Using insurance to regulate food safety and save producers from rainy days

Editor’s note: This piece was originally published by Regulatory Review and is republished here with permission.

Insurers can help farmers manage the risk of microbial contamination in their fields.

Foodborne illness is a public health problem of pandemic proportions. Centers for Disease Control and Prevention estimates that contaminated food sickens 48 million people each year in the United States, causing 128,000 hospitalizations and 3,000 deaths annually. Nowhere is this crisis more acute than in the fresh produce sector, where virulent microbial pathogens in growing fields and packing plants cause many of the largest and deadliest epidemics in the country.

Federal regulations developed over the past few years have set strict new standards for improving on-farm food safety. The United States Food and Drug Administration is responsible for implementing these regulations, but lack the inspection resources needed to monitor the more than 120,000 U.S. farms that cultivate fresh products.

Significant help in closing this oversight gap could come from a surprising source: the insurance industry.

A recent post study documents emerging efforts by insurers to monitor and enforce on-farm food safety standards. These efforts, if successfully scaled up, could transform America’s food safety system, not just on farms, but across the food industry as a whole.

Insurance pools risk protecting policyholders from the potentially ruinous financial consequences of unexpected damage. One of the disadvantages of insurance is that by relieving policyholders of financial responsibility in the event of an accident, insurance removes an important incentive for them to exercise caution, which could increase the risk of an accident. . Economists call this the problem of moral hazard.

To address this problem, insurers frequently create new incentives for policyholders to reduce risk. Many insurance case studies have describe how insurers employ a variety of techniques to reduce risk. These techniques include premium discounts for policyholders who adopt precautions and loss control tips on how to avoid accidents that could give rise to claims.

In interviews I conducted between 2013 and 2020, 35 insurance professionals – agents, brokers, underwriters, loss control specialists and adjusters – describe how they use these and other techniques to reduce the risk of food safety failures on farms that grow fresh produce.

Farmers typically purchase some form of insurance that includes liability coverage for foodborne illness outbreaks. For small operations, this liability coverage is band in a farm insurance package, which includes a combination of coverage for a farm dwelling, personal household property, farm machinery and equipment, farm structures, and farm products and supplies – and may also include automobile coverage. Large farms, like other business entities, carry what is called commercial general liability insurance, which can be sold separately or as part of a commercial insurance policy.

Insurance professionals use various techniques to help farmers reduce the risk of contamination in their operations. For example, insurers use premiums to incentivize farmers to pay more attention to food safety issues. A subscriber Explain that if insurers see an area where a farmer lacks security, their underwriters will “apply pricing debits” until changes are made and then “remove them to make the premium more attractive”.

In addition to offering price incentives, insurance professionals also provide their policyholders with advice on food safety management. According to a second underwriter, making recommendations to farmers on risk management strategies “assistance allows us not to suffer losses, but also helps them to give the best of themselves in their business. »

As a compliance mechanism, insurance has a significant advantage over government regulation. Resource constraints impede insurance less than they do for publicly funded surveillance. For a government agency, expanding inspections puts increasing pressure on a limited budget. In contrast, as the market for insurance coverage expands, companies collect more premiums to fund inspections. For insurers, the growing demand for inspections provides new revenue to pay for them. Therefore, the ability of insurance companies to monitor food safety on farms far exceeds that of government agencies.

insurance too has an advantage over the most common form of privately funded oversight in the fresh produce sector – food safety audits by private third parties paid for by producers. The conflict of interest that arises when producers pay for audits compromises the integrity of those audits and undermines trust in them. Although producers also pay for underwriting inspections, insurance companies have a strong incentive to ensure these inspections are rigorous, as the insurer is responsible for the costs of any food safety failures. This business model for insurance companies includes incentives for rigor and reliability that are absent from food safety audits conducted by private third parties paid by producers.

Insurance as a tool for creating incentives for farmers to comply with food safety regulations is not yet widespread. Providing risk management advice to farmers requires an investment of time from insurance professionals that most cheap agricultural policies cannot support. Therefore, the types of risk reduction strategies described here have been mostly associated with larger agribusiness policies with high premiums. They are not common among insurers of small and medium farms, as the owners of these farms can only afford to buy inexpensive insurance.

Further research could explore ways to organize risk pools among small and medium producers, or provide them with government subsidies to purchase insurance, as is currently the case with crop insurance. This approach could encourage higher premiums and the proliferation of insurers’ efforts to help manage food security risks.

Over time, food safety liability insurance coverage could be a model for other sectors of the food industry.

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