Crop Insurance Example

Federal crop insurance programs cover a wide range of crops across all 50 states. As you might imagine, no single crop insurance program structure could possibly work for every crop, region, and producer.

Further, as explained in our previous topics, crop insurance programs are governed by well-defined rules and procedures that ensure the programs’ efficient and effective operation. In the following example, we’re going to leave behind the more sophisticated aspects of Federal crop insurance programs and provide you with a simplified example to demonstrate the some important basic concepts, including:

  • How does insurance work?
  • Why would I want to buy insurance?
  • How do I make sense of the price of insurance (the premium)?
  • How is private insurance different from Federal Crop Insurance?

We’ve broken this example into five segments. In the first segment, let’s set up the example by imagining an extremely simplified agricultural operation. It couldn’t get much simpler than harvesting money that grows on trees!

1. Example: Introducing your “money-tree” agricultural operation

Now that you know a little bit about your operation and your financial constraints, let’s consider how insurance might be able to help you reach your financial goals … or maybe at least allow you survive from one year to the next!

2. Example: How an insurance policy might work

In the next part of the example we’ll take a closer look at the cost of insurance (i.e., the insurance premium). How do insurance companies decide how much to charge for insurance? You’ll learn about something called the “actuarially neutral insurance premium”

3. Example: How much does the insurance cost? Actuarial neutrality

When we buy insurance from a private insurance company, the price (premium) they charge will include a profit. In the next segment we take a look at our example if we pay a private insurance premium. And we’ll consider why people purchase private insurance products.

4. Example: Private insurance premiums

Finally, we look at an example designed to look a bit like the Federal Crop Insurance program. What does it mean to say that Federal Crop Insurance is subsidized by the Federal government. Why is this a good deal for agricultural producers?