Premium Subsidies

While it is common for developed countries to co-finance premiums for farmers with direct premium subsidies, these types of subsidies are particularly problematic. Generally, direct premium subsidies reflect income enhancement objectives as much or more than they do risk management objectives. Such subsidies are typically provided on a percentage basis, ttis clearly benefits higher risk areas relatively more than lower risk areas. Even attempts to subsidize to levels that represent a pure premium or expected loss basis may favour higher risk areas relatively more than lower risk areas, since in a commercial market, premium rates for higher risk areas would likely contain higher catastrophic loads, ttus, any attempt to introduce premium subsidies will likely be distorting. In principle, if subsidies are targeted to the market failure layer, as described above, market distortions should be minimal. Given the ambiguity loading and cognitive failure that occur in this layer, carefully targeted subsidies may even be welfare enhancing. For the market insurance layer, however, subsidies should, in general, be avoided. Any subsidies in the market insurance layer should be targeted to reducing uncertainty loads in premium rates. Commercial insurers will tend to load premium rates based on the quantity and quality of data used to generate pure premium rates, tte better (worse) the data used to generate the pure premium rates, the lower (higher) the premium load, ttese loads could be offset with co financing from donors. Here again, however, governments should be very clear about the level of these subsidies and the intent behind them.

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