Organic insurance options grow; fraud too? - The Packer

Organic insurance options grow; fraud too?

06/25/2014 09:47:00 AM
Tom Karst

On the issue of organic price insurance, the USDA RMA report states:

RMA would purposely set organic price elections conservatively (when referenced against the data available) to avoid inducing moral hazard and market distorting behavior. Consequently, the organic price elections may fall short of insured producers’ coverage expectations. To do anything beyond this scope may introduce moral hazard behavior into the Federal crop insurance program. For example, a price election that substantially exceeds the actual market-determined pre-harvest/farm gate value creates a serious potential for fraud and market-distortion by interfering with producers’ decision-making processes. There becomes an incentive to produce more of that commodity since a key factor in planting decisions is a producer’s assessment of the expected financial security that attaches to production of the crop, relative to alternative crops. The increased production can in turn affect supply-and-demand interaction, and ultimately, market prices.

Such behavior undermines our ability to offer actuarially sound insurance products since indemnities can accrue due to perverse financial incentives rather than to insured-peril loss events. This is not to say differences between realized season average pre-harvest/farm gate values and RMA price elections do not occur, because RMA is limited in its ability to predict future market behavior. However, RMA is able to minimize the frequency and severity of disparities between price elections and season average pre-harvest/farm gate values when we are equipped with quality price data that provide accurate depictions of what prices have actually been and allow us to assess likely market outcomes for the upcoming crop year.

 

TK: Can the USDA deliver a useful, actuarially sound crop insurance product for growers that won’t roil organic supply and demand? Not an easy task, but the confidence and approach of the USDA RMA so far is impressive. Perhaps organic growers will trade all their yesterdays for a tomorrow with that kind of risk management tool.


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