Insurance Basics: Coverage Availability

Suppose that you have a fire in your home, or you total your car and have to file a major claim with your insurance provider.

On one hand, you’re thrilled that an indemnity is on its way to help pick up the pieces.  On the other, you’re dreading future increases in premiums and the likelihood of receiving a notice that your insurance company decided against renewing your coverage.

In the insurance world, you now pose a higher risk because of your history, which means higher rates and even the denial of coverage.

This treatment can also extend to people who have never had to file a claim.  For example, coverage may be hard to come by if you just bought a home in an area prone to disasters, or if you are a very young or very old driver.

Insurance companies have the right to do business with anyone they chose, and like any smart business, they choose to work with the people who pose the lowest risk.  This ability to pick their customers may explain why providers of everyday property and casualty (P&C) insurance have only lost money once over the past 50 years – in 2001, the year of the 9/11 attacks.

Crop insurance is different.

Under the crop insurance system that has become the centerpiece of America’s farm policy, private-sector insurance providers must offer insurance to growers who are eligible for coverage and want it.  They cannot choose to simply do business with well-established farmers from states that have fewer droughts or are less likely to have violent storms.

For the safety net to be truly effective – and to ensure that taxpayers aren’t left footing the whole bill after disaster strikes – farmers who are statistically more likely to suffer loss must receive high-quality protection, too.

By not excluding farms, the policies carry more risk.  In contrast to the profitability of other lines of insurance, crop insurers lost money in 2012, 2002, 1993, 1988, 1984 and 1983.

Additionally, crop insurers don’t have control over premium setting.  A farmers’ rates are calculated by the government and, unlike lines of P&C coverage, prices will not fluctuate between insurance providers.

In other words, crop insurers compete on customer service, not price.  Conversely, recouping loss from a bad year isn’t as easy as simply raising premiums as is the case with other insurance products.

In return for private companies shouldering more risk and having less control over premium setting, the government serves as a reinsurer on some policies.  As such, the government shares in the losses in bad years, and the gains in years where fewer indemnities are paid out.

It’s a system that has married the best of the private sector with the best of the public sector, and the result has been the most effective, popular farm safety net in the history of agriculture.