Reinsuring Agricultural Risk Calum Turvey, 1 Govindaray Nayak 2 and David Sparling 3 1 Associate professor, Department of Agricultural Economics and Business, University of Guelph, Guelph, Ontario. 2 Senior economist, Agricorp Ltd. 3 Assistant professor, Department of Agricultural Economics and Business, University of Guelph, Guelph, Ontario. Received January 1999, accepted August 1999 This paper develops a basic economic model for evaluating the critical factors affecting crop insurer risks and for computing reinsurance premiums. The model shows how insurer risks and returns are determined by the individual yield risks of insureds, loading factors, administrative costs, buffer accounts and, importantly, the distribution of insureds across crop types and crop growing regions. Based on these factors, an approach toward computing actuarial reinsurance premiums is presented, with examples. Nous présentons un modèle économique de base pour évaluer les facteurs critiques agissant sur les risques du fournisseur d’assurance-récolte et pour calculer les primes de réassurance. Le modèle montre dans quelle mesure les risques et les profits de l’assureur sont déterminés par les risques de rendement particuliers de l’assuré, les facteurs de charge, les frais d’administration, les fonds de tampons et, surtout, la répartition des assurés par type de récolte et par région de culture. À partir de ces éléments, une démarche de calcul des primes actuarielles de réassurance est présentée, exemples à l’appui. Canadian Journal of Agricultural Economics 47 (1999) 281–291 281 INTRODUCTION Because systematically correlated risks exist across a wide range of crops and regions, many crop insurance firms can, at times, face huge indemnity payments that exceed premiums paid and reduce reserve funds. With weak- ened reserves, crop insurers are forced to either increase premiums to customers in the next period or purchase reinsurance from a third-party reinsurer. In most North American jurisdictions, agricultural reinsurance is pub- licly provided by a combination of provin- cial, state or federal governments. The Ontario Crop Insurance Commission (now a Crown corporation called Agricorp) faced such a situation in 1992–93 when sig- nificant crop losses due to drought and other perils increased the loss ratio to 2.42. Ontario was not part of a federal-provincial reinsur- ance plan and responded in 1994 with an increase in premiums of $18 million. 1 A large number of farmers (3,999) either dropped out of the insurance plans altogether or reduced the amount of insured acres (220,000) significantly. The crop insurer’s business strategy is a precarious one. First, research has shown that the demand for crop insurance increases with (perceived) risk and decreases with increased premiums (Goodwin 1993; Smith and Goodwin 1996; Islam 1997). Furthermore, Smith and Baquet (1995) found that a $1 increase in premiums decreased participation by 13.8%, while Vercammen (1995) found that a 1% increase in premium rate decreases insured acres by 0.068%, but enrolled acres will increase as perceived benefits increase. Coble et al (1996) found a price elasticity of