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Addressing the Risks in Captive Crop Insurance

As an essential industry, farming serves to feed the world. Agribusinesses of every size and configuration face numerous risks as they produce crops; these risks often lead to devastating consequences. To protect agribusiness interests, insurance represents a powerful risk management tool. As traditional insurance premiums rise, however, farmers are seeking cost-effective alternatives. Captive crop insurance serves to provide coverage against unique and dynamic risks faced by farmers, often at a lower cost than insurance in the traditional markets. In this guide, we will explore the role of captive crop insurance in protecting against expected and unforeseen risks in agricultural operations.

Unique Risk Exposures in Agribusiness

Agribusiness takes many forms. From smaller family-owned farms to sprawling corporate agricultural operations in crop production, packaging, and distribution, myriad risks threaten business assets. Farmers are all too familiar with common risks like pests, weather events, and diseases. Unfortunately, these common risks are only a few of the many possible threats to crop production. The unpredictable nature of farming leads to risk exposures like:

  • Low production yields
  • Business interruption
  • Equipment breakdowns
  • Labor shortages
  • Flooding and droughts
  • Unexpectedly cold weather
  • Supply chain interruptions
  • Instability in markets

A single poor growing season can spell disaster for farming operations. If equipment breaks down at critical harvesting times, flooding overwhelms fields, or crops simply do not perform to expectations, agribusinesses may experience significant financial losses.

Insurance Protections for Agricultural Operations

Farmers have used a variety of tools to protect against risks. Many farmers have employed a form of self-insurance – using savings or earnings — to cover unexpected losses. Others have turned to traditional insurance markets for protection by purchasing hail insurance or multi-peril crop insurance.

In the 1930s, the U.S. government created the Federal Crop Insurance Corporation. This insurance is provided by private insurers and is reinsured by the government. By 2016, farmers were paying over $7 billion in premiums across nearly 2.5 million policies. While private insurance and federally-backed insurance programs have their advantages, many farmers want improved risk management and control over costs. This is where captive crop insurance stands as a viable alternative.

Captive Crop Insurance: Advantages for Agribusinesses

Captive insurance has emerged as a smart choice for business owners who face uncertainty in their operations. Captives formed and owned by business entities convey certain advantages, including lower costs and improved coverage. For farmers, captive crop insurance represents a powerful risk management tool with the same advantages it provides to business owners in other industries.

Forming a captive insurance entity can be a daunting process for agricultural businesses. Factors related to profitability, annual sales, and current insurance costs must be evaluated carefully before deciding to form a captive insurer. For farms with annual sales over $75 million and insurance costs exceeding $500,000 in annual premium payments, captives may be a feasible solution.

Advantages of captives in protecting against farming risks include:

  • Lower premium costs than in traditional insurance markets.
  • Tax benefits.
  • Improved flexibility in coverage limits and coverage options.
  • Better control over claims.
  • Reinvestment of premiums as profit in years with low claims frequency and severity.

Just like traditional insurance, farmers can use captives to provide coverage for many risks. In addition to general liability and commercial vehicle coverage, captives are ideal for covering risks unique to agricultural operations and production. Coverage options include:

  • Captive crop insurance
  • Weather-related business and/or supply chain interruption insurance
  • Excess reimbursement crop loss insurance
  • Crop disease insurance
  • Pollution loss and liability insurance
  • Environmental loss insurance

Agribusiness is far more than just bringing crops from farm to table. As with any industry, there are legal, financial, and marketing risk exposures in agricultural operations. Captive insurance such as captive crop insurance can provide robust coverage against expected and unpredictable risks at lower costs and with greater control for farmers.

About Caitlin Morgan Captive Services

Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (855) 975-4949.