Crop Insurance & Moral Hazard
Increasingly, traditional farm safety net programs are being recognized as perpetuating the degeneration of natural capital by modern agriculture.
According to Investopedia, moral hazard is the idea that insurance promotes risk-taking for personal gain. In agriculture, crop insurance contributes to the choice of landowners to continue monocropping, tillage, and heavy crop input applications… despite their negative externalities on soil health, the surrounding environment, and long-term farm economic resiliency.
2 Case Studies: U.S. and Canadian Crop Insurance
The tenets of crop insurance, according to the U.S. website Crop Insurance in America, sound noble on the surface: to “support the American farmer, the American economy, and the American family.” They also claim crop insurance is “the centerpiece of the U.S. farm safety net”.
In a sad twist of fate, farmland subscribed to crop insurance is now more vulnerable and less resilient to weather-related losses. By comparison, farmland managed with cover cropping, intercropping, and rotational grazing sees fast improvements in nutrient cycling and water-holding capacity: 2 key contributors to boosting farmland productivity, and resiliency to extreme weather.
In Manitoba, Canada, when a farm switches acres into ‘novel practices’ and out of the traditional corn/soybean/canola/wheat crop rotation, the formulas that calculate crop insurance premiums and coverage levels seize up… because their risk management models rely on historic data. Moral hazard is customers continuing on with the status quo to manage the business risk of crop loss due to extreme weather. As a result:
Fields managed in ways that increase the risk of crop loss due to extreme weather qualify for government-subsidized coverage; while
Fields that are the most resilient to extreme weather may not qualify for crop insurance.
It would seem that crop insurance programs have ceased working well for crop insurance agencies. They grew in popularity with government farm safety net programming based on linear risk management variables… that are in fact multi-faceted risk considerations, now shifting the balance of risk-reward in farmland management decision-making.
Regenerate America sums it up nicely and spells out the appropriate policy response:
“The finance and insurance products that farmers rely on have immense potential to support a transition to regenerative agriculture, but current policies have created a system that often undermines, or even actively prevents, common sense soil health practices that reduce risk on farms – resulting in large scale soil loss and land degradation at an enormous cost to US taxpayers. Crop insurance and lending policy must be adjusted to support regenerative agriculture by removing outdated barriers and creating incentives that recognize the risk-reduction benefits of soil health and conservation management practices.
Summary of Policy Requests:
Crop Insurance: Remove barriers and expand incentives for producers to adopt risk-reducing soil health/conservation practices and more diversified operations.
Lending: Develop offerings (such as lower rates, loan deferments and flexible terms) that fast-track and vastly expand the viability of a large-scale transition to regenerative agriculture.”
The latter initiative is already underway in the private sector for financing and transitioning farmland into better practices. Learn a lot more in the segment below:
Compare & Contrast: Crop v. Home Insurance
Anyone who owns property near a forest or a shoreline these days might be feeling nervous. It seems more like when, not if, homes will be threatened by intense fire and flooding.
Already there are reports of difficulties dealing with insurance companies whose traditional models for predicting losses would not have been sufficient to manage the spike in climate disaster claims. For example, in California it’s even affecting the housing market.
As opposed to being denied like homeowners, crop insurance customers are opting out and adopting self-insurance practices to manage the risk of loss due to extreme weather. In the context of building business plans for fields, reintroducing biodiversity and natural fertility into a field’s production system is working to supplant the need for crop insurance.
Summary
All types of insurance companies will need to newly manage the risk of claims inflating beyond what traditional premiums were designed to cover. It is possible that some of them fail outright, in which case, what will become of the value proposition of paying insurance premiums in the first place?
Already, home insurance adjustors are flailing to process spikes in claims in weather-ravaged communities. Meanwhile, customers of crop insurance are prepared to drop insurance and to adopt novel climate-resilient management practices instead.
Opting out of insurance is counter-cultural - it feels like a very risky strategy for financial resiliency in all cases. But if the coverage isn’t what it seems anyway, customers may end off better, in the absence of moral hazard, to deploy risk management strategies according to individual context.