Editor’s Note: This article was originally published by Regulatory Review and is republished here with permission.
Insurance underwriters can help farmers manage the risk of microbial contamination in their fields.
Foodborne illness is a pandemic public health problem. The Centers for Disease Control and Prevention estimates that contaminated food causes 48 million illnesses in the United States and 128,000 were hospitalized and 3,000 died. The crisis is most acute in the fresh produce sector, where highly virulent microbial pathogens in growing fields and packing plants have caused many of the largest and deadliest outbreaks in the United States.
Over the past few years, stringent new standards have been set to improve food safety on the farm. The FDA is responsible for enforcing these regulations, but lacks the inspection resources needed to oversee the more than 120,000 U.S. farms that grow fresh produce.
Important help in filling this oversight gap may come from a surprising source: the insurance industry.
A recently published study documents emerging efforts by insurers to monitor and enforce compliance with on-farm food safety standards. These efforts, if successfully scaled up, could transform the U.S. food safety system, not just on farms but across the food industry.
Insurance pool risk protects policyholders from the potentially devastating financial consequences of accidental injury. One disadvantage of insurance is that by reducing the policyholder’s financial responsibility for an accident, insurance removes an important incentive for them to exercise caution, which can increase accident risk. Economists call this the moral hazard problem.
To address this problem, insurance companies often create new incentives for policyholders to reduce risk. Numerous insurance case studies describe how insurers employ various techniques to reduce risk. These tips include discounts on premiums for policyholders who take precautions, as well as loss control advice on how to avoid accidents that could lead to claims.
In interviews I conducted between 2013 and 2020, 35 insurance professionals—agents, brokers, underwriters, loss control specialists and adjusters— — describes how they are using these and other techniques to reduce the risk of food safety failure on farms growing fresh produce.
Farmers typically purchase some form of insurance that includes liability coverage for foodborne illness outbreaks. For small farms, this liability coverage is bundled into a farm insurance package that includes some combination of coverage for the farm home, family personal property, farm machinery and equipment, farm structures, and produce and supplies—and may also include auto insurance . Like other business entities, larger farms often come with what’s called business general liability insurance, which can be sold separately or as part of a business operator’s policy.
Insurance professionals use a variety of techniques to help farmers reduce the risk of pollution in their operations. For example, insurance companies use premiums to induce farmers to pay more attention to food safety issues. One underwriter explained that if insurers found farmers to be deficient in safety, their underwriters would “apply pricing debits” until a change was made, then they would “remove them to make premiums more attractive.”
In addition to offering price concessions, insurance professionals also provide food safety management advice to the insured. According to another underwriter, advising farmers on risk management strategies “helps us avoid losses while also helping them be the best in their business.”
As a compliance mechanism, insurance has important advantages over government regulation. Resource constraints have less of an impact on insurance than publicly funded oversight. For government agencies, expanded inspections will put increasing pressure on limited budgets. By contrast, as the insurance market grows, companies charge more premiums to fund inspections. For insurers, the ever-increasing demand for inspections provides them with new revenue. As a result, the ability of insurance companies to monitor farm food safety far exceeds that of government agencies.
Insurance also has advantages over the most common form of privately funded fresh food surveillance. Production Sector – Private third-party food safety audits paid for by growers. Conflicts of interest that arise when growers pay for audits can compromise the integrity of these audits and undermine confidence in them. While growers also pay for covered inspections, insurance companies have a strong incentive to ensure these inspections are rigorous, as they are responsible for the cost of any food safety failures. This business model for insurers includes incentives for rigor and reliability that are lacking in private, third-party food safety audits paid for by growers.
The use of insurance as a tool to create incentives for farmers to comply with food safety regulations is not yet widespread. Advising farmers on risk management requires an investment of time by insurance professionals that most cheap farming policies cannot support. Therefore, the types of risk reduction strategies described here are primarily relevant to large agribusiness policies with high premiums. They are uncommon among insurance companies on small and medium farms, where the owners of these farms can only afford cheap insurance.
Other studies may explore ways to organize risk pools for small and medium-sized growers, or provide them with government subsidies to purchase insurance, as is currently the case with crop insurance. This approach could support higher premiums and efforts by insurers to help manage food safety risks. food industry.
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