Which type of compensation is prohibited in crop insurance practices?

Retrospective contracts are prohibited in crop insurance practices primarily because they involve determining premiums or compensation based on the actual loss experienced by the insured after the insurance has been issued. This retrospective approach can create significant moral hazard issues, as it may incentivize policyholders to manipulate or misreport losses to maximize their insurance payouts.

In contrast, other types of contracts such as fixed contracts, front-end contracts, and hybrid contracts provide clearer methods of establishing premiums and payout structures based on predefined criteria rather than on actual losses. These structures help maintain fairness and predictability in the insurance process, which is crucial for both insurers and producers.

By prohibiting retrospective contracts, the industry aims to foster a more stable and reliable insurance market, encouraging responsible practices and reducing the risk of fraud.