Financial Blog

Crop Insurance Basics: Moral Hazard

Editors Note:

The article below comes from the National Crop Insurance Services newsletter, Whats Cropping Up?

The commentary offers an interesting perspective on what crop insurance does for Americas farms. It also explains that farmers contribute a substantial amount of their own money to protect their crops.

Over the past few years, crop insurance coverage has become an even more important part of a farmers risk management strategy. Without adequate coverage in the drought years of 2011 and 2012 and into the following years with drought, flooding, hail and cold damage, many Southwest producers would not have survived. Now, with a farm program that depends mostly on crop insurance for producers safety net, adequate coverage is essential. RS

Moral hazard is a phrase commonly used in the business community that simply means people act or perform differently when they are fully insulated from risk. An entry on the topic in explained it like this:

We encounter moral hazard every day tenured professors becoming indifferent lecturers, people with theft insurance being less vigilant about where they park, salaried salespeople taking long breaks, and so on...

The idea of a corporation being too big or too important to fail also represents a moral hazard. If the public or management of a corporation believes that the company will receive a financial bailout to keep it going, then the management may take more risks in pursuit of profit.

The term frequently surfaced during the Great Recession, with the Federal Reserve Chairman even noting, As we try to make the financial system safer, we must inevitably confront the problem of moral hazard.

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