Farm Progress

Farmers  share in cost of crop insuranceWith their own money invested, farmers have little "moral hazard" with crop insurance

May 27, 2016

3 Min Read
<p>Crop insurance provides the basis of cotton farmers&#39; safety net.</p>

Editor’s Note:

The article below comes from the National Crop Insurance Services newsletter, “What’s Cropping Up?”

The commentary offers an interesting perspective on what crop insurance does for America’s farms. It also explains that farmers contribute a substantial amount of their own money to protect their crops.

Over the past few years, crop insurance coverage has become an even more important part of a farmer’s risk management strategy. Without adequate coverage in the drought years of 2011 and 2012 and into the following years with drought, flooding, hail and cold damage, many Southwest producers would not have survived. Now, with a farm program that depends mostly on crop insurance for producers’ safety net, adequate coverage is essential. RS

 

Moral hazard is a phrase commonly used in the business community that simply means people act or perform differently when they are fully insulated from risk. An entry on the topic in Investopedia.com explained it like this:

We encounter moral hazard every day – tenured professors becoming indifferent lecturers, people with theft insurance being less vigilant about where they park, salaried salespeople taking long breaks, and so on...

The idea of a corporation being too big or too important to fail also represents a moral hazard. If the public or management of a corporation believes that the company will receive a financial bailout to keep it going, then the management may take more risks in pursuit of profit.

The term frequently surfaced during the Great Recession, with the Federal Reserve Chairman even noting, "As we try to make the financial system safer, we must inevitably confront the problem of moral hazard."

MORAL HAZARD AND INSURANCE

Of course, moral hazard doesn't just apply to investors. The concept is at the core of insurance products, including crop insurance. A driver with great insurance, a cheap premium and no deductible, for example, might drive more aggressively and be willing to file repair claims on every little scrape or ding.

That's why auto insurance policies have deductibles and why previous accidents and claims are factored into future premium rates.

Crop insurance customers similarly share in the cost of premiums, receive rates based on past production and shoulder deductibles as a deterrent to risky behavior.

Farmers who know they will lose money by planting a crop not suitable to a specific soil or climate, will not plant that crop. Instead, they plant the best crops for their regions and work hard for a bountiful harvest while purchasing insurance protection to offer some assistance in the event that disaster strikes.

In short, farmers have little moral hazard because they share in the cost of their own safety net. And the American public appreciates this cost-sharing structure.

For the latest on southwest agriculture, please check out Southwest Farm Press Daily and receive the latest news right to your inbox.

A recent public opinion poll of 1,000 U.S. voters found that nearly three-quarters of Americans believed that "farmers should help fund farm policies so that taxpayers are not paying the full cost."

When respondents found out how much of the crop insurance tab farmers paid, they were also pleased. Nearly seven in 10 voters either said that farmers were being asked to pay too much or were paying the right amount of their premiums. Similarly, eight in 10 felt that the average loss deductible of 25 percent that farmers shoulder before receiving aid is about right or even too high.

Sounds like Congress got it right when lawmakers made crop insurance the centerpiece of modern-day farm policy in the 2014 Farm Bill.

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