Tuesday, November 15, 2005

Old McFraudulent

The story of federal crop insurance is one of misaligned incentives. This National Public Radio (NPR) piece discusses the structure of federal crop insurance. Turns out, when private companies sell the insurance policies, but the government pays the claims, a fair amount of fraud occurs. As you read (or listen) to this story, think about the incentives that the federal crop insurance program creates for farmers and insurance companies.

NPR: Crop Insurance Fraud

1. How would policy sales change if private insurance companies, rather than the government, were responsible for paying claims on the riskiest policies? Do private crop insurers face a strong incentive to sell policies that they would not provide in the absence of government guarantees?

2. Why might auto insurers treat insurance fraud differently from crop insurers?

3. Why might crop insurers try to prevent investigations of insurance fraud? Are farmers more likely to purchase crop insurance policies if they feel those policies are more likely to pay claims?

4. Insurance often changes the incentives insured, encouraging policy holders to be less cautious or even intentionally bring about disaster. The penchant for policy holders to take on more risk or blatantly bring about an insured mishap is known as moral hazard. Health insurance may encourage a less healthy lifestyle, auto insurance may encourage reckless driving, and federal flood insurance may encourage building on a flood plain.

5. How does moral hazard affect the federal crop insurance program?

6. What reforms can the government enact to reduce fraudulent crop insurance claims?

By Brandon Fuller


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