A test on adverse selection of farmers in crop insurance: Results from Inner Mongolia, China

Adverse selection is an operating risk of crop insurance. Based on survey data on crop insurance collected by questionnaires in Inner Mongolia, China, the paper uses non-parametric analysis and econometric models to estimate the relationship between conditions for crop production and farmers' insurance decision in order to test the existence of farmers' adverse selection. The results show farmers' adverse selection does exist, but settling a claim by negotiation and premium subsidy from governments at all levels can defuse farmers' adverse selection under the current system of crop insurance. Risk regionalization, heterogeneous insurance contract and product innovation may decrease adverse selection to some extent.