for crop insurance. Choice Experiment (CE) method was used. In addition, a split sample approach was applied to the price anchoring problem and to examine the effect of government disaster relief on crop insurance schemes. The obtained results revealed that there is demand for crop insurance in Finland. An insurance product was chosen in 46.5% of the cases in the entire CE dataset. Price of insurance is the main factor affecting the choice to insure and the demand was found to be inelastic over the whole price range. The median WTP of Finnish farmers for a 10% increase in the deductible was -1.60 Euros/ha, and if the expected compensation was increased by 100 Euros, farmers WTP increased by 3.40 Euros/ha. The results suggest that the crop insurance markets that are starting to emerge in Finland are dominated by knowledge of premium setting. Our results also revealed that government disaster relief for crop damages would lead to an overall smaller WTP for crop insurance. Multiple farm and farmer characteristics, such as age, farm size and education level, were found to be significant in explaining the choice to insure against crop losses. We also found evidence of an adverse selection problem in future crop insurance schemes in Finland as farmers that had collected CDC payments were more likely to choose crop insurance. In addition the study on the feasibility of area yield index insurance in Finland revealed that its overall efficiency is not high, as half of the farms would not gain any benefit from it.