Many non-farmers don’t understand crop insurance. It’s difficult to understand – I’ll give you that!
On the surface, the premise is just like home insurance or car insurance that most of us already understand. But the implementation of crop insurance is pretty different.
This article from National Crop Insurance Services really helps describe how and why crop insurance is different from auto, life, and health insurance.
All insurance, from auto to life, health, and crop insurance works best when it expands the number of people it covers – a concept known as the “risk pool.” That is because the greater the participation, the more widely risk can be spread. And by spreading the chance of loss among a diverse group of insureds, premiums become more affordable for everyone involved.
Additionally, participants in all forms of insurance must pay premiums and shoulder deductibles. This gives the insured some ownership of their own protection and prevents participants from engaging in risky behavior – sometimes referred to as “moral hazard.”
In this sense, crop insurance works like other forms of insurance. However, the parallels are not perfect because agriculture is a unique kind of business that suffers unique kinds of losses. Unlike other insurance lines, agricultural losses tend to be geographically targeted and severe.
For example, there is little chance that every car in a city will be simultaneously totaled, or that every person in a state will need medical help at the same time. But a single flood, storm, or drought can cause a catastrophic loss for every farming operation in a county or region, which makes it more difficult to insure.
Because of this higher risk, the concentration of losses, and the likelihood of wide-scale disaster, crop insurance policies would be cost-prohibitive and very limited without some form of government support. Thus, America has a crop insurance system based on a public-private partnership between private insurance providers and the U.S. Department of Agriculture.
Under this arrangement – spelled out in a contract known as the Standard Reinsurance Agreement – companies that sell crop insurance must sell a policy to any eligible farmer at the premium rate set in advance by the Federal government. In addition, insurers cannot refuse to provide protection, raise the premium rate or impose special underwriting standards on any individual eligible farmer, regardless of risk.