After I heard the recent news about an actual, real, existing insurance company appearing in an online game, I was amused. I’d never heard of an insurance company being represented in a video game before. But, soon, those of us who play Farmville will see the Farmer’s Insurance Airship, which can be used to protect our virtual crops from withering. It made me curious about how real crop insurance, for real crops, works.
Crop insurance is, like all of the other kinds of insurance policies that exist, a risk management tool. This kind of insurance is available to people who are agricultural producers. In other words, this is the kind of insurance policy designed to be sold to farmers. Those who purchase crop insurance can use the policy to protect themselves against yield loss due to natural causes.
Yield loss is the term used to describe the difference between the amount of crops one reasonably expected to produce in a given season, and the amount of crops that actually were produced. The assumption is that if you don’t end up producing as many crops as you thought you would, the insurance policy will provide you with some financial assistance.
There are different types of crop insurance. An Actual Production History (APH) policy protects the farmer against yield loss from drought, excessive moisture, hail, wind, frost, insects, and disease. The farmer chooses the amount of average yield to insure. This can range anywhere from 50% to 75%. The farmer can also select the percent of predicted price to insure, anywhere between 55% and 100% of the amount of crop that he produces on average. An Actual Revenue History (ARH) policy is similar, but instead of providing protection against a year with low yields, it provides protection against revenue that is lower than expected, based on the revenue from previous years.
Crop insurance also exists for groups to purchase. Those spread out the cost protection from loss over the monthly premiums that the insurance company collects from a group of people who are on the same plan. This is similar to how group health insurance works. In order to file a claim for crop damage, the farmer must inform the insurance company about it within 72 hours after discovering the damage. There are other deadlines that go along reporting crops that were unable to be planted.
In short, crop insurance does exist in the real world, not just in the Farmville game. The difference is that in the game, crops that have withered can be restored. In real life, however, crop insurance provides financial protection for crops that are destroyed through natural causes, from a low yield of crops, or from loss of revenue.
Image by James Rickwood on Flickr