The Prospect of a Forgivable Premium Insurance Policy
Despite low premiums and high subsidies, farmers view crop insurance programs as a gamble. One explanation, in a revenue protection program, is that farmers exhibit loss aversion when premiums are just above coverage. Introducing a model for conditional loss aversion (CLA), in the context of cumulative prospect theory, it can be shown that the introduction of a forgivable premium can remove the producers loss aversion. This would result in producers being willing to spend more on an insurance program and thus, allow for a reduction in the implied subsidy.