Consequence of Rate Instability
May I know whether the Production Insurance Program is voluntary, since I saw from the BattleCard that if the rate is instable, then less Participation and adverse selection. I don't quite understand here, can you please elaborate more here about the 2 points? cause it is instable not insufficient, not quite understand why there is adverse selection.
Thanks and Cheers,
Wilson
Comments
Production insurance is voluntary.
If the rates go up and down by large amounts from year to year, then a farmer who is at low risk for losses might decide not to buy insurance when the price is high. The only farmers who would buy insurance when the price is high are those who are at high risk for losses, which is the definition of adverse selection. (Only high-risk customers will purchase an expensive policy, and without the premium income from low-risk customers, the program will tend to lose money.)
And when the price is low, everyone will buy the insurance.
I see, that is very reasonable and crystal clear. Thanks Graham!