According to the American Academy of Actuaries, “for a risk pool to remain viable, it must be of sufficient size and comprised of a broad cross section of risks.”
In other words, in order for risky folks to have access to affordable insurance, less risky people need to participate too.
This is true whether you’re talking about health insurance, home insurance, or car insurance. Just imagine how expensive your car coverage would be if all the safe drivers with clean records were told to drop their coverage, leaving only people with repeated traffic accidents and speeding tickets. Or the cost of your homeowner’s policy if folks on earthquake fault lines were the only ones to buy coverage.
Crop insurance, which covers about 84 percent of the country’s eligible farmland, is no different. Established farmers on proven land make it possible for smaller growers and farmers in riskier areas to get proper risk protection from the private sector.
In fact, it could be argued that a diversified risk pool is even more important for crop insurance because of the high likelihood of concentrated damage. When’s the last time everyone in a town had a car accident on the same day? Probably never, yet a freeze or a hailstorm can wipe out every farm in an area instantly. Just look at the floods that hit the Midwest and droughts in the Southern Plains last year.
If acres are removed from the insurance pool, then things like affordable coverage and timely private-sector service are sacrificed. For proof, simply look back 30 years before Congress took steps to encourage crop insurance participation as a way to shelter taxpayers from expensive ad hoc disaster bills.
In 1981, there were only 45 million acres enrolled in crop insurance, totaling $6 billion in liability coverage. Risks and losses were high, and even people who had it complained of long waits for indemnity checks or inadequate policies that covered too little.
Today, there are 265 million acres insured with $114 billion of coverage. The fact that there were no calls for Congressional help after one of the worst weather years on record in 2011 is a testament to how well the system is working.
But there are moves afoot to reduce the number of acres in the crop insurance system, and with it the diversified pool that makes it a success.
The Farm Bill before the Senate has amendments proposed to cap crop insurance assistance or even use an income threshold to limit options available to farmers and ranchers. Another amendment even tries to attach environmental mandates to a grower’s ability to have insurance.
Since all crop insurance policies are interlinked, an attack on the system is an attack on everyone covered (about 1.1 million policies in 2011). What’s worse, those farms being targeted by the legislation that will cut back on crop insurance coverage tend to be the least risky in the pool.
As the President of the Minnesota Corn Grower’s Association, John Mages, told Congress during his Congressional testimony last March, “first and foremost, please do no harm to federal crop insurance, which should be preserved, protected, and strengthened.”
That’s sound advice. Here’s hoping Congress listens and puts the brakes on such discriminatory efforts before a whole slew of “safe drivers” are kicked out.