Insurance Basics: Skin in the Game
Crop insurance is arguably the first farm policy in history that is largely financed by the farmers who benefit from it.
Unlike policies of the past, which were 100 percent backed by taxpayers, modern-day farm policy requires growers to take an active role in its funding – a concept sometimes called “skin in the game.”
The concept may be new to farm policy, but it’s not new to insurance. From the earliest shipping insurance at Lloyds of London in the late 1600s to the modern auto policy acquired via a smartphone app, the principal is the same.
A customer pays a premium to an insurance company based on the value of property, and predicted risks, to insure its worth. If the property is damaged, the customer absorbs a portion of the loss, called a deductible, and the insurance company covers the remainder through an indemnity payment.
The deductible acts as a deterrent to risky behavior and keeps the insurance policy intact for true disasters. Meanwhile, premium dollars help customers pool resources to more cheaply buy protection and fund the system that provides peace of mind.
The larger the pool of customers, the more risk can be spread, and the cheaper coverage becomes for all.
The same applies to crop insurance, which is why it would be a bad idea to arbitrarily exclude some farmers from participation.
Since crop insurance’s rise to prominence, famers collectively pay between $3.5 billion and $4 billion a year out of their own pockets in premiums. And they absorb hefty deductibles (on average, 25 percent of loss) when disaster strikes.
Famers love the set-up because it offers some predictability for marketing and for borrowing capital, and because it gives them the opportunity to tailor protection to their farms’ unique needs. Taxpayers reap the benefits, too.
Crop insurance means farmers aren’t running to Congress for one-time disaster relief bills every time drought ruins a corn crop in Iowa or frost kills apple trees in New York.
No wonder so many are singing crop insurance’s praises and calling it their “top priority” as we head into the next Farm Bill debate.