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

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

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

Foodborne diseases are a public health problem of a pandemic scale. The Centers for Disease Control and Prevention estimates that contaminated food sickens 48 million people in the United States each year, 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 fields and packing plants are responsible for many of the nation’s largest and deadliest outbreaks.

Federal regulations developed over the past few years have set strict new standards to improve food safety on farms. The U.S. Food and Drug Administration is responsible for enforcing these regulations, but it lacks the inspection resources needed to oversee the more than 120,000 U.S. farms that grow fresh produce.

A surprising source can help fill this oversight gap: the insurance industry.

A recently published study has documented new efforts by insurers to monitor and enforce food safety standards on farms. These efforts, if successfully scaled up, could transform the U.S. food safety system not only on farms, but also in the food industry.

Risk insurance pools to protect policyholders from the potentially devastating financial consequences of an unexpected loss. One of the disadvantages of insurance is that by relieving policyholders of financial responsibility for accidents, insurance removes an important incentive for them to exercise caution, which can increase the risk of accidents. Economists call this the problem of moral hazard.

To address this problem, insurance providers often create new incentives for policyholders to reduce risk. Numerous insurance case studies describe how insurers use a variety of techniques to reduce risk. These practices include premium discounts for policyholders who take precautions and loss control tips 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—described how they use these and other techniques to reduce the risk of food disruptions. safety on farms that grow fresh produce. .

Farmers usually purchase some form of insurance that includes liability coverage for foodborne disease outbreaks. For small farms, this liability coverage is bundled into a farm insurance package that includes some combination of coverage for farm dwellings, household personal property, farm machinery and equipment, farm structures, and farm products and supplies, and may also include auto coverage. Larger farms, like other businesses, usually have what’s called commercial general liability, which can be sold separately or as part of a business operator’s policy.

Insurance professionals use various methods to help farmers reduce the risk of contamination during their operations. For example, insurers use premiums to encourage farmers to pay more attention to food safety issues. One underwriter explained that if insurers see an area where a farmer is not meeting safety requirements, their underwriters “will apply price 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 food safety management advice. According to the second underwriter, advising farmers on risk management strategies “helps us avoid losses and helps them be the best they can be in their business.”

As a compliance mechanism, insurance has an important advantage over government regulation. Resource constraints are less of a hindrance to insurance than to government oversight. For a government agency, expanding inspections increases the burden on a limited budget. On the contrary, as the market for insurance coverage grows, companies collect more premiums to fund inspections. For insurers, the increase in demand for inspections provides new revenues to pay for them. Consequently, the capabilities of insurance companies to oversee the safety of food products on farms far exceed the capabilities of government agencies.

Insurance also has an advantage over the most common form of private funding for oversight in the fresh produce sector—private third-party food safety audits paid for by producers. The conflict of interest that arises when manufacturers pay for audits compromises the integrity of those audits and undermines their credibility. Although manufacturers also pay for warranty inspections, insurance companies have a strong incentive to ensure that these inspections are thorough because the insurer is responsible for the costs associated with any food safety violation. This business model for insurance companies includes incentives for rigor and reliability not found in private third-party food safety inspections paid for by manufacturers.

Insurance as a tool to encourage farmers to comply with food safety regulations has not yet become widespread. Providing risk management advice to farmers requires an investment of time on the part of insurance professionals that the cheapest agricultural policies cannot sustain. Consequently, the types of risk reduction strategies described here are primarily associated with larger agribusiness policies with high premiums. They are not common among insurers of medium and small farms, since the owners of these farms can only afford to purchase inexpensive insurance.

Additional 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 done with crop insurance. Such an approach can contribute to higher premiums and increase insurers’ efforts to manage food safety risks.

Over time, food safety liability insurance can become a model for other sectors of the food industry.

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