How Do Time and Money Affect Agricultural Insurance Uptake? A New Approach to Farm Risk Management Analysis

Growth in the Federal crop insurance program, as well as in the use of crop insurance in de- veloping countries, highlights the policy importance of insurance as a risk-management tool for farmers. This report presents a new approach to the analysis of demand for crop insur- ance, which can better explain observed insurance coverage decisions among U.S. farmers and inform future discussion about crop insurance provisions in the Farm Bill. The findings indi- cate that when farmers have access to other financial mechanisms—primarily savings—their insurance decisions change. In addition, when researchers consider the element of time—for example, a farmer’s consideration of many crop seasons when making production and risk management decisions—predictions about farm-level demand for crop insurance will also change. Specifically, the authors find that, with savings, relatively wealthier farmers appear to spend less on insurance and self-insure through savings, while limited-resource farmers with low farm income use savings to increase insurance coverage. The more time a farmer factors into the decisionmaking process when comparing insurance versus savings for risk manage- ment, the less important insurance becomes. ---- Errata On August 11, 2016, a correction was made to the first sentence of the second paragraph of page 1. The original report stated the Federal Crop Insurance Reform Act (FCIRA) was passed in 1995, when, in fact, the Act was passed in 1994. While the changes to farm insurance as a result of FCIRA took effect in 1995, FCIRA became law in 1994.