I’ve been thinking a lot about risk and insurance over the last month (among many other things, mind you). See, I bought a new (ok, used) vehicle and when the dealership wanted to sell me three years of breakdown insurance, I hummed and hawed over it. A friend reminded me that insurance companies had already done the math for them to win, and I would be better to just take my chances.
And with that, he took his own chances to buy some Lotto Max tickets.
We’re funny. At the corner store, we will play the lottery thinking “it could happen to me,” but we won’t pick up batteries for the smoke alarm because “it could never happen to me.” I’m quite sure the odds are better to have a housefire than to win the lottery. Just saying.
Are we being optimistic? Or just bad at math? Or … are we insured?
Insurance is interesting. From a sociological perspective, I mean. I’ll leave the math to the actuaries and underwriters. Historically, I imagine that reciprocity and community were the earliest forms of insurance. Modern property insurance, however, grew out of London, England the 1600s in the aftermath of Great Fire and the increasing demand to insure ships and cargo. Edward Lloyd’s coffee house was founded in 1686 to provide marine insurance and it grew into the Lloyds of London we know and love today. Fun fact for you.
What intrigues me about insurance are ‘moral hazards’ – the phenomena whereby people who, knowing that someone will pay for their accidents, take less effort to avoid them. In other words, people who are insured may take on riskier behaviour than if they weren’t. Let’s be honest. What would our barns look like if we had no fire insurance on them?
And how would we farm if we had no crop insurance?
Is there a ‘moral hazard’ of crop insurance? I was reading through journal articles on behavioural economics (sigh) and some studies argue that crop insurance leads farmers to use more fertilizer and pesticides, while others conclude the opposite. I think, though, that we’ve been confusing moral hazards and environmental hazards. If we’re only insuring a crop’s yield (and we are) then the moral hazard of crop insurance might be for a farmer to reduce fertilizer and crop protection and increase the yield risk. However, coverage is based on an individual’s 10-year yield average, their actual production history (APH).
To increase yields over time, we are more likely to see farmers increasing inputs and tillage. This isn’t a moral hazard, but it may be an environmental hazard.
Yet another point we can throw out the window is actuarial fairness. Because the risks in cropping are so high, farmers couldn’t afford the actuarially sound premiums that would keep crop insurance companies afloat. But the government would prefer it if all farmers were insured because it means the Premier doesn’t have farmers banging on the door every time there is a weather disaster somewhere in the province.
Instead of regular bail-outs for crop failures, we subsidize crop insurance premiums. And while that may be taxpayer dollars well spent, I’m worried that these (relatively) cheap premiums lead farmers to see crop insurance as the ‘go-to’ way to manage risk. But Agricorp only manages year-to-year financial risks and not the actual long-term risks to farming. There are many ways that farmers can actually mitigate weather-related production risks, like increasing crop diversity and building healthier soil that would withstand heavy rains and long droughts.
So, now I want to go back to the environmental hazard bit. The environment isn’t the point of crop insurance, but I think it should be. In the end, somebody is going to have to deal with the externalized costs of soil erosion and nutrient pollution. Spoiler alert, everybody will be paying for it.
Mutual insurance, in essence, is about looking out for each other. For now, yes, but also for the future. I believe that insurance companies, and especially a crown corporation like Agricorp, have an obligation to understand and evaluate the risks that are coming in the future. With weirder weather in the forecast, the risks and premiums in agriculture are only going to get higher.
I also believe that the insurance industry has the ability and responsibility to mitigate current and future risk by influencing behaviour and spurring innovation. If I can get a discount on car insurance for putting snow tires on my vehicle, couldn’t farmers get a discount on crop insurance for planting cover crops to prevent soil erosion? Or could we freeze farmers’ APH for five years if they transition to no-till? Hold up, if we started insuring soil instead of yields, would that change how we farmed?
In an ideal world, government subsidies would exist to shift behaviour and stimulate industries that work in the public’s best interest. Of course, food is critical to Ontarians, but what is the ultimate goal here? Is it just about having lots of cheap food? Or are we going to value quality food, clean water and healthy soil for now and for the future? Farmers can deliver one or the other, not both. As taxpayers, which would you pay for?
If crop insurance gives farmers a false sense of security and stops us from taking preventative action, then it isn’t really helping farmers in the long run. With some creativity, we could improve crop insurance and fix the math for society to win. When it comes to the environment, we can’t just take our chances.
(If any readers are interested in continuing the conversation, please get in touch: melisa.luymes@
gmail.com or 519-820-2358.) ◊