Farmers can buy crop insurance to cover their losses in the event of a small yield or low crop prices. If the total revenue from the crop drops below some target level, a payment from the insurance company covers at least part of the revenue shortfall. Farmers differ in the variability of their crop revenue from year to year, with high-risk farmers experiencing large fluctuations and low-risk farmers experiencing small fluctuations. The theory of adverse selection suggests that a high-risk farmer is more likely to buy crop insurance and that s what happens: The farmers subject to large fluctuations in yields and prices buy insurance in greater numbers and also purchase policies with relatively generous coverage.
The market for crop insurance is a bit different from other insurance markets because of the involvement of the national government. The government subsidizes the purchase of crop insurance, and also limits the ability of the insurance companies to vary the price of crop insurance across farmers with different levels of risk.