Determining Crop Insurance Participation in Laguna, Philippines Using Subsidy and Asymmetric Information Incentives

Abstract

The Philippines is susceptible to tropical cyclones which threaten the production of agricultural crops. To help farmers cover their losses, financial protection through crop insurance can be employed. This paper studied the effects of the Philippine multi-peril crop insurance on mean returns per acre. Data on palay (unhusked rice) yields in the province of Laguna were gathered from 1978 to 2015. Using classical decomposition, the time series data was decomposed into trend-cycle, seasonality and irregularity components to compute for the Actual Production History (APH) yield and to forecast the APH yield for 2016. Using the crop insurance incentives model of Just et. al., the data were used to explore the subsidy and asymmetric information incentives for insurance participation for both wet and dry seasons. Three risk classes were considered: low, medium and high, while four insurance guarantee levels were considered: 100%, 90%, 10% and 0%. It was found that as yield guarantee increases, the effect of insurance on mean returns also increases. Additionally, as insurance premium increases, the effect of insurance on mean returns per acre decreases. Results also indicate that effects of crop insurance on mean returns per acre are highest when risk class is low and yield guarantee is high.