Economic Tidbits

100 Questions and 3,000 Answers

President Reagan once said that if the game Trivial Pursuit were designed by economists, the game would have 100 questions and 3,000 answers. President Reagan’s quip is the title of a Tidbits feature called . . . “100 Questions and 3,000 Answers.” The feature highlights a question or comment from a reader along with a response. Questions or comments can be sent to rollingeconjay@gmail.com.

Question: Our property and liability insurance premiums went up 42% this year. Crop insurance premiums are over $100 per acre . . . Insurance is my second largest expense on my farm. Second only to land cost. Can insurance work going forward? Do farmers need to think about changes in what we own and how and what we produce to minimize investment and risk? 

Response: The cost of insurance has indeed risen sharply in recent years. Charles Bilello reported auto insurance rates over the past year are up 23% the biggest spike since 1976 (Figure 3). According to the Wall Street Journal, Nebraska was part of a group of nine states which topped the nation for rate increases on homeowners’ insurance (Figure 4). And the Lincoln Journal Star recently reported “over the past five years, Nebraska had the second-largest cumulative increase in homeowners’ insurance rates at 59.9%.” Several factors are behind the skyrocketing premiums. Inflation, higher interest rates, escalating replacement or repairs costs, more catastrophic weather events, the rising costs of reinsurance, and higher litigation costs are all factors. For crop insurance, relatively high commodity prices between 2020-2023 also contributed to higher premiums.

FIGURE 3. AUTO INSURRANCE RATES (YEAR-OVER-YEAR CHANGE)

Source: Charlie Bilello, This Week in Charts, May 20, 2024

FIGURE 4. HOME INSURANCE RATE INCREASES SINCE JANUARY 2023

Source: The Hidden Driver of Home Insurance Costs, Jean Eaglesham, The Wall Street Journal, May 24, 2024.

Farmers and ranchers looking to mitigate rising insurance costs might want to investigate alternatives for managing risk. The most obvious one is to adjust coverages to reduce premiums, although adjustments could mean producers would be exposed to more risk. Producers could self-insure against this increased exposure to risk by boosting liquid assets. Research by Carl Zulauf, Ohio State University, and Gary Schnitkey, University of Illinois, shows that liquid assets on farms over the years have not increased as much as production expenses, implying the role of liquid assets as a self-insurance tool has declined. Zulauf and Schnitkey say the ratio of liquid assets to expenses has declined fifty percent since the mid-20th century. This trend suggests “that the US farm commodity insurance program has allowed farmers to reduce liquid assets that provide self-insurance . . .” Zulauf and Schnitkey estimate farms would need an added $144 billion in liquid assets for the ratio of liquid assets to expenses to be the same today as in 1980.

Agricultural economists at Purdue University suggest producers evaluate their operations and find any weaknesses as another means of mitigating rising insurance costs. Business plans can then be developed to identify steps to address weaknesses and be prepared if catastrophic events occur.

In the end, premium increases may slow but insurance costs will remain high. Producers should work with their insurance agents and others to find ways to manage risks and insurance costs.

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