Doctoral Dissertations

Date of Award

12-1971

Degree Type

Dissertation

Degree Name

Doctor of Philosophy

Major

Agricultural Economics

Major Professor

M. B. Badenhop

Committee Members

Joe A. Martin, Luther H. Keller, Hans E. Jensen

Abstract

General purposes of this study were to evaluate quantitatively the insurance management strategies of East Tennessee tobacco farmers and to determine the role of Federal Crop Insurance Corporation (FCIC) crop insurance in those strategies. Estimates of values at risk, financial reserves, insurance coverages, and insurance expenditures were obtained for 80 randomly selected farmers having FCIC tobacco insurance (FCI sample) and 80 randomly selected farmers not having that insurance (NFI sample). Data were obtained by personal interview in six randomly selected East Tennessee counties between June 1 and July 26, 1969. Quantitative indexes of insurance management effectiveness were designed to measure the extent to which actual strategies deviated from an optimum insurance strategy, the latter having been defined as a plan in which funds were allocated (1) only to risks of substantial financial con sequence, inconsequential risks being assumed or ignored, and (2) first to those risks which could be most disruptive, Indexes to evaluate management of the income risk, automobile liability risk, property risk, and a number of combinations of those risks were computed and related to variables describing the risk circumstances of both samples. Total farm income was significantly larger for the NFI sample. The FCI farmers obtained a significantly larger percentage of Income from tobacco, while NFI farmers obtained a significantly larger percentage of income from livestock. The replacement values of farm equipment and buildings, dwelling and contents, and total physical as sets were larger for the NFI sample. These differences were statistically significant for all classes except farm equipment, The NFI sample owed a significantly larger amount of debt secured by note or mortgage. The total liquid financial reserves, including cash savings, life insurance cash values, and stocks and bonds, were greater for NFI farmers, but the differences were not significant. The NFI farmers purchased larger amounts of fire insurance on physical assets, but their degree of underinsurance was also larger than the FCI sample. A total of 27 farmers were operating road vehicles without automobile liability insurance. Of the remainder, most had purchased 5/105 limits of automobile liability. One-hundred and sixteen farmers had hospitalization insurance, and 77 bad life insurance on self. The total insurance expenditures of NFI farmers were slightly larger than for FCI farmers, NFI farmers had spent significantly larger amounts on fire and hospitalization insurance. The income indexes indicated that FCI farmers had guaranteed about the amount of expected gross farm income through financial reserves and FCIC insurance. However, this Insurance covered only 30 percent of the possible loss. The FCI farmers had guaranteed about 46 percent of their maximum possible property loss and about 40 percent of their two maximum losses. The NFI farmers had guaranteed about 64 percent and 50 percent respectively. However, the maximum property values were insured to only 30 percent or less of replacement value by both samples. Overall indexes, which included the maximum crop, property, and synthesized automobile liability losses, indicated that the farmers had guaranteed less than 50 percent and had insured about 40 percent of these losses. Exclusion of the maximum property loss increased the value of various overall indexes from 11 to 71 percent. The farmers had achieved reasonable control of their maximum risks except for fire loss of physical assets, and with that exception had effectively allocated their insurance funds. Fire insurance to a larger proportion of the replacement values of physical assets would have resulted in substantial increases in effectiveness. FCIC tobacco insurance alone did not protect a sufficient proportion of income to guarantee stability of operations in the event of severe loss experience.

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