Farm Insurance

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Farm Insurance

Insurance policies and coverage are confusing topics for most farm business operators. All insurance has one primary function. For a fee, the insurance company will shoulder the risk of an occurrence that could have major repercussions to the financial security of a business.

The major types of insurance include liability, fire, weather conditions, health, Workers’ Compensation, life, product liability, and crop. The decision about how much insurance to carry depends on farmers’ exposures to risk, their wealth, their willingness to assume risk, and the cost of the insurance. A well- established farmer is generally in a better position than a beginning farmer to withstand a financial loss and afford the insurance that protects against major losses.

Life insurance can play a crucial part in preserving or transferring a farm business. For example, an insurance policy for key members of a family partnership can provide the cash to pay potential inheritance taxes, a cash inheritance to non-farm heirs, or buy out a business partner. Similarly, if on-farm heirs insure the life of their parents, this money can become an inheritance source for non-farm heirs. Life insurance has many roles, but it’s wise to consider costs in order to get the best protection for matters that cannot be handled by other means.

The use of crop insurance by U.S. farmers has grown sharply, increasing from 45 million insured acres in 1981 to 262 million today. Insured liability shows a sharper increase, rising from $6 billion in 1981 to more than $113 billion currently. More acreage, higher crop prices, and increased coverage levels explain the dramatic rise in liability.

Several factors explain greater use of crop insurance by farmers.Today’s insurance program structure began with the Federal Crop Insurance Act, which required crop insurance to be sold and serviced by the private sector. With private sector compensation based on the volume of premium sold, companies and agents had a strong incentive to bring crop insurance to producers. Increases in premium subsidies and government payment of insurance company delivery costs made crop insurance increasingly affordable over time, boosting participation and coverage levels.

The share of premium subsidized by the Federal government for an individual policy is at the 75% coverage level. The Act set the premium subsidy at 16.9% for a policy with 75% coverage. Despite the subsidy, demand remained limited by reliance on other programs such as ad hoc disaster assistance, target price coverage, and commodity loan programs. The subsidy rate was increased slightly by the Federal Crop Insurance Act. Temporary economic loss assistance in the late 1990s provided a premium discount, which continued until a permanent increase was provided in the Agricultural Risk Protection Act of (ARPA). ARPA raised subsidies, particularly at the higher coverage levels, with the 75% coverage level subsidy more than doubling. The Farm Bill did not change subsidy rates for individual insurance plans but increased subsidy rates for enterprise and whole farm units to 77% for a policy with 75% coverage on an enterprise unit.

Farm programs have evolved from very market intervening programs to those that let market forces operate more fully, with producers shouldering greater responsibility to manage risks. In line with this evolution, the crop insurance program has a number of appealing features. A producer must consciously elect to manage risks, can design a program to fit individual farm risks, and must share in the program cost, reducing public costs and aiding accountability.

The private sector delivers the crop insurance program as part of a public and private partnership, providing producer choice, and promoting competition in service quality and efficiency and effectiveness in delivery. Through the private sector, producer losses are adjusted and indemnities paid promptly. Congress has enabled the program to largely govern itself—with the USDA responsible for setting premium rates, underwriting and loss adjustment standards, and enforcing compliance. Thus many program provisions can be quickly changed to correct program parameters and reduce costs and inefficiencies. Premium rate changes and a reduction in payments to companies negotiated in the Standard Reinsurance Agreement (SRA) are examples of such discretionary actions. Little found that the program operates with fraud and abuse levels far below other lines of property and casualty insurance. Crop insurance also allows many producers to secure credit, as an insurance policy serves as collateral, and aids forward marketing by providing resources to meet delivery obligations in the event of a production loss.

While the aforementioned factors help explain the program’s attraction, there are concerns. U.S. loss ratios —indemnities divided by premiums—have been well below the statutory maximum of 1.0 for many years and vary sharply among regions, raising questions about whether the rating system suitably accounts for program improvements over time, changing production technology, and the probabilities of catastrophes. A premium rate review was conducted by the Risk Management Agency (RMA) in 2010 and a major revision in rating methods is now being implemented. Recently, low losses and high crop prices have resulted in higher-than-expected company underwriting gains and delivery payments. Although some argue they remain excessive, the SRA and the recent rating changes have reduced the expected value of private insurance company underwriting gains and delivery payments, and the long-term average net income of crop insurance companies remains below that in the overall property and casualty industry . Many producers are concerned that crop insurance yields lag expected yields or reduce coverage after successive years of yield shortfalls, as required by most crop insurance plans. An adjustment to reflect yield trends, recently approved for sale, may partly address this issue. Another concern is whether the portfolio of insurance plans can be improved for small producers, socially disadvantaged producers, specialty crops and other crops that may not be covered or have atypical or specific risks or lack transparent pricing.

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There are many types of farm insurance. How do you know what kind of coverage to purchase? The needs of one farm may not be same as the needs of another. By familiarizing yourself with the available options, you could make an educated decision on which coverage to invest in. Below are a few details on three popular types of farm insurance.

  • Crop insurance typically comes in three types: yield based, revenue based, and named perils. This coverage is designed to compensate farmers for losses they experience during a rough growing season.
  • Livestock insurance provides coverage for farm animals. Typical events covered by this insurance include price fluctuations and reduced yield.
  • Property and liability coverage may offer a variety of benefits. It could cover the expenses related to theft and vandalism. It could also pay for injuries or deaths that occur on your property.

What does farm property insurance cover?

In addition to basic packages that insure your farm against fire, lightning and explosion, you can also purchase additional coverage for:

  • Escape of fuel oil
  • Accidental glass breakage, collapse of building
  • Lock repair or replacement
  • Family member in health care facility
  • Funeral benefits
  • Outdoor swimming pools on premises
  • Impact by vehicle or aircraft
  • Falling objects, ice backup
  • Vandalism or malicious damage
  • Tornado, windstorm, smoke and hail
  • Riot, theft
  • Water escape and rupture
  • Transportation
  • Electricity
  • Home-based businesses

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