Crop insurance and unintended consequences
Source: Middle East Insurance Review | Sep 2021
Crop insurance is a disincentive for farmers to adopt climate change mitigation measures on their croplands according to a new research study by North Carolina State University (NC State University).
A press release by the university said that the study ‘Warming Temperatures, Yield Risk and Crop Insurance Participation’ examined the interactions of warmer temperatures, crop yield risk and crop insurance participation by farmers. The researchers found that variation in crop yields due to higher temperatures rose when more farmers had crop insurance.
For the study, researchers developed models using historical county-level corn and soybean production data in the US to understand the production impacts of rising temperatures.
NC State University professor of agriculture and resource economics and corresponding author of the study Rod Rejesus said, “This could be an unintended consequence of providing subsidies for crop insurance.
“The concept of moral hazard could be present here. If insurance will cover crop losses due to various effects like drought or severe weather, a farmer may not want to pay the extra expense for climate change adaptation efforts such as using cover crops to improve soil health, for example.”
Climate change – including warmer temperatures – increases the variability of crop yields; farming becomes a riskier proposition as this variability rises.
The researchers propose possible solutions to this problem for policymakers. These include providing more subsidies to encourage farmers’ use of climate change mitigation efforts – like soil health practices – and starting high-level policy conversations about how to possibly tweak rules and guidelines that govern crop insurance contracts in order to reduce the disincentive effects.
NC State University will continue to study the effects of climate change, crop yields and crop insurance, including the role of certain climate mitigation efforts by farmers. M