El Nino/Southern Oscillation Adverse Selection in the U.S. Crop Insurance Program

Abstract

Research has shown that an indication of forthcoming weather conditions may be seen through the ocean and atmospheric anomalies associated with El Nino/Southern Oscillation (ENSO). This thesis undertakes an empirical analysis to determine the extent to which ENSO based adverse selection by private insurance companies may inflate government losses in federally supported crop insurance programs. An empirical case study of Texas wheat indicated that a statistically significant portion of inter annual yield variability could be explained by fluctuations in ENSO-related sea surface temperatures. Simulations of reinsurance decisions over the period of 1978-1997 indicate that insurance companies can gain excess profit at the expense of excess government loss through ENSO-based adverse selection activities.