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Deciding not to buy insurance

Not buying insurance can free up cash for other uses on your farm. But before you make any rash decisions, consider these four factors

A man walks into a coffee shop to buy a coffee to go and the clerk says “Would you like insurance for that? For only 15 cents we’ll replace it if you spill it.”

Another man has a farm with thousands of acres of crop. The insurance agent says “Would you like hail insurance this year? For only $20,000 we’ll cover your farm.”

Who should buy the insurance? Perhaps it’s the man with the coffee. He only has 25 cents left, he’s dying of thirst, and he has such a nervous tremor that he has trouble holding on to anything.

The second man however has lots of assets and cash, is in a very good financial position and has only had three small hail damage claims in 35 years of farming.

One of your first comments might be: “Go without insurance? But if I had a major crop loss I’d have to re-mortgage the farm to pay my bills.” This could be true. However, if by not having hail or crop insurance you’ve paid off your mortgage, you might be further ahead. And perhaps you won’t have a catastrophic crop loss. The trick is to look at the risk factors for you, your farm and your area.

Whether or not you buy insurance comes down to your risk of loss, your financial position and your comfort level.

Good investment?

Have you ever wondered if the money you’re spending on hail or crop insurance is a good investment? I’m sure most farmers have questioned this expense at one time or another.

I’ve had my share of crop losses and large insurance claims. On our little farm hail is not a big risk. We’ve only collected hail insurance two or three times over the last 35 years, and then it was not over 50 per cent. However, crop insurance has helped feed us for many winters.

Remember that hail and crop insurance are very different. I encourage you consider each type of insurance separately, as they each have different risk factors and costs.

Bear in mind that if you have crop insurance it also covers you for hail losses with different variables and costs depending on the province where you reside.

Let’s consider at a typical farmer, “Tip,” over a 10-year period.

If Tip bought hail insurance to cover his whole farm for $150 an acre for 10 years, with an average rate of six per cent for all crops including cereals, pulses and oilseeds, it would cost $27,000 per year to cover his 3,000 acre farm (3,000 acres x $150 per acre x six per cent = $27,000 per year). Over 10 years, this would cost $270,000.

Say that during that 10-year period he suffered two hail storms, where he lost 500 acres of crop at 100 per cent loss. He would collect $75,000 per loss ($150 per acre x 500 acres), for a total benefit of only $150,000. Over the ten-year period, this is a total cost of $120,000.

If Tip had known that this was how things would turn out, he would have been better off not purchasing hail insurance — he could have invested the $27,000 per year or used it to pay off existing loans.

Of course, this could have turned out much differently, if there had been more hail over the 10-year period. Or, he could have had a year with a devastating hail loss.

Four factors to consider

If you’re considering not purchasing insurance on your farm, take a careful look at the numbers first, and keep these factors in mind.

1. When you’re calculating your cost of insurance, the premiums will depend on the crop you’re insuring, the insurance rate, local risk factors and coverage per acre. Remember that with hail insurance we pay the full cost. Crop insurance premiums are subsidized by our governments so the premiums we pay are much less than the actual cost.

2. The amount of interest you could earn of save by not buying insurance will depend on what you do with the money you don’t use to pay premiums. If you use it to pay off high interest loans or payables it could be as much as 10 or 18 per cent. If you just stick it in a savings account it could be as little as 0.05 per cent. Remember, not buying insurance won’t work as a savings technique if you spend the money you saved on expensive toys and holidays. Any money saved should be put back into the farm to produce the best return possible.

3. You tell me what to predict when you’re estimating losses. You can use historical figures to help come up with your best guess. Also, be sure to figure in the losses that wouldn’t be covered even if you did have insurance.

4. Before you cancel your insurance contract, check with your banker to make sure that this won’t affect your financial dealings with them. Bankers can be a nervous lot.

Whatever you decide, make sure you’re comfortable with your decision, and that everyone on the farm agrees. Saving a few dollars is not worth sleepless nights. However, if you’re always buying insurance and rarely making a claim, I’m sure you could find a better use for those premiums. †

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