Risk Management-Fitting Insurance Needs to the Farm

Farm Business Management Update, February/March 2005

By Bill Whittle (wwhittle@vt.edu), Extension Agent, Farm Business Management, Page County

Risk management is a hot topic throughout the agriculture industry. Farming is a tough business that deals with varied production risks including weather, markets, insects, disease, and labor supply. Other risks to the farm include health and liability issues. On a family farm, risks that affect the farm have an immediate impact on the family so it is vital to consider risks that may impact either.

The management of risk entails the use of tools to avoid, reduce, share, or transfer liabilities. Marketing and production practices such as hedging, forward cash contracting, enterprise diversification, and irrigation are useful tools for management to use to minimize the affect of certain risks common to the farm business.

You can use insurance to transfer certain risks to a third party for a fee. Insurance can commonly be purchased to partially or wholly protect the financial status of the farm and family and includes coverage for personal and farm property, liability, crop, health, life, and long-term care. You should determine the type and amount of insurance necessary to meet the needs of farm and family. The initial step for any management decision is to determine both personal and business goals. Where are you and where do you want to go with your business and family? Then you should address the next questions of "which risks are the farm and family willing and able to accept?" and "at what level of risk does it become prudent to pay someone else to accept?" This last question requires determining if adequate cash reserves and assets are available to continue farming and care for your family if a catastrophic event occurs. These are tough questions to wrestle with. Some farmers choose to self-insure all or part of the family and the farm. Self insurance is an acceptable way of managing risk as long as one understands the need to have enough cash reserves and assets to handle worse case scenarios. Other farmers realize that to maintain a viable operation they must have an infusion of money when disaster strikes, and this infusion probably will come from insurance.

Purchasing insurance is similar to buying a vehicle with many different models and options. Determining family and business goals will provide you with the reasoning to select a specific insurance policy without undue influence from outside sources. Your insurance agent can then explain specifics, such as coverage, exclusions, deductibles, and costs that help you achieve your goals.

Whether you have long purchased policies or are purchasing new coverage, you should be familiar with a policy. Your insurance agent has a responsibility to explain your policies, but you also have the responsibility to take the time necessary to understand this explanation. A yearly review of all policies is important to determine if the policy adequately addresses your goals that may change over time and if you should add, drop, or change coverage. At these yearly reviews, your insurance agent can become a useful member of your farm's management team by making sure the coverage meets but does not exceed your goals and the deductibles fit into your management program. Buying more insurance than needed can be as costly as not having enough insurance. You should be aware of policy limitations. Your agent should be able to address concerns prior to a catastrophic event, not after. Last, a regular review of your policies forces you to evaluate your needs. If you address your goals, you will seldom be in the situation of waiting until insurance is too expensive or you are no longer insurable.

Visit Virginia Cooperative Extension