NAG Magazine

Reduce Premium Subsidies for Farmers Agricultural Insurance

Farmers agricultural insurance is an important risk management tool to increase farmers’ income and protect them against extreme weather events. It can help them invest in higher-risk crops and even offset revenue losses from crop price crashes. However, it has many limitations and can be costly to implement. The authors of this article propose a way to reduce premium subsidies for the highest-income participants in the current crop insurance program, which could save millions while affecting less than 1 percent of farmers’ coverage. This policy is in line with other policies that have successfully lowered insurance costs while improving uptake by farmers (Garrido and Zillbermann, 2008; Mercade et al., 2009).

The demand for agricultural insurance depends on several factors, including the farmers’ risk tolerance, their knowledge of the risks, and their preferences for transfering those risks to others. In some cases, the farmers’ preferences for risk may not be reflected in their choices because of information asymmetries and moral hazards.

To minimize these problems, the USDA’s Risk Management Agency (RMA) selects the counties in which a specific crop can be planted and determines which crops are insurable in those counties. The RMA also sets a minimum premium, which is the amount that the farmer must pay for each acre insured. In most cases, the farmer must insure all of his or her eligible acreage to reduce the potential for adverse selection. This helps to ensure that the insurance provider does not provide too much protection against high risk crops.

In addition, a contract between the insurance provider and the insured farmer is signed each year. Normally, the contract is automatically renewed for the next year unless either party cancels it. The contracts specify the acreage and coverage limits for each county and crop. The contracts also stipulate that the insurance provider will not cover losses resulting from a single catastrophic event, such as a severe drought or flooding.

Farmers’ willingness to pay for a comprehensive insurance product is a key determinant of the demand for farmers-agricultural-insurance, especially for multi-crop producers. In addition to the above-mentioned limitations, a major obstacle in the implementation of comprehensive agricultural insurance is that the premiums for such coverage are too high for many farmers.

Fortunately, the insurance industry has developed a number of products to address these issues, such as whole-farm revenue protection and multi-peril crop insurance. However, the authors of this article argue that further improvements in the design of these programs should be made to improve farmers’ willingness to buy them.

As the demand for agricultural insurance increases, it is imperative to improve farmers’ ability to manage their risk and increase the economic efficiency of the agricultural production system. In the short term, this can be achieved by promoting the adoption of crop-based insurance products that offer more flexibility and lower cost. In the long term, it is essential to promote further agricultural modernization to improve the productivity of small farms and make farmers more resilient against natural disasters.