AN EVALUATION OF THEORIES RELEVANT TO INSURANCE PURCHASES THROUGH AN ANALYSIS OF THE INSURANCE PROGRAMS OF VERMONT FARMERS By Robert Orville Sinclair A THESIS Submitted to the College of Advanced Graduate Studies of Michigan State University of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1958 P roQ uest N um ber: 10008603 Alt rights reserved IN F O R M A T IO N TO A L L U SER S T he q u a lity o f this reproductio n is de p e n d e n t upon the quality o f the copy subm itted. In the u n like ly e ven t th a t the a u th o r did not send a com plete m anuscript and th e re are m issing pages, these w ill be noted. A lso, if m aterial had to be rem oved, a note w ill indicate the deletion. uest P roQ uest 10008603 P ublished by P ro Q u e st LLC (2016). C o pyright o f the D issertation is held by the A uthor. All rights reserved. T h is w o rk is protected a g a inst unauthorized copying under Title 17, United S tates C ode M icroform Edition © P roQ uest LLC. P roQ uest LLC. 789 East E isenh ow er P arkw ay P.O. Box 1346 Ann A rbor, M l 4 8 1 0 6 - 1346 ACKNOT 'LEiJGMENTS So many people have personally contributed in the preparation of this thesis that the writer hesitates to specifically mention any by name lest others who contributed equally be omitted. However, certain people have been particularly helpful and deserve special recognition. Chief among these is Dr. Vernon Sorenson, the writer's major professor, whose advice and direction vo^e most patiently and cheerful!;/ given and to whom fell the unpleasant task of reading and improving preliminary drafts of this study. The other members of the guidance committee, Dr. Lavrence Witt, Dr. Arthur Mauch, and Dr. Denzel Cline are also deserving of thanks for recognizing the difficult conditions under which this thesis was written, and for being most considerate and understanding in directing the writer’s graduate program. A special word of gratitude is due to a close friend and colleague, Verle R. Houghaboom, who cheerfully listened to the writer's problems in analysis and who, through many hours of discussion, helped turn indecision into resolution. Dr. Thurston M. Adams, chairman of the department of agri­ cultural economics at the University of Vermont deserves special mention. Since this thesis is a part of a research project of the Vermont Agricultural Experiment Station, the writer is indebted, to Dr. Adams and Dean J. E. Carrig.an for providing financial support for his graduate program. The writer is also indebted to the Nationwide Mutual Insurance Companies of Columbus, Ohio for sponsoring a part of this study and providing equipment fox* a large part of the statistical tabulation. Special recognition is due Dr. Simon Dinitz, sociologist, of Ohio State University who, wh5.1e employed by the sponsors, counseled with and assisted the author in the preparation of the original questionnaire. Sincere appreciation.is also expressed to the secretarial staff of the agricultural economics department, and particularly to Mias. Janet Hatin and Mrs. Kay Barrows v/ho typed the manuscript. Finally, with deepest affection and gratitude, this thesis is dedicated to C. B. S. without whose encouragement, understanding, and patience, it could never have been completed. TABLE OF CONTENTS CHAPTER I. II. PAGE I N T R O D U C T I O N ............................... Reasons for making the s t u d y ........................... 2 O b j e c t i v e s ..................... . ....................... 3 M e t h o d o l o g y.............................................. 3 The s a m p l e ....................... . .................... 6 THEORETICAL CONCEPTS RELEVANT TO INSURANCE PURCHASES ... 9 Risk vs. u n c e r t a i n t y .................................... 11 Knowledge situations and decision making 12 ............... Basic consumption t h e o r y ............................... 16 A note on rationality and economic b e h a v i o r ............. 18 Insurance principles 22 ................................... The firm-household conflict III. 1 ..................... 31 Temporal considerations ................................. 32 Statement of h y p o t h e s e s ................................. 38 THE FARMERS AND THEIR F A R M S .................... Historical background . . . A3 ............................. 43 Effect on v a l u e s ........................................ 47 Characteristics of sample farms . 49 ........... Attitudes ...................................... . . . . . 52 Effect of income c h a n g e s ............................... 53 Kinds purchased or d r o p p e d ............................. 54 Life insurance as savings ............................. 56 Importance of a g e n t s ................................... 56 V CHAPTER PAGE Summary . . .............................................. IV. LIFE INSURANCE CONSUMPTION P A T T E R N S ............ Why insure V. 57 59 ............................................ 59 Ownership of life insurance by farm o p e r a t o r s ........ . 60 Factors affecting the amount of life insurance 63 owned . . Why did Vermont farmers buy i n s u r a n c e ? ................. 71 Kinds of insurance p u r c h a s e d ........................... 72 Insurance coverage on w i f e ............................. 74 Insurance coverage on children ................. 75 Life insurance coverage on the family u n i t ............. 77 An evaluation of the theoreticalmodel .................. 81 CASUALTY INSURANCE P R O G R A M S ................................ 87 .. .. Vehicle insurance c o v e r a g e ...................... 88 Fire i n s u r a n c e .......................................... 96 Comprehensive personal liability insurance . 104 Summary of the casualty insurance p r o g r a m ................. 106 VI. MEDICAL AND HEALTH CARE ANDINSURANCEP R O G R A M S ............. 110 Health insurance coverage.... ............................ 114 Accident and health Insurance ................. 116 . . . . . S u m m a r y ........ . .......................................... 119 VII. RETIREMENT PLANS OF FARMERS AND THE SOCIAL SECURITY PROGRAM 121 Plans of Vermont f a r m e r s .................................. 124 Farmers with no retirement plans attitudes toward social security ................... 128 ....................... 129 vi CHAPTER VIII. PAGE SUMMARY AND CON C L U S I O N S ...................................... 136 Life i n s u r a n c e ........................... . ...............141 Vehicle insurance ......................................... Froperty fire insurance ................................. 142 143 General liability insurance .............................. 144 .......................... 144 Retirement programs and social security .................. 144 Insurance theory re-examined 145 Hospitalization insurance . . . ............................ B IB LIOGR APIff.................................................... A P P E N D I X ............................................................. 149 147 list of tables table page I, II, III, IV. V. Distribution of Gash Receipts on Vermont Farms, 1956 . . 46 Net Farm Income by Size Groups, 1953 .................. 51 Future Expected Insurance Purchases .......... .... 53 ... 54 Effect of Income Changes 011 Insurance Consumption Kinds of Insurance Purchased or Dropped as Affected by Changes in I n c o m e ................................... VI. Numbers and Percentages of Form Operators Owning Some Life Insurance by Size G r o u p ......................... VII. ................ 67 Comparison of insurance Owned and Other Factors for Total Sample and Those with Foreign N a m e s .......... ■XIII. 65 Amount of Life Insurance Carried as Affected by Number of Dependents XII. 64 Ownership of Life Insurance by Farm Ope ators as Related to fears of E d u c a t i o n ............................... XI. 63 Distribution of Life Insurance Ownership of Farm Operators by A g e ..................................... X. 62 Numbers Aid Average Face Values of Life Insurance Policies Owned by Farm Operators, Classified by Size . IX. 61 Total Amount of Life Insurance on Operator Classified by Size of F a r m ......................................... VIII. 55 69 Relationship Between Insurance Owned by Operators, Social Participation Score and Other Factors ........ 70 viii TABLE page XIV. Reasons Given by 42 Vermont Fanners tor Purchasing Life Insurance XV. XVI. ........ .............. .. Type of Policy Owned Classifiedby Sire Number and Percentof Farm of Farm Wiveswith Life . . .. 71 . . .. 72 Insurance .. XVII. Life Insurance on Wives by Farm Size Group ............ XVIII. Number of Families with Children and Number and Percent I n s u r e d ........................................ . - ir - r ^ r /U.A « .. 76 76 Distribution of Insurance Coverage on Children by Sis e G r o u p ............................................ XX. 75 77 Percentage Distribution of Life Insurance.Oi-mership by Farm Size for Individual Family Members and Whole Family . .............................................. XXI. Total Face Value of Life Polic5.es and Percent Distri­ bution by Family Member and Size Group .............. XXII. XXIV. XXV. XXVI. XXVII. XXVIII. 81 Total Life Insurance Premiums and Average Premiums Per Insured Family by Size Group ......................... XXIII. 79 Ownership of Motor Vehicles by Size of Farm .......... SI 90 Types of Auto Insurance Coverage Owned, by Size Group 91 Amount of Bodily Injury Liability Coverage by Size Group 91 Amount of Property Damage Liability Coverage by Size G r o u p ......................... ..................... 92 Distribution of Collision Coverage by Size of Farm . . . 93 Insurance Coverage on Trucks by Farm Size Group . . . . ix TABLE PAGE XXIX. Average Valuation, Fercent Insured, and Size of Mortgage by Farm Size G r o u p .................. 50XX. 9S Risk-Preference Rating as Related to Size of Farm, Farm Valuation, Net Worth, Insure nee Coverage, and Other F a c t o r s .......................................... 100 XXXI. Percentage of Valuation Insured Related to Size, Ago of Farmer, Education, Income, Total Valuation, and Size of M o r t g a g e ............................................ 103 XXXII. XXXIII. XXXIV. Costs of Hospitalization for Breadwinners and Dependents 112 Cost of Surgery for Brea, i.winners and Dependents 112 .... Cost of Doctor's Calls and Office Visits for Bread­ winners arid Dependents .......... XXXIV. 113 Total Medical Expenditures, 220 Vermont Farm Families, 1953 .................................................. 114 XXXVI. Persons Covered and Type of Coverage, Hospitalization Insurance XXXVII, . . . . . . . . . . . ........................... XL. 11? Characteristics of Farmers With and Without Retirement t P l a n s ................ XXXIX. 114 Preferences for Different Hospitalization Insurance Plans XXXVIII. ..................... Attitudes Toward Social Security by Size Group ......... 126 130 Average Income, Average of All Insurance Premiums, and Percent Premiums Are of Income by Size Croup, 195 F a r m s .............................................. 137 TABLE XLI. PAGE Farms Per County, by Size Group; and Basic Sample Selection.................................................150 XLII. Sample Size Compared to Total Number of Farms, by Size G r o u p .................................. XLIII. Comparison of Selected Characteris tics of Sample Farms In First -and Second S u r v e y s ........................... 152 LIST OF FIGURES FIGURE 1. PAGE Hypothetical Utility Function Preference for Security 2. for Individual with a ............................... 25 Hypothetical Utility Function for Individual with a Preference for R i s k .................. , .................... 26 3. Typical Shape of Individual's Utility Function ............... 28 4* Intertemporal Indifference Curves and Income-Expen^ibure D i a g r a m .................................................... 33 AN EVALUATION OF THEORIES RELEVANT TO INSURANCE PURCHASES THROUGH AN ANALYSIS OF THE INSURANCE PROGRAMS OF VERMONT FARMERS By Robert Orville Sinclair AN ABSTRACT Submitted to the College of Advanced Graduate Studies of Michigan State University of Agriculture and Applied Sciences in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics Year Approved 1958 All economic activity in a •Jynonlie economy tokos place in an atmosphere of uncertainty. Uncertainty of the future has a vitally important effect upon the production plans of f .rmors; because of uncertainty these plans must be :I t e m ! and tie use of resources is likely to be li fferent, perhe ps less efficient, than would be the case in a static economic system. Uncertainty imposes costs, either •.s losses in assets or in forgone income resulting from modifying production plans to decrease uncertainty. known vs risk, is insur f'le. One type of uncerta.inty, This study' is concerned with the area, of insurable risks and the use of insurance to protect against uncertainty This study has two broad objectives. The insurance consumption patterns of a sample of 220 Vermont farmers ere analyze-.I to y i n an understanding of the ownership of insurance and knowledge of insurance orinciylcs; an! the ttitudes toward and -sociation between insurance ownership and certain economic and sociological variables are inve:tipat ed, Secondly, current economic theories pertaining to insurance consumption are revise,'ed. and critic all;,' evaluated, in light of the empirical relationships. Insurance is not a productive input in the sense that fertilizer, labor, and fee! are productive* insurance is non—physical— a sense of security. The product, of Because of this, insurance is analysed within the constructs of consumption theory. In order to safisfe.ctorily explain the insurance purchases of the farmers surveyed, it is necessary to modify substantially the ;:iv received consumption theory. Even the basic 'ssumptions of consumption theory— perfect knowledge, r ■fionality, and individual utility .or :d.— miaation— are open to question, The intcrrel..tionship between firm end .household., and the intertemporal conflict raised) by insurance purchases require a re—evaluation of current attempts to a.-paly the received theory to insurance ownership. complex decision making process s it In order to fully ^::pl J.n the q alies to the purchase of some kinds of insurance, it is necessary to hypothesise u si/nnlc aneous resolution of the many areas of conflict before utility maximization is achieved. Most discussions of the application of utility theory to insurance consiur.ption make no distinction among the different kinds of insurance. Institutional requirements, sociological .'fetors, custom, and a pent activity play a. very Important part In the decision to purcha.se certain kinds of insurance. In fact, the decision making process as it is usually defined may he entirely absent. These exogenous factors may completely overrule economic considerations in explaining purchases of some kinds of insurance. There is good evidence that insurance consumption may be more closely related to increases in income than to absolute level of income— an .application of mar gin a lit y principles. Although sufficient data to determine demand elasticities for different kinds of insurance are not available, there is un indication that demand elasticities do vary. XV The level of knowledge on insurance pr:t n c i p V s of ’ she farmers surveyed leaves much to be desired. Given the v-.lues ox these farmers, more perfect knowledge of insurance principles would result in a, more efficient coverage t'lover cost. Few farmers have given cry but cursory attention to retirement plans or needs. This study, then, is a combination of a quantitative statistical analysis of the insurance programs of Vermont farmers, and a quali­ tative analysis of motivations affecting these programs. It is an attempt to provide a benchmark for the use of those people counseling with farmers on their insurance programs, and raises some questions concerning currently accepted theories pertaining to insurance purchases. CHAPTER I INTRODUCTION CHAPTER I INTRODUCTION To live and labor in uncertainty is the common lot of all men. Life, health, wealth, and income are all exposed to innumerable, unpredictable dangers. This is particularly true of the farmer, faced as he is with the vagaries of weather, the fluctuations of the price system, and the constant danger of accidents to himself, his family, or his employees; to say nothing of the ever-present threat of an untimely demise • These uncertainties have costs, both economic and social. There is no way of measuring the mental anguish suffered during long and serious illnesses of a family member; nor is it much simpler to determine the amount of forgone income resulting from management decisions modified in the light of production uncertainty. As a means of partially protecting himself and his family against risk or uncertainty, the farmer utilizes formal or informal insurance. For those risks where the probabilities of occurrence and loss are known, he may use formal insurance. For those uncertainties for which it is impossible to determine empirically or by a priori deduction the probabilities of loss, he may use one of the informal insurance strategies: bility, or liquidity. diversification, discounting, increased flexi­ 2 It has been said that pure risk— that which is insurable— need have no impact on decision making and resource allocation. This would seem to be a misleading statement, since if risk-preference and knowledge of probabilities of loss are less than perfect and vary among individuals, then there is always the decision of whether or not to insure and for how much. These are important decisions for the farm manager, and in some cases the success of his farming operation or his family1s welfare may depend upon them. It is in the area, of insurable losses that this study will be concerned. Reasons for making the study. This project was initiated in part at the request of the Ohio Farm Bureau Insurance Companies— now Nationwide Mutual Insurance Companies. This organization, which has been insuring Vermont farm families for many years, asked the Vermont Agricultural Experiment Station to survey a group of farmers to obtain data on insurance attitudes and coverage. In return for the survey data the company agreed to underwrite a part of the cost. Although formal insurance is, or should be, an important part of most farm programs, little is known of the insurance programs of farmers. Even less is known of attitudes toward insurance or of the factors motivating insurance purchases. Little is known of the risk- preference of farmers and its effect on consumption. And while infor­ mation on present consumption patterns is important in studying ■^Earl Heady, Economics of Agricultural Production and Resource Use (New York: Prentice-Hall, Inc., 1952), p. 442. 3 expenditures of the insurance dollar, far more important is a knowledge of the motivating forces in insurance consumption* This is particular­ ly needed in view of the present emphasis on farm and home counseling. This study then, is an attempt to investigate some of these areas of imperfect knowledge. Objectives. inquiry. There are three broad objectives or areas of Because little %vas known regarding the insurance ownership of Vermont farmers, the first need was to collect as complete data as possible on insurance ownership of s. representative sample of farmers. The second phase is an attempt to consolidate and reviev: the various areas of economic theory relevant to insurance consumption. These theories will be critically appraised and any inadequacies of the theory 'will be explored. If it is found that economic theory does not by itself satisfactorily explain insurance consumption, answers will be sought in other areas. The third phase of the study is concerned with farmers * retire­ ment plans and the effects of social security on these plans. With all farmers now included in the social security program, it is desirable to know the likely effects of this program on insurance purchases, land ownership, and related problems. Methodology. Science is a continuing search for truth^ the scientific method the vehicle for making the search. Science cannot be static, however, and the truths of today, as represented by the system­ atized knowledge, the laws, principles, and theories, are but stepping 4 stones to further truths, further theories. . Science progresses through observation and experimentation; these are the bases of all definitions of the scientific method. The ultimate objective of science is prediction— inferences which can be made on future activities based on observations of present or past relationships. In scientific experimentation the investigator formulates his ideas into an hypothesis; he follows a logical pattern of thought and deduces that "If this act is performed, then this will be the result.'1 He then attempts to confirm or deny his hypothesis through experimentation in the physical sciences and through obser­ vation in the social sciences. Because society will not usually permit experiments on man, the social scientist must observe the results of such variations as occur without his intervention and learn what he can from them, disentangling as much as he can from the tangled skein of cause and effect. behavior of a few. He must generalize on the behavior of many from the By using the proper statistical techniques he can do this, and, within the limits of his data, expect similar results to be achieved by other social scientists. When it comes to formulating theories In economics and the other social sciences there is a unique problem. Because of the "free-wili'1 of human beings it becomes necessary to set up certain assumptions regarding human behavior; if these assumptions are sound, the theories upon which they are based can be used to predict economic actions. those theories which may be applicable to insurance consumption, two common assumptions are rationality of action by the individual and In 5 perfect knowledge, or at least sufficient knowledge for the individual to be willing to act. In this study these assumptions will be criti­ cally examined in the light of the data obtained. A large part of this study is empirica.1; the collection and classification of quantifiable data, guided by presently recognized economic theories. However, while a major share of the study is con­ cerned with the statistical analysis of these empirical data, no small part is a subjective analysis of qualitative observations. The in­ terpretation of attitudes and motivations, the determination of social status and risk-preference, are areas where highly refined quantitative analysis does not seem practicable. As a result, the analysis includes a measure of the subjective interpretation of the interviews by the writer. This study, then, is a combination of a quantitative statistical analysis of the insurance programs of Vermont farmers, and a quali­ tative analysis of motivations and other psychological factors affect­ ing these programs. It is guided and directed by currently recognized insurance principles, but does not attempt a precise mathematical verification of these theoretical concepts. In fact, it is more an evaluation of those theories which apply to insurance purchases. Value judgments are doubtlessly made in this study. The writer has attempted to identify any which are included; however, many have probably been included without being specified. is particularly vulnerable to this difficulty. A study of this type However, even the most objective statistical research may also include value judgments, many 6 of which are hidden in the theoretical constructs or in the mathemati­ cal analysis* The sample. Because of the complex nature of the problem and the great amount of data needed, it was deemed desirable to make personal intervie\^s to obtain the necessary information. The popu­ lation from which the sample was drawn consisted of all rural house­ holds owning one or more units of livestock. dairy was converted to a cow-equivalent basis. All livestock other than Poultry raisers were considered to have one unit of livestock for every 100 hens or major share thereof. Xn Vermont, local town listers (assessors) are required by law to submit annually to the State Commissioner of Agriculture a certified list of all owners of livestock and poultry in their respective towns. This list was used as the population from which the sample was drawn. Because Vermont's agricultural economy is geared so firmly to the dairy cow, farm size is most conveniently and meaningfully measured in cows per farm. chosen: A stratified sample with five different size groups was 1 to 11 cows; 12 to 19; 20 to 29; 30 to 39; and 40 cows or more per farm. Two hundred farms were chosen as the sample size. It was considered desirable to keep the number of farms per group approximately equal rather than to choose randomly from the entire population (Table 1, Appendix). In an effort to get state—wide representation the farms were chosen so as to assure at least one farm in each size group in all 14 counties in the state. The original sample was drawn by random numbers 7 with the intention of having at least 40 farms in each strata, or a total of 200 farms. Actually, when the survey was completed, 220 usable records were taken, but the number of farms per group varied from 35 to 56 . viewers. Records were taken by five specially-trained inter­ (The questionnaire is included in the appendix as Exhibit A.) All data were machine tabulated. Commonly accepted statistical tests of significance were run where applicable. Unless otherwise stated, all results were significant at the 95 percent confidence level. Because of the method of stratification used in picking the sample, none of the results as listed for all farms in the sample should be inferred to be representative for all farms in the state. While it would be possible to weight the results, according to sample proportions, and thereby .get representative figures for the whole popu­ lation, this has not been done in the study. The data for each stratum are, however, inferentially representative of all farms within that stratum. After preliminary analysis of the data for the 220 farms, it was decided to re—visit some of these farms to get further information. Consequently, 45 farms which exhibited certain desired characteristics were purposely chosen for this survey. A comparison of specified characteristics of these 45 farms with the original 220 farms is in­ cluded in Table 3* Appendix. These farms were visited during the late fall of 195^, and the questions as shown in Exhibit B, Appendix, were asked of the farm operators. Specifically, this data pertained to a knowledge of insurance and insurance principles* risk—preference of "the operators, and retirement plans. Forty—one usable records were obtained. The remaining chapters of this study present the results of the investigation. In Chapter 2, those theories having relevance to insurance consumption will be examined and an attempt made to develop a coherent theoretical framework within which insurance purchases may be examined. Chapter 3 is a discussion of the evolutionary development of Vermont's agricultural economy, and of certain sociological factors which may affect farmers' decisions. In Chapter 4, the life insurance programs of the farm families are discussed. Chapters 5 and 6 pertain to casualty and health insurance programs respectively, while Chapter 7 is a discussion of retirement plans and social security. In Chapter 8 the analysis is summarized and conclusions drawn as to the value of this research and the need for further investigation. CHAPTER II THEORETICAL CONCEPTS RELEVANT TO INSURANCE PURCHASES CHAPTER II THEORETICAL CONCEPTS RELEVANT TO INSURANCE PURCHASES Economics as a discipline is concerned with problems ox choice* Resources are scarce, man's wants almost insatiable, and the economic problem becomes one of deciding which wants are to be satisfied and how scarce resources are to be allocated so as to maximise satisfactions of the individual or the community. means requires decision making. Selecting among scarce end competing It is with a limited phase of decision making— namely, that of using..Insurance in. solving problems of risk and uncertainty— that this thesis is concerned. Since this is a study of insurance programs, one v/ould normally start with a discussion of insurance theory* However, there is no complete body of principles or concepts known as a theory of Insurance. In this study, when the term "insurance theory" is used, it will refer to those principles or concepts borrowed from economic theories of consumption or production which, when properly modified, have relevance t o insur anc e .consumpt ion. The jreceived economic theory is normally divided into two general areas; production theory and consumption theory. these are not distinct, clear-cut entities. Unfortunately Normally, production theory is concerned with the firm, with the combination and one of the numerous factors of production (inputs) to maximize profits resulting from the production and sale of goods and services. Consumption theory deals with the combinations of goods and services which, when utilized 10 by the consumer (household), will maximize satisfaction. The output of the production process is a physical product or a service; the output of the consumption process is measured by a psychological concept known as utility. Despite the apparent distinction, It is often difficult to determine if certain economic decisions concern production or con­ sumption and the firm—household conflict is a real and troublesome problem. Static economic production theory provides a set of well-defined concepts and principles which determine what shall be produced, how much shall be produced, and how it shall be produced. By making certain assumptions, static theory describes a system which will determine production, allocate resources to their most efficient use, and return to all factors of production the value of their marginal productivity. The received theory, then, will solve all problems of choice, eliminating any need for management and decision making, provided the basic assumptions apply. Of the many assumptions neces­ sary for static theory to be operational, at least three have special significance to this study. These are the assumptions of perfect knowledge of present and future events; that the goal of the farm firm is profit maximization, in the long run if not in the short run; and that the individual will act rationally. If perfect knowledge of the present and future is no longer assumed, the future becomes uncertain and theories involving risk and uncertainty are necessary. Those decisions made to eliminate or alleviate the effects of risk and uncertainty involve formal and 11 informal insurance schemes. But insurance is not strictly a production input, ana this Introduces the problem of firm—household conflicts. If there are conflicts between the goals of the firm and, those of the household, profit maximiz at ion may no longer be assumed the goal of the production unit. Finally, idien there are conflicting goals, rational action becomes ifiore difficult, or at least economically rational action map'' not always be the rule. The consequences of relaxing these assumptions are discussed below. Risk v s . uncertminty. While the layman, and indeed many trained scientists, tend to use risk and uncertainty synonymously, there is a difference. To clarify what Is to follow, un attempt will be made to define the terms as they will be used in this study. In an Insurance sense, risk is often considered a chance of loss. Farmers are prone to classify all outcomes which may lead to losses as risks. Technically, hovrever, risk refers to outcomes which are pre­ dictable in an actuarial sense. need not be predictable. The outcome of a single occurrence It is only necessary that the probability of loss can be established for a large number of cases. probabilities can be established in two ways: These empirical a priori probability, where the chances are Icnovm beforehand, as the chance of drawing an ace from a deck of yz curls; or statistical probability, based on observa­ tions from a very large number of cases. based on statistical x^obability. Most insurance schemes are In order to establish probabilities the sample must contain a large number of observations, the losses must be repeated in the population, and the losses must bo independent and 12 randomly distributed.^ The ability to establish parameters of the probability distribution for outcomes distinguishes risk elements from uncertainty elements. not. Thus, risks are insurable but uncertainty is Uncertainty is entirely of a subjective nature; it refers to anticipations of the future held by the individual. Since uncertainty is not insurable in an actuarial sense, the individual must use informal insurance schemes to protect himself. Both risk and uncertainty have costs. The costs of insurable risks, such as protection of property from loss by fire, or net worth from liability lawsuits, are measured by insurance premiums; the costs of uncertainty are measured in terms of forgone income resulting from something other than the optimum allocation of resources which are necessitated by adapting the firmfs operation to protect against unc e rt aint y . Because reaction by managers to risk and uncertainty involves decision making, and since uncertainty is a function of the state of knowledge concerning future events, a brief discussion of knowledge situations follows. Knowledge situations and decision making. When Frank Knig ht3 started to modify classical static economic theory by introducing 2Ibid., p. 443. ^Frank E. Knight, Ri s k . Uncertainty, and Profit (London: of Economics and Political Science, 1937), Reorint No. 16. School 13 imperfect knowledge of the future, the door was opened to a study of the managerial function. Managerial theory has advanced extensively since Knight classi­ fied the degrees of knowledge held by managers as perfect knowledge or certainty, risk, and uncertainty. Knight defined the perfect knowledge situation as that commonly assumed by static theorists in which manag­ ers have no risk-bearing to perform; in fact there is no need for management. According to Knight's risk situation, the probabilities of errors in perception and inference are known and the costs of bearing risks can be computed and incorporated into insurance schemes thereby eliminating this kind of risk-bearing as a ta.sk for management. This left only uncertainty as a place where management was needed. Current thinking^ would indicate that Knight's theory was incom­ plete in several respects. uncertainty on ^ t h First? he distinguished between risk and e b a s '3^sjof whether or _not it is possible to compute probability, errors, rather than on the more realistic subjective basis of whether or not there is sufficient information at hand for action. Secondly, he failed to distinguish situations in which the manager tries to learn, does not try to learn, or is prevented from learning; and thirdly, his classification depends on inductive methods, although managers act deductively as well as inductively. ^Glenn L. Johnson, Managerial Concepts for Agriculturists (Kentucky Experiment Station Bulletin 619, 1954T*" 14 It is possible to distinguish several different knowledge situ­ ations in which managers find t h e m s e l v e s . 5 These are: (l) Subjective certainty; perfect knowledge or the conviction that knowledge is perfect enough to act as though it were perfect. uncertainty or imperfect knowledge. (2) Subjective Sub-divisions are: (a) risk— action, (b) learning, (c) inaction, and (d) forced action. In the subjective certainty situation the manager feels that he has essentially perfect knowledge, or that the probabilities of error are definitely known. If the manager feels that his present knowledge is good enough for him to take either positive or negative action, and that the utility or value of further learning is worth less than its cost, he is in-the.risk—action situation. In the learning situation, a manager feels that the amount of knowledge at hand is not sufficient to act and that the value of acquiring more information is worth more than its cost, so that decision is postponed for further study. If the manager in the learning situation finds that exogenous circumstances force him to act before he has the desired amount of knowledge, this is a foreed-action situation. An inaction situation is one in which what is known is insufficient for positive action, but the value of what would be learned would be worth less than its cost. When a manager is in a learning situation with regard to a particular problem, flexibility or liquidity become important. If the maintenance of increased flexibility or liquidity results in something ^Ibid. 15 less than an optimum combination of resources, the cost to the farm * firm is in the form of opportunity costs measured by this decreased income. The value of flexibility or liquidity must be weighed against its cost in determining the optimum organization of the business. Other types of informal insurance include discounting, diversification, and internal credit rationing. The ideal solution to decision making in the light of undesira­ ble chance phenomena is to reduce the probability of occurrence of the event to zero; for desirable chance phenomena, the idea], solution would be to attempt to incres.se the probability of occurrence to one. Farmers use technology, enterprise selection, and group action to reduce the probability of occurrence of undesirable chance phenomena. Reduction of this probability requires knowledge of the cause end methods of eliminating it. Often this knowledge too is imperfect, particularly as to the latter. Because individual action to control or reduce the probability of 'undesirable chance phenomena is often inadequate, group action, including commercial insurance, is resorted to. Decision making applied to insurance purchases assumes that the individual is in a subjective certainty or risk—action learning situ­ ation and the purchase of the insurance is the result of the positive operation of the decision making process. It assumes that he has perfect knowledge of the parameters of the probability distribution, that he is familiar with all of the possible alternatives, or that he has sufficient knowledge■that, the cost of further knowledge is greater than its utility. Therefore, the purchase of the insurance is a 16 voluntary and reasoned action. The writer feels that many times the manager is in a learning or inaction situation and the purchase of insurance is a result of forced—action caused by institutional require­ ments beyond his control. The implications of this situation may be far different than for insurance purchased through the voluntary appli­ cation of the decision making process. Basic consumption theory. Insurance is not a productive input in the sense that fertilizer, labor, and feed are productive. The productivity of insurance is not measured in pounds of milk or bushels of grain as is the productivity of other factors- of production. As will, be discussed in greater detail below, the product of insurance is measured in non—physical terms, in a sense of security or satisfaction. In this respect, insurance might better be considered a consumer good, and analyzed in the light of received consumption theory. The household may be likened to a firm in certain respects. It buys inputs and transforms them into a final product which in this case is psychological rather than physical. This product has been called utility or, by some, satisfaction. A basic stumbling block to the development of an operational consumption theory has been the measurement of utility. theory measures the output in physical units or dollars. theory must measure psychological units known as utility. Production Consumption Goods are considered on the basis of their ability to satisfy human wants. recently, utility analysis has been only slightly modified from the Until 17 z philosophy of Bentham0 who held that certain actions produced pain, other actions pleasure. Pain yielded disutility, pleasure utility, and man will choose that line of action "which will maximize utility. While Bent ham considered utility in a, moral sense as a guide to behavior, political economists soon siezed on the concept as a means of measuring consumer satisfaction in an economic sense. Many attempts, for the most part unsatisfactory, have been made to measure utility. In the 1930's, the indifference technique was developed which did not imply measurable utility. However, whether or not it can be measured (and it is beyond the scope of this thesis to review; all of the literature concerned with the measurement of utility) the only definite theory of consumer behavior which commands respect requires that some entity be maximized. Fundamentally then, utility analysis assumes that each good consumed yields a certain amount of satisfaction to the individual consuming it. It further assumes that repeated consumption of the same good, holding the consumption of other goods constant, eventually yields diminishing total utility. The individual is assumed capable of allocating his income dollar among all consumer goods so that total utility will be maxiraized. And while the individual has not generally been assumed to know how much he prefers steak to liver, milk to beer, or an insured position to an uninsured one, he is assumed to be able to indicate a preference one for the other* z Jeremy Bentham, Introduction to the Principles of Morals and Legislation (Oxford: Clarendon Press, 1789)• 13 Utility theory then, provides a general description of consumer behavior. Using maximizing principles, it attempts to explain the processes involved in decision making as it applies to consumer goods. Like production theory, it has shortcomings; among them the assumption that the consumer will always attempt to maximize utility, its inade­ quacies in dealing with changing values, and its difficulty in dealing with problems involving collective action. Finally, unlike production theory, utility theory until the present has been nonoperational, in that measurement of utility has been impossible and interpersonal comparisons could not be made. Perhaps the work on the utility of money of Von Neumann and Morgenstern,? Friedman and Savage,® and others discussed later will provide a breakthrough of this important barrier. As yet however, this work appears to be highly inconclusive, and while it may be valuable in clarifying certain actions of individuals, its predictive value is questionable. A note on rationality and economic behavior. Much of insurance theory, indeed, much economic theory is based on the assumption of rational behavior. Just what is this concept which has such a powerful hold on the theorists? Von Neumann and Morgenstern^ state that "there 7 John Von Neumann and Os ar Morgenstern, Theory of Games and Economic Behavior (Princeton, New Jersey: Princeton University Press, 1944)%3ilton Friedman and L. J. Savage, The Utility Analysis of Choices Involving Risk (Journal of Political Economy, Volume 5®77 pp. 279-304/ ^Von Neumann and Morgenstern, op. cit., p. 9. 19 exists, at present, no satisfactory treatment of the question of rational behavior•'* But in this sense, the two authors are probably discussing ends rather than means. Normally, to the theorist, ration­ ality is measured in terms of means of achieving an end, rather than of the end itself. Given the goal, the rational individual is assumed to be the one who will choose that course of action which results in the most efficient use of all resources employed in achieving this goal. Thus, if $ 1,000 worth of protection can be afforded by the expenditure of $ 10 , the rational individual will not spend $20 for this protection. This assumes, of course, that the individual has complete knowledge of all alternatives. It is when one tries to judge rationality by applying it to ends that the greatest difficulty arises« In this case, one assumes that in all actions involving making and spending money, people are driven toward a definite goal, the attainment of the greatest possible amount of satisfaction* It Is assumed that, in hedonistic terms, certain actions of man result in pleasure. as to the intensity of pleasure. All’ possible actions can be scaled The rational, economic man is pictured as weighing possible alternatives in the light of their respective pleasure-giving powers, and selecting that alternative or course of action which maximizes pleasure. This is the foundation of utility analysis, and. the rational individual Is pictured as one who seeks to maximize utility; i.e., pleasure. Since all economic goods have utility and value, monetary measures are normally used to determine utilities. However, who is to s a y .that the desired ends are rational or irrational? 20 Rational behavior does nob necessarily imply normality; irrationality abnormality. In fact, what may be perfectly normal, behavior to one person may seem entirely irrational to others. As an .example, surveys have shown that certain consumers will buy articles on credit, paying relatively high interest rates, while at the same time having suf­ ficient savings invested at low interest to pay cash for the article. From an economic means standpoint, this would seem irrational. However, certain individuals may find it difficult to save and be willing to pay the interest premium from installment buying— a means of forced savings— in preference to withdrawing present savings vhich -would be painful for them to replace voluntarily. This would seem to imply that rational behavior, as applied to goals, is largely subjectively determined. To paraphrase an old saying, 11rational is as rational does .*1 Just how realistic is this assumption of rational behavior, this concept of economic man as .a human calculator, mechanically assigning utilities to all economic goods end services and allocating a given income unerringly among those goods and services which maximize some kind of psychic return or satis taction? stated, "Human behavior One eminent economist has is not under the constant and detailed guidance of careful end accurate hedonistic calculations, but is the product of an unstable and unrational complex of reflex actions, *1 r\ impulses, instincts, habits, c us toms, fashions, and mob hysteria. Jacob Vincr, Journr1 of Political Iconomy, Volume 33 (1925), P- 373. 21 The question of rationality is important to decision making. If man is assumed to be rational, in a utility—imed.mising sense, then decision making is merely the careful weighing of alternatives and the choice of the alternative which affords the gra test s1tier ction. However, it is more likely that there are many motives other than the mascimization of s> tivsfr c t i o n involved in decision making. these may be hidden ant impossible to detect. sites, Some of Incited, as Katona ”Multiplicity of motives, some re in ' : 1or cinq one -mother and some conflicting with one another, is much more common. The amove discussion is b- seel on a sampling of expressions by economists 011 the assumption of rational action. It is essential in as suiting rationality to make the assumption of r abionol means rather than ends. The dot xalna hion of whether a given goal or v.-lue is rational, ie., plausible end non-conflicting with other goals, is a subjective one, said probably cannot be tested in the crocible of econo.! lie theory. Ho never, given the goals or ends, it is desirable to assume that the methods of achieving these ends be rational. is coin on to :assume rational beh ...vior in this sense. Thus, it lad although in an ex ante sense all individuals are assumed to act rationally, a careful scrutiny of these actions, ex post , may also throw*- some doubt on this assumption. Desx>ite these shortcomings, to allow a specific theory to have general application the assumption of rationality in this sense must be made. ^G-eorge Katona, Fsycholo;doal Analysis of Economic bglpgqLor(New York: McGraw-Hill, 195lT7~P* 31* 22 Insurance principles . Insurance is a, device .for risk—sharing. It is b,<,sed on the villin gne s s of individuals to accept a. small certain los.s each year rather than take a chance on incurring a, very large loss at some unpredictable time in the future. Under insurance plans, each individual contributes enough money In the form of premiums to create a fund large enough to replace all losses of the group which are due to chance occurrence. In addition, the contributions must also be large enough to cover administrative costs of the insurance group, less any earnings from Investments. In order for any insure nee plan to be successful, there must be knowledge of the incidence of losses and the size of losses. known. The probability of occurrence of losses must also be Although no single individual can predict tdien he will en­ counter a loss due to chance events, it is possible to predict by probability theory the total losses for a. given time period of a large group of Individuals. It is safe to assume that no one insures to make money, at least it would not be considered rational to do so. Since this is true, what is in the psychological make-up of an Individual which causes him to Insure? Basically, a very important motivation in insurance con­ sumption is a desire for security; the security which comes from the certainty a,fforded by the Insurance plan. This is a subjective factor and is difficult to measure quantitatively. On the other hand, chance- taking reflects a. tendency to gamble, which is the antithesis of security-seeking. It Is not necessary to use formal gambling to illustrate these contrasting ideas, oven though it is customary to do 23 so. Certainly farmers often engage in long—chance schemes which s/re analogous to formal gambling in many respects. How can a rational individual express or exhibit a strong desire for security on the one hand end at the same time be taking long chances for gain? For example, consider the farmer who gives up the relatively secure position of dairy farming on a, completely owned, adequate farm to invest large sums of borrowed capital to purchase another farm, or engage in a different, more risky type of farmers do act in this way. forming. It is evidentthat The apparent inconsistency would seem to come from looking at security-s> eking and chance-taking as separate and unrelated values. People who have ..ssets and earning power are motivated to main­ tain them in the presence of risk and uncerteinty. As a means of main­ taining these assets, they use formal and informal insurance. In order to reach these decisions, an individual must attach utilities to the various income positions. For example, a person who insures attaches greater utility to the smaller certain income resulting from the insured position than he attaches to an uninsured position either before or after a loss. The ordinal placing or rating of utilities has been recognized as a legitimate technique in economic analysis for many years. In postulating a theory of insurance, Friedman and Savage 12 argue that this ability to choose between an insured and an uninsured position implies also an ability to measure utility cardinally. 12 Friedman and Savage, lac. cit. The 24 person must know how much he prefers the insured position over present income or present income less the loss. Unless the individual knows how much, he cannot weigh the two risk incomes together and compare the resultant average with the income assured by the insurance company. To illustrate the Friedman—Savage hypothesis, consider the individual who takes out an accident insurance policy. Before insuring, this person runs some chance of having a disabling accident, and some chance of never having an accident. If he does not insure, he will either maintain his present income (Ip); or, should he have an accident and become disabled, he will in all likelihood have some lower income (I2 ). If he insures, his income (I™") will be reduced by the amount of the insurance premium, but it will be a certain income. In order for this individual to Insure, according to the Friedman-Savage hypothesis, this income (I* ) must ha.ve a higher utility (be worth more) to him than (I), the average of his present income (Ip) and his future income (I2 ) weighted according to their probabilities. In order for this to be so, losses must become increasingly important as they increase in size. This con be illustrated by Figure 1, where (Ip) is the uninsured income position with no loss, (Ip) ^he uninsured Income position if loss occurs, (i ') the insured income position, and (I) the average of Ip end I 2 weighted according to their probabilities. The line (uu) Indicates the utilities derived from the different Income positions. The utility of each income except (I) is measured from the axis to the (uu) curve. Since (I) is the average of two income positions, it is measured along the straight line connecting (ly) ^3. (^2 )* 25 If the utility of (I**) is greater than the utility of (I), a person insures. However, the utility of ( I c) cannot be greater than the utility of (I) if utility fails to fall at an increasing rate to the left of (Iq), or, what is the same thing, losses must increase in importance at an increasing rate as they increase in size. Thus, increasing marginal disutility of losses is a prerequisite to insuring. I I? FIGURE 1 HYPOTHETICAL UTILITY FUNCTION FOR INDIVIDUAL WITH A PREFERENCE FOR SECURITY The theory would seem to agree with the commonly accepted insurance principle of insuring against the major losses. Apparently, people who are adjusted to a certain Income-producing power fear the loss of that power. Small losses appear to be much less important proportionately than large losses. If, however, the possible loss is sufficient to bring about a change in social status, insurance becomes e spec nal ly import ant. 26 The same theory can be used to explain chance—taking at unfavor­ able odds. Two kinds of ch.-mee-taklng exist, formal chance-taking or gambling9 and informal strategies involved in the everyday operation of the farm. Both are similar, in that a, person exchanges a certainty situation for an uncertain one involving ths possibilities of gain or loss. In this case, as vrith insurance, the average income of the loss and gain situation is usually smaller than would be the income if no chance were taken. In Figure 2, (I-j_) is the income if loss occurs, (I2 ) the income if there is a gain from the chance-talcing. (I") is the income before taking the chance, (I) again the .average of (lg) and (ip) weighted according to their probabilities of gain or loss. Utility Vu(I~) FIGURE 2 HYPOTHETICAL UTILITY FUNCTION FOR INDIVIDUAL ivITH A PREFERENCE FOR RISK In this case, before gambling the person has an income desig­ nated as (I*). By chance-taking he runs a chance of getting a smaller 27 income (Iy) (losing the gamble) and a chance of getting a larger income (-*-2 ^* this case if the utility of the average income u(I) is greater than the utility of the certain income u(l,')> the chance is taken. If the utility greater than u(l ). of the gain is sufficiently large u(I) can be This implies that the utility or value of gains in income—producing ability or income must increase at an increasing rate; income producing ability has increasing marginal utility for people who take chances at unfavorable odds. If the utility gained from gambling is so great that the individual gambles to the extent of depriving his family of their basic needs or end,angers his asset structure, it can be considered pathological* This theory is in marked contrast to the views of Marsha.l l U and others that no rational individual would engage in even a fair gamble. To one who believed in the diminishing marginal utility of money, it was inconceivable that a rational individual would gamble one dollar for the even chance of winning a dollar, since the utility ofa dollar lost was always greater than the utility of a dollar gained. dabblers, even at fair odds, were considered to have a psychological quirk in their natures. According to Friedman and Savage, in order for a person to both insure and take chances a unique shape must be assumed for the indi­ vidual 13 utility function. This function, as illustrated in Figure 3 j must have increasing marginal disutility for losses, and increasing "^Alfred Marshall, Principles of Economics (London: and Co., 1920). Macmillan marginal utility for gains. trated, Thus, assuming present income as illus­ the individual would callingly insure against large losses and gamble to get large gains. around present income This utility function, sloped as it is will allow the individual to gamble for small stakes at fair odds, but not at unfair odds. It allows him to take long chances for big gains and insure against major losses, but refuse to take smell chances or enter into petty insurance schemes. also be used in a. socio-economic sense. It might An individual may willingly take a large gamble at quits unfavorable odds, as indicated by the utility function, if by winning he were to move into a higher socio­ economic class. "Men selves even a .on they will and do take great risks to distinguish them­ know what the risks a r e , " ^ Utility Present income > Income FIGURE 3 TYPICAL SHAPE OF INDIVIDUAL'S UTILITY FUNCTION 29 Are individuals actually cognisant of their hypothetical utility functions and with the odds concerned? that they are* What it does assert The hypothesis doesnot assert is that individuals °ct as if they calculated and composed expected utilities .and as if they knew the odds. by this hypothesis the There may be reason to believe that actions of individuals can be predicted. Of course not all individuals would characteristically kinked utility function. be expected to have the Some individuals are chronic gamblers, and their utility function vrould be as illustrated in Figure 2, page 26 ; while other people are exceptionally cautious and would be as in Figure 1, page 25. However, the Friedman-Savage hypothesis can rabionally explain how farmers can pay unfair odds to an insurance company for protection while simultaneously purchase land at whs.t would seem to be poor odds in order to change the scale of operations. Therefore, it would appear that individuals are willing to insure if their Income utility after paying the insurance premiums is greater than the average utility of the income they would receive if they faced the chance event according to its probability of occurrence. The individual will theoretically insure until the utility of his next dollar spent for Insurance premiums is equal to the utility of that dollar spent for other uses. The analysis described above would appear to make two contri­ butions to this discussion. In the first place, it presents a methodo­ logical procedure for the mathematical cardinal measurement of utility 30 whicn, if sound and usable, is a step forward in making utility analy­ sis operational. Secondly, It presents a conceptually logical e:cpla- nation of the makeup of that portion of the individual’s utility function which pertains to risk and uncertainty. It offers a method of explanation of hov; an Individual can rationally gamble and insure, and indicates that managers need have neither a preference for security in order to insure nor a preference for gambling in order to take long chances. This framework has been taken by Johnson^ and adapted to many of the decisions confronting farm managers. It has served as a frame of reference for Johnson and colleagues In setting up a research project to measure the utility of wealth of farmers. This research is part of the Interstate Managerial Study of the North Control Region Farm Management Research Committee, and is reported by H a l t e r . T h e technique employed vis one of presenting a series of hypothetical insurance and gambling plans to the farmers involving different costs and different gains or losses. fair, and unfair. Odds were calculated as fair, more than Reactions of individuals to these hypothetical schemes were aggregated and relative utility indifference functions were developed. Reactions to the various losses and gains situations Glenn Johnson, Proceedings of Research Conference on Risk and Uncertainty in Agriculture, Great Plain Council Publication No. 11 (Fargo, North Dakota: North Dakota Agricultural Experiment Station, Bulletin No. 40G, 1955). ^Al b e r t Halter, Measuring Utility of We alt h Among Farm Managers, unpublished Ph.D. thesis submitted to the College of Advanced Graduate Studies (East Lansing: Michigan State University, 1956). 31 were then associated with certain economic and sociological factors, as age, education, income, net worth, and type of farming. A critical analysis of this work would suggest that the technique is promising but inconclusive. The above discussion summarizes some of the main points in commonly accepted theories pertaining to an individual's reactions to risk and uncertainty. They are based on certain definite assumptions which are important to this analysis. In the first place, these theories assume that the individual's actions in all matters pertaining to choice among alternatives will be directed toward mmdmizing utility. Secondly, they assume that utility is measurable, if not cardinally, at least in an ordinal sense. Finally, in line with the first assumption, rationality of action is assumed. The firm-household conflict. There is one characteristic of the agricultural sector of the economy which makes it quite unique. This is the interdependence between the farm firm— the producing unit— and the household. On the family type owner-operated farms so common in the United States, the distinction between firm and household is usual­ ly difficult if not impossible to make. nomic unit in itself. The farm is a complete eco­ Each member of the farm family may share In the labor- required and in many cases in the management decisions. a sense, contributes capital to the enterprise. occupy one location. Each, in Firm and household Because of this Interdependence, the normal assumption of short run profit maximization as the motivating force directing the activities of the firm must be relaxed. It no longer is 32 possible to consider consumer decisions in the light of consumption theory alone, nor production decisions by production theory* Decisions reached are likely to be a compromise between firm values and household values. Under this system decision making can become a more difficult task. Temporal considerations. Another urea of conflict which is closely related to the problem of firm-hous ehold r e l tionships Is that having to do with the portions of the income flow to be allocated between current consumpt ion and future consumption. The problem becomes one of allocating resources so as to mo rdbnize utility over time. This is particularly important in insurance theory. In some respects, Insurance can be looked upon as a means of sacrificing present Income in order to assure having a guaranteed future income. This Is true in the esse of fire ins nr: nee or other types of casualty insurance and probably for life insurance as veil. Thus, in tcdcing out life insurance on his own life, the farm operator recognises the interdependence of firm and household and the needs of the firm and household in the event of his death. To illustrate the temporal problem, one might, therefore, present the utility maximisation problem through use of a modified intertemporal indj fference curve technique which resolves these con­ flicts between present end .future use of Income, Tim's is illustrated schemeiicnliy by Figure 4, In which the linear functions Iyly, lolo, and III/ represent different income orcoonditure levels divided between present expenditure and future cxpend.iture. Indifference 33 curves T ^ , T ?T 2 ^ and represent, three different preference levels between present end future consumption. level, such as Thus, at a very low income all income is needed to meet present consumption subsistence needs end the point of tendency bet1,sen the indifference curve TpTp -and income possibilities curve V i . Is at the present con­ sumption axis. Present Income and I I FIGURE Future Income and Consumption k INTERTEMPORAL INDIFFERENCE CURVES AND INCONIC—EXPENDITURE DIAGRAM The TpTp Indifference curve Is relatively flat to indicate that at low levels of Income there is a decided preference for present con­ sumption over future consumption. 1212 an‘ ^ '^2^2 represent a sliphtly higher level of income with the point of tanyency between the two 3h curves allowing or smo 3.1 amount, of1 , money to be invs ; I p life insur; rce Tor future income. Atrelatively hi 'r come level. I; there is a much larger or,,aunt of 1,10110,7 spent for life incur.moe to ^ insure future Income for the dependents of the insured. The complexity of this str -ted bp un e x a m l e of how loot: at th.S' t; _e of •nu.lpsis rv.p be 7. rtiallg do. >n(in the writer's mind) a 1 rr f,: lip m up r elationshi ps . 1 It aj.ild a falrlp s 1: hie -'0 or. a marry Laivi os a -nnual income c n be expected. true of :no dairy farms of tt»e northeast. iven s This is pm-ticuli rig This income flow is divided among several areas; ... lar e part goes for productive r/pensesj some is alloc ;.tnl -'or fined e.xr enses such payments , and the rexiiainde r probably sx/ed. "s taxes, interest, oes for family living. 'mb principal Any rsiti?.! is A priori reasoning and ooservubion of farming oper­ ations v/ould indicate that once an income level has been established, expenditure patterns are relatively constant. This may be particularly true in regard to family living expenses, for once ■ family' becomes accustomed to a given standard of living, it is very difficult to adjust downward to a lover standard. Keynes has said, "For a. man's habitual standard of life usually has the first claim on his income, and he is apt to 3 a.re the difference vfich discovers it 3e31 between his actual income and the expense of his habitual standard; or, if lie does adjust his expenditures to changes in his income, he will over short periods do so imperfectly .1,17 Should income fall, then within certain ranges family expenses will remain fairly constant and. 'he difference in exp end it ure , barring any jnoney available for savings, will occur in productive expenses. Therefore, if this analysis is valid, with no increa.se in income the family which takes oat a now life insurance policy has the alternative of either decreasing the standard of living by the amount of the premium or decreasing expenditures for productive (income-producing) items. If the ? bandsrd of living is fairly stable, the additional expense of the life insurance policy might be assumed to come from that allocated to productive expense. Since .leereasing the expenditure for inc orro- pro du cin g inputs is likely to adversely affect future production end future income, one night assume farmers would be reluctant to increase life insurance coverage, unless, of course, there was an earlier increase in farm income. This theory would seem to be substantiated by data quoted later in this study which indicates that while 90 percent of those farmers surveyed planned no future changes in their life insurance programs, 60 percent ■would buy more life insurance if incomes were to increase by 25 percent, -while 38 percent v/ould decrease their present life in­ surance coverage were incomes' to decrease by 25 percent. It should be recognized that there are no empirical data to show what farmers actually have done as incomes changed. The figures quoted indicate only how farmers state that they would act under these circumstances; ^ John Maynard Keynes, The General Theory of fvmioymcnt, Interest and Money (New York: Her court Brace and Company, 1935). 36 however, in studies of this type it is common to accent such statements as indications of actual behavior under the given conditions, recogniz­ ing the chance of error. It would appear from this that there is a marginal relationship between income level and some types of insurance purchases. That is, consumption of insurance may be more closely related to changes in the level of income than it is to the actual level of income at any given time. This reasoning does not explain why the farm family experiencing an increase in income decides to spend a portion of this increase for life insurance premiums rather than for other consumer goods. This is particularly true as it applies to insurance on the farm operator. Utility theory pictures the operator weighing the utility of one alternative-^-—present income— against the second, alternative— future assured income— and choosing to insure. However, in the case of life insurance, the owner does not expect to collect on the policy himself, except in the case of those types with high cash values. To purchase temporary life insurance under the utility nia:cimization theory, one must assume that the operator gains satisfaction not from expecting to enjoy the benefits of the insurance himself, but from the realisation that the needs of his .family will be met and/or the firm may be better able to continue. His motivations are not ego-centered. On the other hand, the operator who purchases endowment or limited payment insurance might be assumed to include in his utility maximization calculations 37 the expected, utility which he would receive were he to live long enough to collect on the policy. While it would be nice to assume that the farm operator bases decisions to purchase insurance on a well-defined analytical process, the writer is more inclined to the view that actual purchase of additional life insurance is in part a, function of the effectiveness of the salesman, the ignorance of the purchaser, or certain behavioral or "I A habitual reactions .-1"0 Imitation may also be an important factor in life insurance purchases. Xf one applies this same type of reasoning to the purchase of fire insurance, he finds a somewhat different situation. In all probability, when the operator obtained possession of his farm, the physical property was protected by some fire insurance. If the oper­ ator purchased his farm on credit, the financing agency required that the buildings be insured, at least to cover the amount of the mortgage. Thus, the decision facing the operator at this juncture was in all likelihood how much insurance should be carried. However, nearly all operators maintained fire insurance even in the absence of institution­ al requirements. In this case, a loss by fire v/ould directly affect the earning power of the firm and perhaps wipe out a major portion of the firm's capital accumulation. The rational, operator then, might be assumed to weigh the effects of this possible loss of future income against the ■^George Katona, _op. cit., p. li+2, 230. 38 present, income spent to insure against loss and to arrive at a utility maximizing decision. If this is true, variation in coverage among different farm operators can be assumed to be due to differences in the shape of their utility curve; i.e., their subjective risk—preference. It should be recognized again that any decision to increase fire insurance coverage must be made with the knowledge that either pro­ ductive expenditures or the family standard of living must decrease by the amount of the increased premium. This may in part explain why changes in fire insurance coverage lag behind increases in value of the physical property. Another factor which should be mentioned is that a decision, once made, to alter insurance consumption patterns will have a long run effect on other consumption and production expenditures, since the insurance contract is a continuing one. Since it is costly to take out insurance which is later dropped., one might assume that the operators who insure also hold favorable future income expectations. St at ernent of hypotheses. The preceding discussion would seem to raise certain broad questions regarding the analysis of this area of management behavior. These questions in turn will lead to a statement of certain hypotheses which may be tested by an analysis of the data at hand. In view of the interrelationship between firm and household in agriculture, and because of the peculiar nature of insurance, should insurance purchases be analyzed in a construct of production theory, consumption theory, some combination of both, or a modification of one 39 or the other? There is justification for believing that a special interpretation of received theory is necessary if it Is to apply to insurance consumption by the sampled group of farmers. Secondly, if this type of analysis Is to be of value in a policy sense, it is necessary to know if insurance consumption is a result of the normal operation of the decision making process. In other words, when a farm operator takes out a life Insurance policy or increases his fire insurance coverage, are bhe normal processes of decision making carried out; is it a result of a logical weighing of alternatives and the choice of the alternative which will result in some end being maximized? Finally is there a method of analysis sufficiently advanced that Insurance consumption and certain socio-economic variables can be corre­ lated with predictive results of adequate accuracy? Practically all literature on the subject speaks of insurance in a compound sense and makes no distinction between the various types of insurance as to methods of analysis. The writer believes that a clearer undertstanding of insurance consumption patterns and attitudes toward insurance can be gained only by considering the various types of insurances individually, or at least by making two broad classifi­ cations which, for want of better terminology, will be called personal insurance and casualty Insurance. There can be little argument but that individuals differ in their willingness to bear risk or their desire for security. Risk- preference is a subjective phenomena, related perhaps to age, income, 40 education, net worth, and other economic fa.ctors, but for the most part being psychologically determined. There Is also little doubt but that the same individual can rationally indicate both a preference for security by owning insurance, and a preference for risk by gambling, either formally or informally. The Friedman—Savage hypothesis con­ vincingly describes the utility function which will allow the indi­ vidual to take these contrasting actions. Neither the Friedman-Savage analysis, nor any later modifications of it present a method by which these actions may be accurately predicted. Methods of analysis utilizing the Friedman-Savage hypothesis require some definite assumptions as to the cardinal measurement of utility. Because of certain problems discussed below, there would seem to be some question as to this technique and the results obtained from its use. Perhaps a method exists whereby risk-preference of the manager and his reactions to risk or uncertainty situations may be determined without assuming the cardinal measurement of utility. Insurance theory is based on the assumption of rationality of action and maximization of utility. when faced v.lth a what ought to It infers that the individual, problem (a conflict between values of what isand be) goes through the decision making process of obser­ vation, formulating alternative courses of action, quences of a given course of action, deciding and bearing responsibility for this decision. analyzing conse­ on a course of action, The theory Infers that the individual maximizes his satisfactions (utility) as a result of the decision, and while it does not state, it also infers a self-centered 41 type of maximization where the individual's satisfaction is the only relevant goal. Although the theorist v/ould undoubtedly claim that the theory must be and is general enough to cover all cases, it is the writer*s opinion that it does not adequately explain the realities of insurance consumption. The maximizing problem in insurance purchases is not solely one of self-satisfaction, but must consider an inter­ related network of firm—household, must consider present income—future income, and self—family conflicting values. It would also seem reason­ able that decision making in many insurance purchases Is strongly modified by institutional requirements or desire for social acceptance. Certain insurance consumption may also be related to group behavior. Based on the above discussion the following hypotheses are suggested for testing in the sections that follow: 1. To be meaningful in explaining consumer behavior, insurance theory must distinguish between at least two broad types of insurance coverage; personal insurance and casualty insurance. 2. Apparent irrational actions of fIrm-househcld units in insurance consumption can be explained by recognizing the importance of non-economic social or institutional factors. 3. A large part of present insurance cover y e or future insurance consumption is not a product of the decision making process as it Is commonly defined. 4. A manager's attitudes toward insurance or his riskpreference can be satisfactorily predicted by some method other than the cardinal measurement of utility. This method must recognize the complex firrn-household interrelationships, along with the intertemporal considerations. It will be based on a concept of maximization of satisfactions, but will be more than the ego—centered type of maximization inplied in normal utility analysis. Insurance consumption may be a function of changes in Income rather than present income or net worth levels. Ignorance of Insurance principles is costly to farmers of Vermont, both in terms of money and unnecessary mental CHAPTER III THE FARMERS AND THEIR FARMS CHAPTER III THE FARMERS AND THEIR FARMS Historical background. The purchase of insurance, unlike many other farm expenditures is closely associated with the value system of the individual concerned. The willingness of the individual to assume risk, or conversely, his desire for the security afforded by the insurance scheme, is a very important factor in insurance consumption. The ethnological background, predilections, and. psychological make-up of the person affect attitudes toward insurance programs and the result ing acceptance or rejection of the program. Because these subjective values are influenced by environment and tradition, it is desirable to discuss briefly the agricultural development of Vermont. The people who first settled Vermont, in the m i ’die and latter part of the eighteenth century, were chiefly of English origin. They cane mainly from Massachusetts, Connecticut, and New Hampshire, where their families had already been established for two or three gener­ ations . By 1790, the population numbered 65,125 of which the English element constituted about SI,200 and the Scotch element about 2,600. 19 7 The population of Vermont has been continuously augmented by immigration from other states. As already stated, in the early years, these people came from the other New England States, but after IS 50, more and more have emigrated from New- York and states farther west. "^Vermont Commission on Country Life, Rural Vermont (Burlington: Free Press Printing Company, 1931);, P* 11 • As might be expected in an inland agricultural state, the pro­ portion of foreign born residents in .Vermont has always been relatively lovr. According to the 1950 Census, 8 percent of the population of the stale were foreign born* On the farms, the greater share of the foreign born are French Canadian who have emigrated from Quebec. Vermont can be properly classified as a rural state, and xvhile the percentage of rural population is decreasing, it will probably remain rural for many years to come. Total population in the state has increased just over 6 percent in the last 25 years, while population in the United States has increased 13 percent. Rural population in Vermont as a share of total population is now 64 percent, a decrease of 4 per— cent in the last 25 years. 20 Like the trend throughout the country, the number of farms in the state is steadily decreasing. of 16 percent. Since 1930, there has been a decline According to the 1954 Census of Agriculture there are 15,981 farms in the state, three-fourths of which can be classified as commercial. Of the remaining 25 percent, 16 percent are residential and 9 percent part-time. Many of the commercial farms are small, with 21 nearly 50 percent having gross incomes less than 55,000 in 1954 * Alt hough this was not always so, the agriculture of Vermont is now based primarily on the dairy cow. The history of its agriculture 20R. H, Tremblay and V. R. Houghaboom, Agricultural Trends in Vermont (Department o f 'Agricultural Economics, University of Vermont, Burlington, 1955)* 45 is a record of changing conditions, resulting in major shifts in enter­ prises and in the economic status of the people. Early agriculture was on a. bare subsistence basis, and an early source of income was from the sale of potash and pearlash, by-products of the land-clearing oper­ ations. As land-clearing proceeded, grain production took over to a large extent, particularly in the Champlain Valley. However, this was / primarily a transitory phase in the agricultural development of the state, as disease, unfavorable weather, and competition from western New fork made grain production unprofitable. The sheep industry experienced a brief period of glory from 1820 to 1840, due to high wool prices. In the Champlain Valley wool pro­ duction became the most important agricultural enterprise, and It was claimed that in the late 1830 's this was the foremost sheep and wool producing region In the United States. The development of the famed Vermont Merino added further recognition to the state. However, with low wool prices In the 1840's, came another shift in the state's agriculture, this time to dairying. The opening of the railroads in the state and the invention of the cream separator were important developments which made Vermont one of the leading butter and cheese x^*°ducing areas of the late 1800's. In the early 1900's, the fluid milk industry came into its own and more and more of the milk produced In the state went into fluid uses, until today practically all of the r.dlk produced in the state Is sold as fluid milk. 46 Evidence of the importance of the dairy industry to the state is shown in Table I. TABLE I DISTRIBUTION OF GASH RECEIPTS ON VERMONT FARMS, 1956 Commodity Percent of state total Value “WTSooT Dairy Milk and milk products Calves and cull cows Total dairy 76,063 7,532 S3,595 69.2 . 6.9 76.1 Poultry Mis c ellaneous Forest products Maple products Fruit Potatoes Truck crops Other meat animals Greenhouse and nursery Total 11,710 3,251 3,233 3,039 2,347 364 735 652 .. 440 109,366 10.6 3.0 2.9 2.3 2.1 0.3 0.7 0.6 0.4 100.0 Source: _ Agricultural Marketing Service. About 63 percent of ell land is in farms, the average farm size being 203 acres in 1954* Among commercial dairy farms, the average farm has 24 cows; however, 60 percent of the farms with co*ws have less than ly. Vermont farmers have most of the conveniences of their unban neighbors. Ninety-seven percent of the farms have electricity and 47 75 percent have telephones. Around 3S percent had television and nearly one—hall’ had home freezers in 1954 Eftact on values. the frunners This brief description of the background of aid of agriculture in Vermont is designed to provide an insight into the f oundations of the value systems of Vermont farmers.'''^ There are dangers for the untrained person in trying to enumerate or describe the values of an individual or group of individuals. One of these dangers is the possibility of at tribe ting to the 5_ntervi ei-fee, values which the enumerator may feel he holds important, but which in fact are far more import c.nt to the snunier.rtohimself than to the respondent. There appears to be very definite correlation between the actual belief that a thing is true or untrue and fie desire that it should be true or u n t r u e , ^ It should be evident that values held by farmers vill be con­ ditioned to a significant degree by their environment. Rural living, for example, .is different from urban living, ar. 1 rural maople hold 22-r-, . , Io m . eg -VA »•belief" is here defined as a conception of reality as it is based upon a person’s experiences, his study and recsoniir , This con­ ception may bo true or false, but it is ultimately possible to prove empirically that it is true or false. A "value” is an individual’s conception of how reality con be improved— of -hat ought to be. It is an opinion of an individual and may continue to be held by him even tncugb in the opinion of every other person this opinion is wrong. Each person has a set of values, some of v/hich may be conflicting or inconsistent. Values are generally "ends” as compared to "means to ends." ^ S . H. Britt, Social Psychology of Modern Life (Mew York: Rinehart and Co., 1941;• 48 different values regarding the basic fundamentals of life. And \jithin any rural society there can be diversified values; for example, those held by the older generation as contrasted to the changing values of the new generation. The older society held self—suftieiency to be a goal, ana any remaner: tion was d ue grinr .rily to hard v:ork and shrewd farming practices; in trie nevrer s o d -ty men live by matching wits a.gainst men• The fact that the farmer is closely asociated with nature and is dependent on its forces, conditions his value system and / makes him realize that his future security is dependent to a large extent on natiiral forces beyond his control. There has been a decided emphasis on the practical and the necessary in rural areas. Cash expenditures have generally been for productive items; however, the trend toward consumer expenditures is gr o;r±ny in r c cen t ye a c s . Kith the increasin; cy.italizotion repaired to ret into farming has come s. change in values with regard to band ownership as an 'ulti­ mate .oil. Until recently the farmer had looked to land ownership for sec’irity, r-ather than to endowments, ennuitd.es, or pensions. There is evidence that this value is changing. One goa.l which ir.ost farm families apparently hold is the desire for security. Although one of the more important goals of rural people, it is generally one of the more difficult to obtain. There are several factors contributing bo insecurity and/or physical uncertainty in agri­ culture. Among them ore price variation, both for inputs and output, )O yield variation as affected primarily by t>e .. .her, and loss from cata­ strophic disasters such as floods, drouth, hail, and wind. The majority of Vermont farmers are veil isolated from uncer­ tainty proclems of this type. the state. Catastrophic disasters are uncommon to With milk as the major source of income, they arc much less dependent y o n the weather than are croc farmers. Their product is sold in regulated markets and is much less subjnet to price fluctu­ ations than are most other commodities. Prices can be predicted quite accur' tely for six months to a year in advance. Their main expense items are hired labor and concentrates; items v.hich io not fluctuate excessively in price. All this contributes to a more stable type of agriculture than is found in many sections of the country. There is reason to believe that because of the stability of agriculture in the state, the Vermont farmer may be more naturally cautious than is the farmer in the cash crop areas, for example. The stability of his farm­ ing enterprise makes him less willing to gamble or take undue risks. Characteristics of s.ample farms. is has already been explained, the sample of 220 farmers vus drawn from a population of 15 ,064 f^rms for the state as a whole. The farms were selected randomly, the only attempt at stratification being to maintain proportional distribution in each of the 14 counties in the state and to keep approximately the same number of farms in each sice group. Over three—fourths of those surveyed were full-time farmers, earning their entire income from the farm. Nine percent earned the major share of their income from the farm and 11 percent earned the 50 major share off the farm. Just under 2 percent were retired or dis­ abled . Tenancy is very low in Vermont. Over 97 percent of those sur­ veyed owned their own farms, and of those renting, all hoped to own eventually. About 43 percent hoped to increase the sice of their farm. Only 20 percent of the farmers were veterans, three-fourths of whom were veterans of World War II. The mean cage of all farmers was 47.5 years. No farmer in the sample was under 20 , 30 percent were between 2.0 and 40 years, 49 percent between 40 and 60 years, and 21 percent were over 60 ye rs old. Over half of the families were composed of man and rife end minor children. Just under 15 percent .ere man and wife alth no children, and just over 3*6 percent 'mere a single male or female. Some 13 percent of the farms were operated a.s a father—and—son combination. Family size varied from 1 to 10. The mean size family was 4.1 but the modal family size was three persons. Any attempt to measure educational level has its shortcomings. In a study of this kind years of formal classroom education is usually used as a yardstick; however, this measure presupposes that the learn­ ing process coases 'when the individual leaves the classroom. Certainly this would not be the case in agriculture where experience Itself is the greatest teacher. Hovrever, it is necessary to use some measure of educational training, and years of formal schooling is the best avail­ able . 51 For the farmers surveyed, years of schooling ranged from none to 21*. There was a very decided bi-modal frequency di str ibut i on , with peaks at eight years and 12 years A third of the farmers had eighth grade educations and 29 percent had high school educations. eight percent had a high school education or better. had the equivs.lent of a four—year college degree. Thirty- Only 5 farmers The mean educational level vse l s 9*3 years. The farmers were requested to give their Income for the calendar year of 1953 (the full year previous to the date of the survey). The income requested was net farm income as reported for income tax pur­ poses. Table II b elow summarises income as determined by the survey. TABLE II NET FARM INCOME BY SIZE 0B0UPS, 1953 Size group Cows .1-11 12-19 20-29 30-39 10+ Average 30- 1,500 A 1 .6? 51.06 30.11 12 .<36 11*59 31.37 Net farm income 01,501-3 ,000__33^001-5j_000. P e r c e n t 36.11 21.62 50.00 21.13 29.16 23.21 22 .2.2 21.62 17.39 21.13 29.16 22.56 . 35j 001+ 2.70 2.17 11.23 15.03 11.36 100.00 100.00 100.00 100.00 100.00 100.00 25 With high schools located only in the larger toons .and only eight years of schooling available in all other towns, it v u g a f. irla­ common practice to leave school at the completion of the eighth grade. This was particularly true of fan :iers' sons who were needed to help with chores and general .firm v-ork, Nova, with better roads and trans— portation, a far greater percenter re of farm youths are completing high school. It is interesting to note that less than 8 percent of those sur­ veyed felt that farmers were experiencing prosperous times, even though over 65 percent had net farm incomes of over fl,500. However, this can be explained in part by the fact th-jf milk prices in 1953 averaged 60 cents lower than for the year 1952.^ The index of Vermont farm products prices had fallen 13 points from the preceding; year, while the index of costs of dairy farming had decreased only 13 m i n t s . Vermont farmers we ve also talcing a dim view of the future in that only 9.5 per­ cent felt that farmers would have pood economic conditions in the next year or two, while 10 percent predicted bad. times and 13 percent saw no change. Six-tenths of the farmers claimed to be worse off in 1953 than they were in 1952, and 65 percent expected to be no better off in 1951. Attitudes. In order to better understand the values held by the farmers surveyed and he vain greater insight into the dynamic factors motivating them in insurance consumption, certain questions were asked reg....rding thoir attitudes tovrard insurance and related factors. such question concerned their feelings shout price sup-sorts. interesting to note that 37 percent of price supports of -any kind. One It is 11 femmers surveyed opposed Of those favoring price suppor to, exactly one-half favored flexible s u p ports, while 23 percent favored a 90 per­ cent support level. Educational level was more significant in influ­ encing opinions toward price supports than other factors. Of those Of\ Economic Handbook (Burlington: Vermont Agricultural Extension Service, Department of Agricultural Economics, University of Vermont). ■with more than high school education, 52 percent opposed price supports, while only 28 percent of those with eighth grade education or less opposed them. One interesting statistic is that 82 percent of all farmers surveyed felt that Vermont should have a compulsory automooile lia­ bility insurance law. Only 36 percent recognized that such a law would probably result in increased premiums. Nearly one—third felt that such a law would decrease automobile accidents. Tc'JBLS III FUTURE EXPECTED INSURANCE PURCHASES Type of insurance______ Garry more Life Auto Fire, liaoility Accident andhealth Carry loss____ No change P e r c e n t 3.23 6.82 12.33 5*96 3-69 2.27 1.37 1.38 89.86 87.27 84.93 82.57 Undecided 3.22 3.64 1.37 10.09 Data concerning expected purchases of insurance in the future are summarized in Table III above. For all types of insurance, well over 80 percent of the farmers surveyed expected to make no changes in their program. Effect of income changes. In an attempt to gain some idea of the relation between income changes and insurance purchases, respondents were asked how changes in income would affect insurance consumption. Table IV below reports on these findings. 54 TABLE IV EFFECT OF INCOME CHANGES ON INSUh.LCS Cu NSUMPTION Change in Insurance consLLTi.ption Change in income________ Buy more __ ____ Undecided_______Decrease or drop P e r c e n t 10% 25% 10/6 Y% 50% increase increase decrease decrease decrease 30,5 60 .5' 2.7 1.3 0,4 2.3 11.6 30*0 59.7 In ‘this respect, it is interesting to note from Table III that over SO percent of all farmers expected to make no changes in their insurance programs. However, when they were asked what changes they would make if incomes were to increase or decrease by certain specified amounts, many more indicated that they would increase insurance cover­ age with increases in income, decrease coverage with decreases in income. This would tend to substantiate the marginal aspects of insurance purchases; that is, purchase of insurance is more closely associated with changes in the income flow than with the level of income. Among the factors of age, education, number in the family, and income level, number in the family seemed to be a more important factor associated with changes in insurance with changes in income. Kinds purchased or dropped. From those respondents who indi­ cated tnat they v/ould increase or decrease insurance ownership, on attempt was made to determine vdiut kinds of insurance would be 55 purchased if incomes increased; what kinds dropped with decreases in income. Table V below summarizes this Information. TABLE V KINDS OF IKSUA.t G i PURCHASED 01 DROPPED m3 EFFECTED 3Y CM .A'IAS II5 IliCOkE Kind Incre. <.se^ in income Dec r c m e in income Percent Percent ____________ increusiny ovmershi p ___ decreesing ovm orship Life Auto Fire, theft, liability Accident and health No change Total ____ 29.54 31.02 4.54 5.20 16.36 16.32 10.91 4.54 33. 65______ ________ ____ 41 .32 100.00 ' 100.00 As the table indicates, life insurance is the most variable, both as to increases and decreases in income. This is in line with the general theory which considers the casualty types of insurance 's more or less "must1* policies in the farm insurance portfolio, while life insurance as the luxury item of the program. As might be expectc 1, youhg farmers (those under 40 ) would have purchased more life insurance had income increased. Those farmers over 60 would havs spent their increased insurance dollar mainly for increased automobile and accident and health coverage. If incomes were to decrease, more younger farmers would have dropped or decreased their life insurance, than would older farmers. The older farmers would have tended to decrease fire insurance coverage. 56 Life insurance as savings. In ito second survey, only 9 out of 42 farmers questioned listed the savings feature -s one of the reasons for buying life insurance. In the original questionnaire however, formers were asked whether or not, in their opinion, life insurance was o.s good 0. me thou of soring money as a s w i n g s account or as government bonds. In answer to this question, 61*5 percent felt 1:1fe insr.ro.nce to be as msod a method of saving as 0 savings -account and 53*7 percent believed insurance as good as governmsrt scarings bonds. Many farmers recognised that life insurance was a method of "forced" savings, in that the policyholder is billed periodically for the premium. This they felt to be an advantage over "voluntary" savings via savings accounts or government bonds. Importance of agents ♦ The local, agent is on important person to the farmers 1 insurance programs, lien asked what they would do if they desired more insurance coverage, 34 percent of the responients indi­ cated that they would contact or. agent. The importance of the local agent Is due in part to the fact that he is usually a neighbor, often a trusted friend. In many smeller communities the local --.'.gent may handle several types of insurance; In fact, some agencies are attempt­ ing to carry a full line of Insurance to meet the complete insurance needs of their clients. Some of these a,gents are doing a creditable job In planning the over’—all form, insurance program. Despite the importance of the local agent, almost h l f of the farmers surveyed felt that most insurance agents knew less about the kinds and ounounts of insurance that a farmer needs than the farmer himself. Nearly 50 percent of those surveyed had purchused property insurance (lire, theft} liability^ automobile) from three or more different a r n t s and nearly 45 percent purchased their life insurance from more than one agent. Probably t- c insurance consumption of farmers is influenced by the actavitios ■nd p e m o c i v o n e s s of the agents. measure p. a n fit -atively how im; .01 ■tent a Thero is no way to variable this salesm .unship is, but 1 1\sr-e is Initio guestion but th" t it is an important factor, An a.btern,at wa.3 nm ’o to rna’-'e a ouanhilusive me .surement by deter, lining the number of times the respondents were contacted by a gents in ihe previ­ ous year♦ About 54 percent of the farmers ho 1 not been contacted by an insurance agent on -a sailing inoervie ore single time*• percent hr a been cont scted three or i ore times. As woall Another 10 be c::;.ect^d, a 1.3 of the f rmer ’r,s an import an t fact or in determining m.s attractive­ ness to insuraaioo salssaen. about 7 out of 10 of the farmers under 40 bad been contacted bp an insurance agent, but a out of 10 of those over 60 years of age hoi net been. In f ■ct, a. 0 TTas the only variable of any si miiicanci In determining ado was contacted • Summary. In this chapter an attempt has been made to enumerate some of the characteristics of the farmers surveyed which would be expected to influence their value systems end thereby effect their incur*oi-ico consumption patterns. It should be repeatedly stressed that attitudes towar 1 insuranco, motivation9 and, the d e c 2. si.on—making r rt go complex subjective factors. Attempts bo explain insurance purchases in terms of one or t w o . or even a limit ed few of those vo.rio.bles are live­ ly to ;;rove frustrating and fruitless. CHAPTER 17 LIFE INSURANCE CONSUMPTION PATTERNS CHAPTER XV LIFE INSURANCE CONSUMPTION PATTERNS Life insurance is different from other types of insurance in one major respect; the event insured against is sure to come, only the time and cause is uncertain. In buying life insurance the purchaser is gambling that he will die before the expiration of the policy if it is term insurance, or before the accumulated premium payments total the face value if it is permanent insurance. Through life insurance the insured can replace an uncertain future income for the family unit with a certain one. By so doing, he provides for the payment of a certain definite sum of money at death or at the maturity of the policy to replace his economic value if deceased or to provide income if retired. As with other types of insurance plans, the insuring company operates on the principle of the "law of large numbers;" by knowing mortality rates the company can determine actuarially the premiums required to meet the costs of the plan. Why insure? The original purpose of life insurance was, and still is, to provide protection for survivors. From a family and business standpoint, all lives possess an economic value which may at any time be eliminated by death. The basic purpose of insurance is to protect survivors against the loss of this income. In addition to protection for survivors, permanent types of life insurance provide a means of saving. With many of these policies, the insurance can be cashed in when it is no longer needed for survivor 60 protection. In this respect, insurance provides security for survivors against dying too soon, and security to the policyholder against living too long. Ownership of life insurance by farm, operators. For purposes of analysis, the sample of 220 farmers was divided into five different size groups, based on the number of animal units per farm.^ The data will be analyzed largely in terms of these five size groups. Table VI below shows the numbers and percentages of farmers with life insurance by size group. The 75 percent coverage of Vermont farm operators compares quite favorably with figures released by the Institute of Life Insurance for the United States. This source reported that 74 percent of the adult male population of the country owned life insurance of some kind in 1955* They further reported that according to their survey only $2 percent of the farmers of the country 27 As previously stated, in a highly specialized dairy area such as Vermont, animal units per farm is one of the best measures of size available. The size groups were as follows: Group I, 1 to 11 animal units; Group II, 12 to 19; Group III, 20 to 29; Group IV, 30 to 39; and Group V, 40 units and above. An attempt was made to get 40 randomly selected records in each size group, however, the actual number varied from 35 to 56. From a statistical inference standpoint, the complete sample of 220 should not be looked upon as representative of all of the farms in the state, since the number of records taken in each size group was not proportional to the total number of farms in each group. The sample farms in each stratum is representative of that stratum, however. Table XLII, Appendix, shows the proportion of farms sampled in each size group. ^1956 T.ife Insurance Fact Book (New York: InsuranceT* Institute of Life 61 were insured. However, aggregate figures as to numbers with insurance tell only a small part of the story. More interesting is the distri­ bution of insurance by size of policy. Table VXX gives the distri­ bution by total amount of coverage of farm operators. One should note that in the two smaller size classes, 68 and 78 percent of the oper­ ators owned less than $2,000 of life insurance; in fact, 40 and 52 percent in each of the groups respectively owned only $1,000 or less in life insurance. Of those farmers owning $10,000 or more in life insurance, nearly all are in the three larger size groups* TABLE VI NUMBERS AND PERCENTAGES OF FARM OPERATORS OWNING SOME LIFE INSURANCE BY SIZE GROUP Group I II III IV V All farms Number of farmers Number with life insurance 42 37 50 35 56 220 30 27 34 30 44 165 Percent with life insurance 71.4 73.0 68.0 85.7 78.6 75.0 The data indicate a fairly high correlation between size of farm and total life insurance owned by the farm operator. 297 This would The actual coefficient of determination (r ) was 0.578 a-nd the simple correlation coefficient (r) between farm size measured in animal units and total face value of life insurance on the operator was 0.76. All correlation coefficients are determined by simple correlation analysis and unless otherwise noted are significant at the 5 percent level. 62 seem to substantiate the belief that ownership of life insurance is in part a function of income or income-earning ability. TABLE VII TOTAL AMOUNT OF LIFE INSURANCE ON OPERATOR CLASSIFIED BY SIZE OF FARM Amount of life insurance 1-11 No insurance'* $ 500 or less 501 - $ 1,000 1,001 1,500 1,501 2,000 2,001 3,000 3,001 4,000 4,001 5,000 5,001 7,500 7,501 - 10,000 10,001 - 15,000 Over $15,000 Total 28.6 — 40.0 6.7 20.0 10.0 6.6 10.0 — 6.7 — — 100.0 Size in number of animal units 12-19 20-29 30-39 40 and over All farms Percent of farmers with insurance 27.0 11.1 40.7 7.4 18.5 — 3.7 7.4 3.7 3.7 3.8 — 100.0 32.0 2.9 17.6 — 11.8 17.6 — 14.8 20.6 8.9 2.9 2.9 100.0 14.3 6.7 20.0 10.0 3.3 6.7 6.7 13.3 20.0 10.0 3.3 100.0 21.4 — 11.4 — 4.6 20.4 2.2 27.3 6.8 15.9 9.2 2.2 100.0 25.0 3.6 24.2 4.2 10.9 12.1 3.6 15.S 10.3 9.7 3.6 1.8 100.0 -*As a percent of all farms in the group. Table VIII shows the number of policies and average size of policy owned. The actual number of policies owned varied from 1 to 5, with two farmers each owning the larger number. policies owned was 1.7. The average number of For all farmers owning life insurance, the mean value of insurance on the breadwinner was $4,196. This series ranged from a relatively large number of farmers with single $500 policies to one farmer carrying life policies totaling ::p28,000. Because of the popularity of $1,000 policies and the few farmers with relatively high coverage, the median is in many respects a better measure of the average face value of insurance owned than is the 63 arithmetic mean. However, since most statistical tests are based on the mean, this measure of central tendency will be the statistic most often referred to. TABLE VIII NUMBERS AND AVERAGE FACE VALUES OF LIFE INSURANCE POLICIES OWNED BY FARM OPERATORS, CLASSIFIED BY SIZE Group Total Average number of Number Number number of of with policies policies per farmers insurance owned insured operator I II III IV V Total 42 37 50 35 56 . 220 30 27 34 30 44 165 45 32 64 50 S3 274 1*6 1.2 1.9 1.7 1.9 1.7 Face value per insured farmer Median Mean $2,470 2,417 4,602 4,665 5.832 4,196 Factors affecting the amount of life insurance■ owned. $1,875 1,050 4,000 4,000 _ 5,000 3,000 Income , age, education, family status, and social standing are variables commonly mentioned as affecting life insurance ownership. It has already been shown that size of farming operation (a fairly reliable measure of income) is significant in explaining in part the variation in ownership of life insurance. A somewhat similar, although not as close, relationship exists when age is considered as the independent variable.^ As shown in Table IX, while a much higher percentage of young farmers (20-39 years) than of the other age groups had some life -^Correlation between age and total face value of insurance on farm operator; r^ = 0.173; ** = 0,41* 64 Insurance coverage, the amount of coverage was smaller than for those operators in the 40-59 year group. Some 84 percent of those from 20 to 39 years of age had life insurance coverage of $5*000 per operator or less. In the 40 to 59 year group, nearly 20 percent had life policies whose face value totaled over $5,000. Exactly half of those 60 years and over had no life insurance, and those with insurance had $5,000 or less per operator. TABLE IX DISTRIBUTION OF LIFE INSURANCE OVTIERSHIP OF FARM OPERATORS BY AGE ...... Total face value of insurance owned Age 40-59 (108 farmers)__ 20-39 _ (60 farmers) —— -— 60 and over (46 farmers) P e r c e n t None"*r $ 500 or under 501 - $ 1,000 2,000 1,001 3,000 2,001 5,000 3,001 7,500 5,001 7,501 - 10,000 10,001 - 15,000 15,001 - 20,000 Over $20,000 15.2 5.4 21.4 19.6 12.5 25.0 10.7 5.4 — — — 100.0 ____ 20.4 4.6 26.7 12.8 12.8 25.6 4.6 4.6 4*6 2.4 __ -1.3. 100.0 50.0 4.3 60.9 — 8.8 26.0 — — — _ — — 100.0 *As a percentage of all farms. The relationships between age of operator and total face value of policies is as one would expect. Younger farmers with dependents are conscious of their need for family protection and are utilizing insurance to meet this need. However, because they are not fully 65 established in farming, they are limited in the amount which they can invest in family protection. This limitation is imposed by the necessity of retiring mortgage debt and improving their equity position. Consequently, the average coverage is less than for farmers in the middle and older age groups, even though a higher percentage of farmers in the younger age group are insured. As has been discussed before, using years of formal educationas a measure of educational level is not entirely satisfactory, since it assumes all learning ceases when one leaves school. only measure readily available. However, it is the Table X illustrates the relationship between years of education and life insurance coverage. TABLE X OWNERSHIP OF LIFE INSURANCE BY FARM OPERATORS AS RELATED TO YEARS OF EDUCATION Amount of insurance None to 8 Years of education 9-12 13 and over 96 103 21 Number of farmers P e r c e n t None^r $ 500 or under 501 - $ 1,000 1,001 2,000 2,001 3,000 3,001 5,000 5,001 7,500 7,501 - 10,000 10,001 - 15,000 Over 15,000 Total *As a percentage of all farms. 43.6 9.1 41.6 10.9 20.0 I6.4 1.8 — — — 100.0 46 .8 2.2 27.8 15.6 5.6 32.2 6.7 4.4 4*4 1.1 100.0 9.5 5.3 5.3 10.6 21.0 21.0 21.0 15.8 — — 100.0 66 It is interesting to note that 82 percent of those with eighth grade educations or less had '£3*000 or less in insurance. On the other hand, over one—third of those farmers with some formal education beyond the high school level (grade 12) had $5*000 or more in life insurance. It is also noteworthy that all of those farmers with policies totaling over $10,000, were in the middle bracket (9-12 years of schooling). Education may be a positive factor in life insurance consumption,*^ but is less important than some other factors. If the breadwinner is to provide adequately for his dependents in the event of his death, he must carry more insurance as the number of dependents increases. Table XI illustrates the relationships between size of family and amount of life insurance owned. As is indicated by the table, all insured families of one or two persons had $5*000 xvorth or less. However, nearly 40 percent had no life insurance. The operators with the larger families tended to have less insurance on the average than did those with 3—5 members. One possible explanation for this is that many farmers feel that the amount available for life insurance should be spread out over all members of the family. If there is a limited amount which may be spent on insurance premiums, this practice of insuring all members of large families means that average coverage on those farm operators with large families will be less than for those operators with fewer dependents. The correlation -^Correlation coefficient for education and total life insurance on operator = 0.12. 67 between size of family and insurance on the operator was very low (0 .06 ), and was not significant. Social standing or "style of life" has been suggested as a variable affecting life insurance pur chases.^ Measuring sociologi­ cal factors presents problems not faced in measuring or correlating strictly economic variables. Many of the measures must be highly subjective in nature. TABLE XI AMOUNT OF LIFE INSURANCE CARRIED a S AFFECTED BY NUMBER OF DEPENDENTS Amount of insurance Number of families _______ 1 or 2 42 Number in family_____________ 3-5_________ 6 or over 134 44 P e r c e n t None/r $ 500 or under 501 - $ 1,000 1,001 2,000 2,001 3,000 3,001 5,000 5,001 7,500 7,501 - 10,000 10,001 - 15,000 Over $15,000 Total 36.1 — 42.3 23.1 30,8 3.6 — — 100 ."0 ~ 20.9 4.7 29.2 13.3 9.4 24.5 7.6 6.6 2.8 1.9 100.0 25.0 9.1 21.2 12.1 24.2 2A .2 6.1 3.1 10O.0 *A 3 a percent of all farms in group. -^Simon Dinitz, Insurance Consumption Patterns (Research Depart­ ment, Nationwide Insurance Companies, September, 1955), P- 16. "This interpretation stresses that life insurance consumption patterns reflect the value orientations and 'styles of life 1 of persons and that these value orientations are in turn'largely a function of their socio­ economic statuses or positions. This suggests that a person’s outlook 68 One approach used vus to select from the sample <-11 f-uwors ■.>£ loreign ancestry. Of the 220 rangers, 43 records \ are so selectai, most of whom vjcre French-C.xaadian, These f wa s were compared with the whole sample on certain factors as shown in Table XII. The ii hhrence in moan values for life insur mce ownership is 3481, which, when tested by means of signifleant differences,33 proved to be hi lily si -nificant at the 5 percent level. It would s sew a s a fe assumption, in lldrt of these tests, to state that those farmers of foreign ancestry tend to carry less insurance on their own lives than do the avei-ape of .all farmers in the sample. Dinits,34 in a preliminary analysis of some of these data, emphasized strongly the importance of socio-economic variables as predictors of life insurance ownership. In order to farther test this hypothesis, in the second survey an attempt was made to mea.sure social and his values determine his insurance behavior and that he holds these values primarily by virtue of his status position in society. "Various studies have; indicated that 'differences in education, occupation, wealth, powder, family background and resilience lead to the formation of status or prestige groups. These groups cons is tently display different forms of conduct, have different attitudes, values, tastes, aspirations and consumption patterns, all of which may be subsumed under the term 'styles of life.'" ^ B a s i c formula for testing tv.ro means for significance: X X (fd = V/p:-!i” +~A to | I I I o 'O H P p oi o p t p-d P co oi o • • • • Ci — I P— — c f C " — I I I I I o Oi to p HD o ( —i a B o o o • • 'P. 3 £ t? -1 o d O ] • • • • * * sa CD P P *H o rC p •H inj i—i C.Q H H CD O IH P >H P P ^ I O Pa o i- s aj -P o P p P £H Q H ^ *d P N Pi CO I rH r-q P fH CD p P P 3s CD P-, r—f" u CO *d CJ p, TOj Oi p p- p p o a-' to h d co I i toi p CO c\> I I I Io o CO 00 -co o cP O i| I I I I I CD O r—I 02 r p- p -h co p rH t O r H i—I O * o o I co I p i «=: £ Icj P P a? !d c o CO. *0 O to 1-0 >A CO (M O OJ (M W IP i— t to i— I i— I i— | I—I cn OJ > ■i—f S P Ol 1 p •H XI o 0 O .c o> ■3 CD] *H pH CD p I p p CD o o i —I i —i toto CO co to CO tO :d CO CO 02 C— i— | C— CO I I I i—Ipi-i —Ii—I P| p p, p, o CD O •H P y p o Pt-t P S CO i— I -H- CO i—I CO P" H5 O I O o p o p o P i -P o «j >-< y &-» -5! pq > p I—I ra d p p I pa ^ Pin P P 1-3 p p P ^ p 1-1 02 0 2 —d* i—I *H (D XI o d CS § S co cc\ CO P CO co • • • • • * Cm O M o d P d £-« n d P rH rH 3 ^3 § (Xi a o » CD o & P PQ P 1— I pa co 02 COl Q

• Oi CD P - H- t o CO 0 2 C\2 c\> p rH co O I oi co C— O O- CO O- -CO I P to HD CO I to H C M P I t p o • Io o p o o o o- CD CD O HD rH O*- Oi I I I I I I o I 1 I oo • «J* u 0 0 0 CD o o ^ o o o o o o t> 8 0 0 0 0 0 to o d H rH cJ I I O OI QI gI pI O O O P _ o o o o O d o o O CD to CD CD O P to O -V O H Oi CO to O- O to 0 p i—Ii—I01 tO C P CO C O C O P -I 02 P P CO C O CO •H HD o o I—I O CD CO O OHD • • # * • CO r i o o co o hd t O O i i—( i—| Oi d o u DO C2 Cl .-) p I —I I —I p 0 CD DO 01 P £ CD CD 80 — r 1 i—1 i—1 cD C O cD P -P CO a rH <|-tO CO CV p O «OH - < 0 0 ? -H- t O I o rH VO CV xi -p ’S C V - U CV O to CD o o •rH rH •H CV ir\vO -j' CV H CV i— I r H CV P r~rf CD * -d- CV \D t>- t"- co o a,-p cD o i—i co \0 \ 0 UO CO CO -HD • CV XO C'' E>- O' H CV C\j O O , H CV uo rH CO rH •rj P CN 0 rH P 1 P O O HD CO CV o H P o o c v r H i— I c v cD EH •H C O rH x O 's O H rH r H 'C O c O o -H* P O -P ctJf CD o I—I O. i P P EH O "Xi P i• O - —I O • t— ! o O-jCA m O Q lA »c\ I O * rH cv I CV 0 0 0 4 0 0 x 0 i — I ■—) CO CV o o rH d P cd t cD -p O E-t P CD a“ I rH •H C O v O O — H D i— I ■ • • • • C O i— I CV i— I C O ■— I C O r H r H :di *H1 a lA C M > O H O #\ r\ rH CV V v O O O O O *\ ** #\ o V O 'd 'p H H a •O O P CD I I O O O O vo O C D P o 23 H-* p P 81 I II III IV V All farms An evaluation of the theoretical model. Average premium per insured family & 89 69 196 192 192 sue Life insurance serves two basic purposes: the protection of survivors through the assurance of a future income in the event of the death of the insured, and a means of savings or investment. For a high income individual, the latter objective may be as important as the formerj however, tor the farmer who traditionally has low farm earnings the investment ieature is far less important. Numerous studies have shown that most farmers can get 82 a greater return on capital reinvested, in the fern than can be earned with life insurance. Therefore, the relevant consideration for farmers in purchasing life insurance should be the protection feature rather than investment. The normal interpretation of utility theory would seem to require modification before it can be applied to life insurance purchases. There are three basic areas of conflict, all of which are closely interrelated. and the family unit. One of these conflicts is between the individual The idea of an ego—centered utility maximization must be reconsidered from the standpoint of maximizing utility within the family as a group. This does not infer an aggregation of the individual utilities of ea.ch member of the family. However, life insurance does not give utility in the normal sense to the individual purchasing it; its utility is measured by the satisfaction received by the insured from knowing that other members of the family unit will have a source of income in the event of his death. A second closely related problem involves the conflict of interests between the firm and the household. It should be recognized that, barring an increase in income, any increase in the monetary requirements of the household will decrease the income available for productive inputs for the firm. The decision to purchase insurance must be made math full knowledge of this relationship. Finally there is a combined firm-household decision as to whether to spend for present consumption or to buy insurance to assure a certain future income. This re—allocation of expenditures must 83 result in either lower present standards of living (unlikely) or lower expenditures on income-producing inputs. This in turn may start a spiral of lower gross income from the farm firm. Some farm ooerators apparently prefer to utilize present income by reinvesting it in the farm firm, probably believing that the future income needs of the family will be more adequately met by this alternative than by purchas­ ing life insurance. The owner of life policies with less than $2,000 total face value would not be assumed to be rationally trying to pro­ vide future income for his family. To him a life policy is probably a forced way of saving to provide a "burial fund." At any rate, the concept of utility maximization resulting from the purchase of insurance must assume the simultaneous resolution of these three inter­ related areas of conflict. A second deviation from the theoretical model is that it does not accurately describe how many farmers actually buy insurance. From observation of ownership patterns and from conversations with farmers, the writer believes that many purchases of insurance involve no such rationalization between present and future income possibilities, but rather are "spur of the moment" or "impulse" purchases. Many policies have been purchased as a result of an agent's visit at a time when part of a milk check remained unspent. While the Friedman-Savage hypothesis, discussed in Chapter II may logically explain how a rational individual can both gamble and insure, it does not, to the writer's satisfaction, explain life insurance consumption. Even if one were to assume that utility can be 84 measured, cardinally, there is still reason to doubt——under the present state of methodology— that the hypothesis would have predictive ability, primarily because the methods used to date do not satisfacto­ rily resolve the areas of conflict discussed above. The "style of life" approach suggested by Dinitz and discussed earlier in this chapter may offer a partial explanation. Life insurance was found to be significantly correlated with scores on the social participation scale used in this study. However, the corre­ lation v,ras not high, and the scale was so constructed that there would automatically be a relatively high intercorrelation between scores and income levels. One cannot deny that the various social factors— the desire for social acceptance, the feeling or value that insurance is something all socially acceptable people should have— play an important part in insurance ownership by some people. Reviewing the whole mass of data on life insurance consumption and related factors, the writer would draw the following observations. 1. A small number of farm operators surveyed, not over 10 percent, apparently have a definite insurance program, have certain goals, and are actively ivorking to achieve these goals. These oper­ ators know something about life insurance, though not as much as they should know. They are the ones who "buy" rather than being "sold." They recognize what problems their untimely death would pose to the farm unit and the farm family and are actively trying to minimize these problems. They tend to insure primarily their own lives, However, they too need assistance in maximizing the return from their insurance 85 premium dollar. The theoretical model, and the assumptions on which it is based, seem to apply most to this group. They more nearly meet the requirements of subjective certainty resulting from near-perfect knowledge and rational action. They seem to have a better understand­ ing of the interrelationships of firm and household and the temporal considerations, 2. A second group, which is made up of the majority of farm operators, have some insurance, but usually only enough to pay the expenses of a final illness and burial. This group has no insurance "program," although the individual members may have collections of "policies." They recognize that insurance is probably a p o d thing and they feel it important to "bo insured," even though the amount of insurance is very small. to a good sales patch. They are for the most part highly susceptible They try to insure ell members of the family, alth ough the face amounts are very small. They have little knowledge of the types of insurance or what Insurance can do for them. The buying habits of this group fail to substantiate the theories of insurance consumption. 3. insurance. The final group is composed of the 25 percent without Some are low income farmers, although 30 percent had tax­ able Incomes of over $3,000. Many are too old or in too poor health to get insurance, even though they might desire it. The educational level of this group is slightly lower than the others, but it is questionable if education is a major factor in their failure to have life insurance. One factor in their lack of life insurance may lie in their infreouent 86 contacts with insurance agents. Three—fourths of this group indicated, they had not received a visit from an insurance agent during the preceding year. However, a loroe proportion of the group just don't believe in life insurance. Reasons vary from a belief that the company will cheat the beneficiaries to a feeling that insurance is "social­ istic.” A high risk preference may be a f-actor, although the writer was unable to detect it. Also there seemed to be no less a feeling of responsibility toward the family among this group. 4. Attempts at predicting life insurance consumption based on any of the studied variables individually or as a group will be less than 10 percent effective.37 Many insurance purchases have been the result of unplanned .actions or impulses. Important to this analysis is the general lack of information regarding insurance, and in any attempt at a meeting of the minds between a well-informed agent and on unin­ formed farmer, the farmer is likely to cOiVe out on the short end. Before insurance consumption by the majority of farmers can be con­ sidered to be a function of the decision making process; i.e., the result of a carefully planned choice of alternatives resulting in the maximization of utility, farmers must become far better informed regarding insurance• Until that time, there will be a. somewhat less than desirable allocation of income as determined by the theoretical concepts of insurance ownership. ^ M u l tiple correlation coefficient for correlation between face value of insurance on operator and sice of farm, rue, number in iaaily, and net worth is .30. CHAPTER V CASUALTY IK3URAHCE PROGRAMS CHAPTER V CASUALTY INSURANCE PROGRAMS Casualty insurance, as discussed, in this chapter, will include fire, vehicle, public ■liability and workmen's compensation, and theft policies. These are the insurance policies which insure orirnarily physical property, although medical payment provisions of vehicle and liability policies also protect the insured against claims for injury to persons. Xn analyzing the purchases of casualty insurances, one faces a somewhat different situation from life insurance purchases. It was found that life insurance consumption was partially related to socio­ logical and psychological factors. There is probably a greater amount of subjectivity connected with life insurance consumption than there is with casualty insurance purchases; that is, a feeling that one "should” have some life insurance to protect dependents, even if it is only a token amount. Then too, casualty insurance is in some respects, more closely related to the fcrm firm than is life insurance. VJhile it is indisputable that the death of the farm operator would either terminate the existence of the farm firm or would cause a change in management, there would seem to be a somewhat different attitude toward this eventuality than there is toward the loss of a barn from fire, for example. Many farmers seem to take an almost fatalistic attitude toward their eventual death and the resulting circumstances. They recognize that the event is sure to occur sometime in the future, but 88 from their attitudes toward life insurance and their consumption patterns, they seem, for the most part, to believe that they won't tie prematurely, or if they do, the farm will provide for their dependents. The motivation for casualty insurances would appear to bo slightly different. Vehicle insurance coverage. Several types of coverage are in­ cluded in vehicle insurance; among them are property damage liability, bodily injury liability, comprehensive (including fire and theft), collision insurance, and medical payment. Property damage liability protects one against claims for damages to property other than that he owns which is damaged in an accident involving the owner* s vehicle. Coverage ranges from 05*000 up to 4100,000 or more. Bodily injury liaoility likevd.se protects the insured against claims for damages for injuries suffered by anyone in an accident involving his vehicle. These two coverages are the basic part of the vehicle insurance contract. They arc often quoted as, for example, 10/20/5 > which means that the insured is covered to the extent of t10,000 bodily injury per injured person or 120,000 maximum for the accident, and Of,000 property . dcinage Most financial responsibility laws refer to this coverage. The Vermont Statute, enacted in 1953, states tnut "The commissioner shall require proof of financial ressensibility to satisfy any claim for damages by reason of personal injury to or the death of any person, of at least 510,000 for one person and 120,000 for tiro or more persons 89 killed or injured and $2,000 for damages to property in any one acci­ dent ”38 Medical payment liability covers injury to persons riding in the Insured's car. This plus the two previous coverages protect the insured from damage which he inflicts with his vehicle. Comprehensive insurance and collision involve damage to the insured's cor 'which he may or may not cause. against almost all catastrophes. Comprehensive protects Among the many forms of protection included are fire, theft, falling objects, broken glass, malicious mischief, windstorm, and water. Collision insurance protects the insured's car against damage which he causes. It is written with a deductible clause, varying from 125 to $100. Only five of 216 farmers responding owned neither car nor truck. These 216 farmers owned a total of 332 vehicles, ox which 177 were cars and 155 trucks. Table XXIII below gives distribution of ownership of cars and trucks by size group. Ownership of both car and truck was primarily by the larger farm operators. Of those farmers with cars, over 75 percent reported that they were the principal driver of the car, while 85 percent of those farmers owning trucks reported that they were the principal driver of the truck. Children, who, if under age 25 require higher insurance rates, were the principal car drivers in only 7 percent of those families with cars. 3^Acts end Resolves Passed by the General Assembly of the State of Vermont (l953J* 90 Aboirs 45 percent owned one of the three low—pr:i ced makes, abort a third owning one of the high-priced cars. ownership of autos had. purchased them new;. Half of those reporting About one— fourth of the cars were one or two years old at the time of the survey. Half of the cars were five years old or older. t a b u : xxixi OWNERSHIP OF MOTOR VEHICLES BY SIZE OF FARM 1 or more cars, 1 or more 1 or more cars No car G r o u p ______ no truck_____ trucks, no car and trucks or truck P e r c e n t Total I 50.0 28.5 11.9 9.6 II 42.9 31.4 25.7 III 30.0 14.0 54.0 2.0 IV 29.4 6.8 61.B V____________12.7____________12.7___________ 74_.6 _______ =____ All farms 31.5 *' *16.5 47'.?' * 2.3* 100.0 100.0 100.0 100.0 100.0 100.0 Types of coverage owned by those reporting cars is shown in Table XXIV. Ibile practically all operators in all size groups have property damage liability and bodily injury liability, there is considerable variation as t-o other types of coverage. There is a fairly definite association between size of farm and percent ox farmers carrying different types of .insurance, indicating that for certain types of auto insurance, incooe is probably a. factor in extent of coverage. Tables XXV end XXVI give the amount of coverage for property damage liability and bodily injury liability. 91 o -p m3 o s: CD O C H H cc cl i—1 O C\! 1-P I— I CM P ~ O O O CD O o • • • • O O o Q O CD O O CD O CD O H H H H rH Oj -P O E-c O’A CO O i—!-O £tJ G O co LO rH O • • • • t -H nO t— CP CM uo i—i CO O C D LT\ M3 cm CO CM CM CO i—| a X* ^ O a> ctf * ^r< c •<&* to c— o- ic—"co o rH CM I * O. CD Ph -P t i—I •H r< l l —I rO t>j *.-j1 CM O P *H! LT\ < + C'-’P O cp C O CO t O O n O co i —I L \ O'- O • * • • * f-( r—i l ■c5 o X'I o g cmI CQ *H *H PH o .3 I —I CO O co CO CQ ’} -P Q i > ol aa Eh PH O -Pi iH 13 LD w I -P G rO -P nCOM UO UO VO vO no CO G PH O £CD E E-< a> m3 *H G aj -P UO MD -H'nO P- O * i-O CM P • ♦ o * O O i— 1 o I NO * 1 CO Up cp CM C P \0 to C'i r-H CP M3 vO -p CO CO co to - 3 •H IH a cm P* (Sj IA CD Q *9 p • - p u"\ s O - p CO to- O O CM £> C O • * * • • d O P-H 1— 1 C h ‘p *H 1-H rp o G P- CO o «■» • (D s M •rH § O a CD O O o CP -H o CO !—I o o o % CL, i—! rH i—I rH o o E-h f-H PI CO» O• O• CO• o• no -p- PM O CO -H CM G o O -P O CP O C D M >■—* O O --C ip CO >■ O o o o o LP O CM cr\, 4-> to -■■-H r l H H > H U H rH H H H (—1 92 As can be seen, 6 percent of those driving cars have no property damage liability or bodily injury coverage on their car. involved only 10 farmers out of 167* However, this By far the majority of farmers surveyed have only the state minimum coverage for bodily injury, but over the ndrimum for property damage. Amount of coverage does not seem to be associated with size of farm. TABLE XXVI AMOUNT OF PROPERTY DAMAGE LIABILITY COVERAGE BY SIZE GROUP Limits— property damage Under $5,000$10,000$5,000 .. ._ $ 15,000 $9,999 P e r c e n t Group I II III 4*6 — — IV V All farms 3*2 — 1.2 J I• 6o.o 75*0 81.2 79.6 73.0 36.1 24.0 15.0 9.4 20.4 19*6 None 16.0 10.0 6.2 — 6.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 Table XXVII, which shows ownership of collision insurance, has some interesting data. Nearly two-thirds of all farm operators carry some form of collision on their autos with $50 deductible being the most common type of coverage. There is some association between size of farm operated and percent of farms insured. In the second survey, 29 out of 41 farmers owning automobiles had collision insurance, which is somewhat higher than the percentage insured in the earlier survey. More revealing is the fact that 16 of the 29 had cars which were four years old or older. These farmers were not to carry collision?,f 01 the 29 farmers with collision. 13 stated that this was no problem in that thsre was no question but that co.llision should always be carried. The remaining 28 £ armors questioned listed value of the car ao tl: mary factor in deciding vhether or not to have collision insurance. Other factor's mentioned were number driving the cor and whether the operator could offord collision insurance. About a tenth of those contacted c«mild not distinguish the difference between liability and collision insurance. ThBLF XXVII DIST 'I8UTI0N OF COLLISION CCVddr fi; pv 317.E OF FARM 80 percent/ 150 " 8100 No 32$ 20 percent''’ c eduotitle deductible deductible collision P e r c e n t Group I II III IV V all farms 3.1 . C .6 3 .1 4,1 1.8 42 .e 5?.0 /'-7 £O/O 59.4 .. . . 2 <*/ . 071*^ 2, ^ 9U — - ..hr.?4 9-*L1r T ..T_ 47.6 48.0 9,0•> r ^ 34.4 3/,. 7 37.7 Tot al 100.0 100.0 100.0 100.0 100.0 100,0 •^With Q0/2Q coverage, the insurance company pays 80 percent of claim, the insured 20 percent, regardless of size. On the face of these findings, one might conclude that the economics of insurance do not enter into the decision-making process of these 13 farrne.s s £ar us collision insurance is concerned. may be true; however, an insurance This gent who writes a large volume of insurance with farm people offered another explanation. His theory is that many agents persuade farmers to carry collision insurance in order 94 that tne insured vill feel he is getting something for his money. Thus, if -a farmer has an accident and collects on his collision insurance, he feels he is getting the protection lie is paying for* If he has an accident and has no collision, he feels he Is being cheated; that his insure ace is not giving him the kind of protection it should. And even though the accumulated premiums from collision far outweigh the col­ lected damage awards from accidents for most farm operators (71 oercent had never filed damage claims), the one tine the operator is able to collect, or his friend or relative collect, Is enough to give a. higher level of satisfaction from the insured position than from the uninsured position. This postulate Is hard to defend from a theoretical standpoint if one accepts the assumption of rationality of action anf perfect knowledge of the risks and probabilities of loss. However, it may more accurately describe collision insurance coverage than the theory does. Table XXVIII gives information on kinds of coverage by truck owners. Coverage on trucks is not so extensive as is coverage on autos. While this is to bo expected, with certain types of coverage, it would seem to be a weakness insofar as liability coverage is concerned. Some 2$ percent of all farm trucks being operated on the highways are not covered by liability insurance. When questioned as to this lack of coverage, the most frequent answer was that the truck was used very little on the highway. 95 i—1 -P cd d O *H OtO o C-tO Cf\Oi rH O'-VO vO J>-t>- C*- Td *'“0XI O C Cd CQ •(-} *H rH 04 in w CH M r fi -p r’s -p a) *H 5^ 1 c.0 rH Q > *r-f CD o * X cj tu M 9 f-t o. § % *rf I—I PQ CQ OJ O n 0 B3 n § U*\CQ * 4 • » » ir \ -Cj- r— ! E>- i>nOvo c— r -p 3 Of M ltn O' O- o HJ rH d I0 So o Q)f s £l S31S-t o •H! Cd mU ch vo ~ -f o 1o « • » • • ■vO t—j OJ VO U"\ C\? r l ^ C O C\? rH C? o| o j O Eh E3 03 oq > O o 03 O < d t> **H co d -C> C f— 1 P-t Cl a' •H H ex -p I>- rH CV -H Supplemental Survey;, Appendix 9. 98 - c h o -v cv . , i—i i—I CH CH CV1CV O 4-3 P-) CD P-r CD U CO CO c l C i H 3 Cd' CV t> O '- 5 -r-u O vD c o O ’ \ D -4 ?H CV CV UA o C D hD t30 cd UJ P> 40 CD > 9 •\ «\ «\ C x VO 4-3 T d C O CO CD fH rH o r.' o c o co ci3 c! P-4 '(H n O f-O .H 0-3 CTj - P X O Jh rd O CD Cd -P > rH ,4 CO Or . X f—I x - cv • • ■ 03• CV• to t\J P— i—Ict vO LA -4f DT\ eo VO UA LT\ CV t - C>? O rH o tQ 03, lA CH »i ^ * *s to o VO to CV UA —I i— i rH r—I CV I vrtfe cel e O I —i ■=-i V? ro ft rri P> r*4 Td CD CD P -l p O Ph to 4-3 03 •H P-. * PHj co o h ty V) to rH O O'- O 30 C— VO v \ 'JO V O \ C Td jg, to V n 'd C=4 a (13 o t3j0 •rH a ' _p p4 CD £ -4 iti P i— i "j ♦> 4-3 COtOvO CO C"- O O ' CO CO ” 0 O ' v d u~\ CH u~\ to -V,vo H n 30 OJ H ^ OJ •> :vo i— I i— ! 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O *-H CVKO CD £ CO IH H ■vj> 'd 1 H 1 —1 rH *-H rH rH 1— 1 CH H !-p o ph 101 Secondly, -the use of to degree of risk. scale presumes rati.no of thc questions as The risk rating giwen the questions by the investi­ gator is entirely subjective, in that it reflects his viev/s as to degree of risk. This rating ray not he* consistent .ith bow the farmers would rate the problem situations. Finally, it is especially difficult to develop guest3.0ns 1 or a scale 'Hiich ar o app lieable to a highly specialized dairy area, such as Vermont. Correlations run between risk-preference and percent of valu­ ation insured proved non—significant. It has bc.nn shown that life insurance coverage was quite highly correlated vrith income level. In an attempt to discover if those farmers with higher incomes had s. higher percentage of total farm value covered by fire insurance, simple correlations were again calculated. However, a piin it was found that no significant correlation existed between percent of total vr?r:uiti or. insured and income level. Apparent­ ly farmers f el that fire insurance is a necessary farm expense, and therefore, the question of whether or not they can afford fire in­ surance coc'S not materially effect their insurance cor!sumption. When asked what they used as a guide in determining t*>e amount of fire insurance to carry, nearly one half indicated that they insured at replacement cost or some percent of replacement cost. About 15 percent stated tint they insured at original cost, and another 15 percent insured for all that the company would write. The remainder used some measure of "what they felt they could afford" as the guide to coverage. 102 Those farmers who used income as a guide to fire insurance coverage had the lowest percentage coverage• Those using original cost or some percent of replacement cost were most completely protected. Institutional factors very definitely effect fire insurance purchases. Credit agencies require fire insurance on all mortgaged property, often to the extent of 100 percent of value. The correlation betv.reen percent of valuation mortgaged and percent of valuation insured was .26 and proved to be significant. However, the mean percent age for all mortgaged farms (73.0 percent) was not significantly cover­ different from the mean coverage for unmortgaged fares (70.0 percent). Table XXXI shows a slightly different analysis of insurance coverage. An interesting point is that total valuation for those farms averaging 30.6 animal units is less than for those farms averaging 19-2 animal units, but percent of valuation insured is greater. IJliile it is hazardous to speculate on reasons for this relationship without further informncion, from an examination of the data one might tentatively conclude that in the first group arc a number of non-fan a properties with heavy investments in buildings. These owners are apparently not insuring as heavily as full-time fanners who are dependent upon the buildings in the operation of their farms• In summary, farmers apparently look at fire insurance os a necessary expenditure for their farming operation. factors While institutional are important in affecting fire insurance coverage, they do not significantly increase the extent of coverage. about the only con­ sistent relationship evident is the tendency for percent of valuation 103 +co P j o P -PP * H -Pf O CD oj ! rH O P P i —I W CD ■j ! P cmH p do o p AD; CP l—! rH 11—I -P CP > i o cr?eh ! S o J t t i 1 i o eh ^ Eh O ci CD P> 1 p-1 P P; o! § w cP •v P| tP Eh rH -H i C V ! CV cv cv 140 to O CP CM CM 0 vO UN 00 —-HvC C\> u± CM P o CD CO CO 1 C \! CV O v -H - ' H Q •n *> H I —i Q L -TLJ *> Eh p Eoh iPIj PI w N ] (S3 I —II—I W r CV 00 o P -U>| t—IVC' co n *> « CV* \ > ! p -v cp O Eh rH ° o rt; o *\ rH CH C O u ± < T\ QvfOv CH•X ONO*1 p* \ ; l~H i—t CD j DO h-0 p P> p -io; i— I CV -v > n *\ C V jC V ^ :P £h >'-H Eh P o •H ■4— * M fp O CD CO •rH r-T CO r—! CV OPJCV E -i s; ■P p i CD co a p-. p H 'A e- - r* CD 'd; > CO 104 insured to increase on the larger f r m s . This would seem to substanti­ ate the be lief that when a farmer has become adjusted to 3, certain socio-economic level, he is willing to insure a -ainst losses which would, ix they occurred, put him on a lower socio—econo?lie plane. Thus, farmers unsure heavily even though on the basis of the subjective risk—preference rating they may indicate a willingness to gamble or assume risks. Comprohensivo \-ersonal liability insurance. While fire is undoubtedly consiu.wed the major insurable risk which farmers face, the farm operator today runs o, pro- ter risk than ever before of becoming involved in ■ lawsuit because of injury to or death of another person or damage to property. This is due in part to the increased use of machinerv -and motor vehicles, to the greater reliance on hired labor, and to the greater net worth of farmers. Also a factor is the change in attitude of the population toward liability and damage law­ suits. Employees who have previously v orked in industry are for'iliar with the laws protecting them and expect like protection in agriculture. A court judgment b u y ins t o farmer could result in the loss of n life­ time ox savin :n the complete wiping out of him- farmer1s equity in his iarm. There ...re there common types of liabi Lity insurance, other than automobile ll.mility, that a m r , v r may c a r r y Those are e plover’s liability, ..orkmon's compensation, and comprehensive or general liability. 105 Employer’s liability protects the rs.ri.ier ainst suit in c c-.n employee is in .lured at work turough negligence of the employer. Workmen's compensation, required Tor any employer of seven or ■ 'ore persons bub volunt. ry dor uiy others , guves t be work or* rolection Prom loss of ’-.-'ages as :i result of Iniriry, pies »uyvonb for in.iurles received. Comprehensive liability insurance protects the f arc or in cases where accidents or the rJ.estriiction of pronerty result in lou'suits against the farmer by the general public♦ In one earlier survey, only 2f .-'•at of 120 -harm-ars or 11 percent had any form of liability insurance. Over 20 percent of the 24 farmers with *insur< .nee were in the two larger, farm size groups. Coverage was primarily of the general liability type with a in im am amounts of cover­ age; the 010,000 limit being most, frequent •rf th.e mu'dutum limit being 1 2 5 ,000 . In the 1956 survey, 1? out of 42 farmers (A0 percent) h*’d liability incur-- ace. Incur race a vents are pushin p t h s age which in piart ;.ccounts for t- e big incrc. .so. f'g pe of co oar­ Despite this activity by --gents, of the 2f fo.rn.ers without liability insurance 17 had never had an .'.pert try to sell this type of policy to then-, or even had any­ one discuss liability insur nee with them. Various reasons were given b;y those farmers v.dth insurance as to why they carry liability . Noticeable among the reasons, however, m s the indication that they had been "scared” Into buying this type of policy either by some near catastrophe occurring to t.hem or to a friend or relative. Even though the premium is relatively small for the wiounl. of risk protection 106 afforded, unless a farmer regularly employs hired help,, he r oner ally needs some type of motive.bion, such us r close cell, to 'eurc’iuse the insuronce. Summery of the fi-fualty insurgric_e vgvirn.m. It. was seen at the end of Oha.pter III, that the received theory of insurance by itself furled to adequately explain or predict life insurance consumption. The conclusion was reached that the many ar-r.s of conflict between xirm-househoId, and present—future consumption, along with the diffi­ culty of n 'lying an essentially self—centered type of utility maxi­ mization to family values male it necessary to expand the theoretical framework beyond the present concepts. At first glance, it would seem that the utility maximizing concept might have its broadest applic.tion In the area of casualty insurance; i.e., the fire, vehicle, and gen ra 1 liahility policies. Here there Is no complicating factor of savings or investment being combined with protection. Those types of coverage are more nearly "pure11 insurance, and the amount of insurance carried might be expected to be a direct function of the subjective risk-prcferen.ee of the individual. There is apparently less of a conflict between firm and house­ hold with this type of-coverage. There is a definite tendency among formers to include fire, auto, and liability insurances as farm expenses, as contrasted with household expenses. Here again, they are not productive expenditures in the 3 ,rise of being variaolc inputs which have a direct effect on production. However, in determining customary 1C7 patterns of expenditure, as discussed in Chapter III, these costs are normally included in the firm's budget. Following this some analysis, however, any increases in consumption of these insurances, barring an increase in gross farm income, must come from other productive expenses, from family living standards, or from present savings. Does this mean that these insurance expenditures can be analyzed completely vithin the framework of the utility maximizing concept? It would seem to be not that simple. In the first place, institutional arrangements play a very important part in this type of insurance coverage. All mortgaged property must be insured, so that for mortgaged property" the decision making function is completely absent. The only actual decision facing the manager in this situation is the extent of coverage, and many times he is not even allowed this decision since the financing agency may require that the maximum amount of insurance allowable be carried. Thus, the purchaser of a car on credit is forced to carry collision insurance of a certain mount, and very” often must also have liability. The mortgagor requires the mortgagee to carry fire insurance at least to the extent o C the mortgage, often for the re place,rent value of the buildings. Financial responsibility laws make it almost mandatory for auto­ mobile drivers to have a minimum amount of liability insurance, at least they make it extremely foolhardy not to do so. uGrs ^ <.'.m, a largo part of decision making is divorced from consumption. loa Finally, it is quite probable that custom plays an import m t part in some types of casualty insurance coverage. This is especially truo of collision insurance, in that such a large prouortion of farmers surveyed felt that there was no decision to mvke as to whether or not collision should be carried* These farmers made no attempt to analyze tile problem; they simply held a belief, perhaps based on social imi­ tation or desire for social acceptance, t h :t this type of insurance is a "must" for them. Their '■'statements are in part substantiated by the fact that collision insurance ownership is not related to income level, net worth, or ape or value of the automobile. Mo doubt the activities and advice of agents is an ini] or tent factor in this respect. On the other hand, fire and theft and comprehensive auto insurance are positively correlated v.dth size of farm, indicating that for these types, income is an important factor in determining amount of c ove rage. Fire insurance is a3.so considered a "must" ite.u by farmers due in pert to institutional hectors and in pert to custom. Few formers would -duit ever making a decision as to whether or not to have fire insurance at J_1; however, no rly all admitted to trying to decide logically the amount to have. Some even dodge this is sue by carrying all the company will vibte. The abtei ipt at measuring risk preference by a rating scale was not successful in predicting insurance-buying habits. However, it shows promise, and a more careful selection of questions and further 109 analysis of weighting should give better results. This is on area where further investigation may prove fruitful. Recognizing the effects of sociological and institutional factors on insurance consumption and modifying the theory accordingly, it would seem safe to assume that farmers in utilizing fire insurance recognize that the risks involved are major ones which, if incurred, would probably lover the socio-economic status of the individual. Since the frequency of occurrence is relatively low premiums 'ire not excessive for the protection afforded, and formers are almost uni­ versally willing to insure against loss of future e.-rnings or assets. CHAPTER VI MEDICAL .AND HEALTH C a RE AMD INSURANCE FROf-RAI'-S CHAPTER VI MEDICAL AND HEALTH CARE AND INSURANCE PROGRAMS Another insurable risk facing iarrn operators and their families is that of medica.l expenses and disability. Although agri cult are is often considered one of the more healthy occupations, it is also one of the more hazardous. Then too, statistics which show medical expenses of f arm families bo he lower than those of nonfarm urban people may conceal the true facts. The reason for the lov/er medical expenses may not be th :t f •rm people are healthier than their city counsins, but rather that they do not avail themselves of medical, surgical, or dental services; either because of the unavailability of these services or because ['arm people feel they cannot afford these services. Indicative of this is the fact th:;t only 28 percent of those farmer’s surveyed had regular physical examina.tions by a physician. Income level was not a. factor in this case; the only f ctor apparently associated v:as educational level. The higher the educational level of the farmers, the -greater percentage had annual physical examinations: but even ojr.ony college graduates less then 40 percent had regular examinations* However, even though less than 3 farmers in 10 hod an annual physical examin 'ition, nearly 9 out of 10 reported having a reg< Alar f ainily do ct or . Evidence that agriculture is a hazardous occupation can be found in the number of farm operators disabled for some period of time during the year previous to the date of the survey. The farmers surveyed Ill reported that 25 of their number (12 percent) were disabled during the year. Four of the 25 were considered to be permanently disabled at the time of the survey and four others were disabled for three months or more. One—third of the disabled operators reported that their loss of earnings amounted to 32,000 or more for the 3^ear. Fourteen of the 25 had no insurance to reimburse them for their loss of earnings. Thirty—two of these farm operators, or 15 percent, required one or more home visits by a. doctor during the year, and physicians visited the homes of 5A farmers one or more times to treat dependents. In addition 78 operators made one or more visits to a physician's office for treatment. The dependents of 113 farm operators made visits to a physician’s office. Eight of the operators and two dependents made over 50 visits bo a physician's office for treatment. Only a small part of this expense was covered by insurance. A smaller number of farm operators required hospitalization. In 1953, 11 of the 220 farmers surveyed were edwd'.ted to hospitals, and 39 dependents were hospitalized. Most of the dependents were confine­ ment cases* Six operators and 15 dependents required surgery during the year. Tables XXXII, XXXIII, and XXXIV show a distribution of costs for hospitalization, surgery, and doctors' visits* Only 65 of 220 farmers reported expenditures for drug items totaling 32,700 in 1953* Undoubtedly more farmers than this purchased drugs; however, such consumer expenditures arc seldom recoraed. and easily forgotten. Only 99 of 220 reported expenditures for dental 112 care, -for This too is 3, relatively low oer— total cost ox ^4,579* centage of the population receiving dental core. Expenditures tor eye flosses or eye core were recorded by 46 farm families and totaled ^1 ,564 . TABLE XXXII COSTS OF HOSPITALIZATION FOR BRE.iDUINNERS AND DEPENDENTS I! ! i i i 1 ---- ■ - Amount of expense Under .4100 7100 4199 Breadv.-inrers Dependents All 4 IS 22 S 10 ---------- ------ — Cost 4400 and over 42004300: 4299 4399 N u m b e r 9 3 .5______ 3 5 6 . Total having expense 2 3 . 7 11 39 50 Total cost ■32,808 6,452 39,460 ( T.J3LE XXXIII COST OF SURA FjTL-L •uiioimt of expense Under 450 Breadwinnera Dependents All 1 6 450: 499 4 4 I* O . R BIl LDtlKNEAS /RID DEPENDENTS 41005149 1 1 2 4 I5O- $2003199 $249 N u m b e r 1 2 3 3 1 4 4250 and over — 2 2 Total having exoense 6 15 21 Total cost 41,015 .fU $ 2,531 ■ As can be seen in Table XXXV, a total of 175 families reported expenditures for medical c re of one kind or another, tot .aliny over 427,000 113 O'' C\2!«—1 r-- o r—T* \ Uojo*V t>-oC; ,o0 c o hr ^: i vO C O on CO CO fc! O t vO O? CO Q Q CO □c: i— 1 O !|CO ei £5 --C o oO ~cf PQ > M d 3 3 cojco g CO C -H HH CO I —I >» CO O Eh i — I O' O rH O Q c^' c^!-oo 2 i— 11cv >0 d CO /“V -1 o tH i I i —IC!J O O'O' OJ CO! cr\ o :o o Cv -O' vO CO oo vO t-l CO o o f CO J-* CD Uh I o cd en +5 9?; 0* Ja <»! CO CD Jh PQ Q 114 table xxxv TOTAL MEDICAL EXPENDITURES, 220 VERKONT FaAK FALILLSS, ISA of Range in Number Percent. expense________ reporti n g _____reno rt ijijg" o o 99 14-9 199 249 299 349 399 449 499 749 O N o n e __ Under 450 d 50 - „> 100 150 200 250 300 350 400 450 500 750 - 1 Total Total expense Percent of total expense 20 45 53'" 48 17 11 11 6 7 3 2 5 9 3 220 > 1,145 4 12 3,343 1,096 1,928 7 2,545 9 6 1,713 8 2,269 1,117 4 647 3 9 2,355 20 5,505 2,503_______ 10 027,366 100 27 11 6 6 3 4 2 1 3 5 o loo -*As a percent of those reporting expenditures. Health insurance coverage. Just half of the farmers contacted had. any kind of hospitalization insurance. Table XXXVI rives distri­ bution of hospitalization coverage by size of farm. TABLE /TCP/1 PERSONS COVERED AND TIPS OF COVERAGE, HOSTITALIAATION INSURANCE Group No insurance Persons _cove red Operator____Fa; A l y P e r c e n t I II III IV V 411 farms 54.6 5-1.4 62.0 36.0 ___ LiiA ________ 50.4 38.1 7.1 8.1 40.5 30.0 8.0 14.-3 51.4 1.8 ______ il/4 42 *3 7V3' : 'As a per carit of those insured. nil!?e__°T pi an"' __ _ JgfPrlli_____ In;1iv ickuil 31.6 31.2 Oo 'G S*Sy• 50.0 r o A. 39.0 68.4 63 .8 66.7 " 50.0 It 61.0 115 Age was a factor affecting purchase of hospitalization insurance. While 52 percent of those farmers under 40 had hospitalization, only 40 percent of those over 6() had this coverage. Education of the operator seemed, to he an even more significant factor, since only 34 percent of those with eighth grade educations or less owned this insurance, while 61 and 62 percent of high school or college educated persons respective­ ly were covered. Surprisingly enough, there seemed to be no relation­ ship between size of family end extent of coverage, and not a close association between, income level end. ownership of hospitalization insurance. The most common room benefit was 36 per day, for a. 30 or 31 day maximum period. These room allowances have since been increased; however, they were the modal size at the time. from under 35 par day to over flf. between -3150—3200. Room allowance ranged The modal surgical allowance was Nearly three-quarters of the policies made no payment for a btendan ce by physic inns, other than the surgical allow­ ance. Finally, nearly three-fourths of the policies were with one of three major companies. Vfnen questioned as to reasons Cor taking out hospitalization insurance, the most common answer was "it just seemed like n good thing." Farmers, like others, recognize that medical costs have increased greatly, and a serious illness or major surgery could easily take a full year's income. Hospitalization insurance is considered by those owning it to be 1 good investment; the peace of mind resulting from bavins it being worth the price. 116 Ox onose owning h os pit ^,liz'uion insur'-rice, yo percent expect to keej) the insurance; however, nearly 15 percent feel that they do not reo ...ive cu le, ;ua,te ,r o tect ion for the premiums paid. About half of those with hospitalizati.on insurance have filed claim at one time or another and less than 20 percent of those filing claims felt that theg did not receive a fair settleme nt. In an attempt to determine th.e type of policy favored, the respondents were given a choice between two different types of policy. One choice was between a policy vhich paid all coses over tln J or all costs under plOO. Then they were asked to state their preference for a policy paying all cools over 1300 or all cos Is under 0300. }Q0CVTI shows these preferences. relative costs of th- Table Unfortunately no indication of a plans was given, so there is no way of drawing any very meaningful conclusions from the results. Just under 11 percent of the sample had any type of major medical expense policies, all of which ■'.cere group polio insurance. None of those surveyed had the so—c.ailed 11catastrophe" medical policy, which pays all expenses for major illnesses up to some high limit. This t,ygce of policy, however, was very new at the tine of the survey. Accident ypd health insurance * Several types of policies are included in this classification, the major ones being the standard accident policy, the /J) and D or accidental death and dismemberment policy and the travel accident policy. These policies in general provide for benefit payments in c v?e of injury or ckvth of the insured due to -accidents. There are many forms and types of policies, some of 117 • CV -H O 5=3 C O CV -P C Oo a) o o O rp o *H V —! O < W i —1 Th u O CO & »-4 a. fxC O CO i —I r.3 M S o I—I M 0 1 —-3I i —I r io i—![cv VO -3- I I -rr t— 1 CO . . . O \ C'- Cv vO 1 A \0 [C°\ Q > s'o H O H Cv o h < L > C --J C L) C O H _o PU C OO O O o op r' V 1 ---1 iH - v r • * * - V c .( C v 00 o) .c P'i 0 !*H -j n CV o C H u -P CD c ; O'x : _p O CO £3 1 H •H 03 a> On s o -V - I C-J CV • p - 1 EH EH (H @ P^i (—1 Q O co o p H ro-* 0 r-rT r,_j 1— 1 « CO o o o O M CD o •H O r —{ , C i— ! o o o H b H a) to "CO O * * • » -c r c v o o V CV —T -- T ri M H <33 V—1 CD CO v -*3 p -l ro O O O O J— 1 *0 = 1— I i— 1 H to fD s >3 H Oh > o W CO c p o * • • • C v t> o - V t ' - i-'V \ 0 c< o to f-1 Ml—11—IH- > i—Ii —IM i—1 oi M H 118 which are very inclusive, others listin;; specific types of accidents for which benefit payment s principal sura c.--e made. Most of the policies inclnie p. vl :ich is p.~id the boneficiary in cose of accidental death ox see insured. In addition there all be a schedule of payments related to loss of limb or sight or both. lump sura payment or as a weekly indemnity. The 1-rtt ?r may be m.v •3 as Certain other policies ore strictly of the ■hisability type, paying a yj.nrxn.teeo weakly or monthly sum as long -s the insured Is dis .bled. These policies are vrritten vnd sold by local agents; however, many arc included as "gimicks" -to lure customers Into buying some other product. ■Under one plan, a farmer subscribes to a magazine and receives the AD and D policy as a 11bonus." They may be included with automobile or ranchinery sales; sometimes a yon.n policy is written on members ox a cooper.ative. Because the method of purch -sing or receiv­ ing cover ppe for this type of insur-nee Is so unorthodo::, no attempt will be made to ussoci ate ownership Tith any of the soc:!o-econoiuic v ~r i a.d1 e3 . .about 20 percent of ti e fairera surveyed had one or /..ore of these plans, two r mi cro owning oix different policies. Individual nccid ent cn.J health •.nd -accidental dexth oxl dismemberment policies wore by H r -p to the x.ost common types. iij_ah of i'&'ty but 'Uinual premiums r...nped from under tne modt.il class 'rs3 '>10—1; .annu-_.ll■. . T ic most fr ecu cat 1:ee!oly Ii 30.bil3.ty p'.ynart un, ar these policies was from g 3.0—14 policies) and 325-29 (13 policies), for a period of 12-21 weeks. Tnree—fourths, of the policies paid from 3300—1,000 -principal sum In c x o of accidents! death. In general, this is not an important part of any farmer1s insurance program. For th.ose fai-iaers owning policies of this sort, It does provide token payments In case of injury or death .fro/a -'ccidonts. \fith ugrioulture bec/mming more mechanized, there may v.-ell he a pi- ce for policies of this type in some farmers * insurance nro crams ■ S urinary. Vermont farm families in this survey spent of ylfy per faiidly for medical expenses. n average While this is considerably under the national average of h21“ per family, this should not be construed to me an that th.ose Vermont ''an?1families in less need of .medic al services f an tna national are healthier and eve •••age* More likely, it Is because of low Incomes and luck of rmnr-by medic"1 About half of tx/oe families h--d hos pit:•.lisation insur ..nee of sc, .e kind, the majority having individual plans covering the entire family. However, many families were covered by a group plan sponsored by one of bn a farm organizations. While cove:-age vrs not compulsory, o.t le.-i.st f0 percent of the membership had to be insured for the group policy to remain in force. Therefore, there vus n sense of obligation to tns group which nay h *■vo prompted some f ax .ilies to insure. Hctent of coverage -appears to be a s s o c i a t e d more closely with education-'! level and age than v.ith income -or size of family. The reasoning behind the decision to buy hospitalize! Ion insur "'.nee seemed to ?.nvolve a. wei^hin^ of insurance costs against the probebility of some Illness and 3.20 losses 1,3 -a result of this illness. Another factor which may be important but which is difficult to measure is revealed in the answer given by ono respondent who st .tec], "VJhen you're sick you don11 want to have to worry about hov: you're going to gay -all trie bills." At the time or the survey, the majority/- of farm families were not yet ready to -ccept major medic cl expense policies, even though in the event of a major illness the consequences on the farm income end net worth could be most serious. Either these respendents re in a learning situation regarding major medical expense, or else they feel that the probabilities of a major illness occurring arc not yrr t enough to warrant the cost of insuring against this type of risk. CHAPTER VII RETIREMENT PLANS OF FARMERS AND THE SOCIAL SECURITY PROGRAM CHAPTER VII RETIREMENT PLANS OF FARMERS AND THE SOCIAL SECURITY PROGRAM In the last 25 years a great decal of attention has been given to the problems of the aged in our society. This awareness has been due in part to a marked increase in the number and proportion of older people in the country, as a result of a longer life expectancy. Accompanying this are changes in our economic and social life which have made it increasingly difficult for our older people to find pro­ ductive and satisfying opportunities* Labor, industry, and government have all recognized the problem, and programs have been developed to alleviate the situation. Industry pension plans, individual retirement insurance, and annuities are used extensively by nonfarm groups, but probably the most significant development has been the Old Age Survivor's Insurance program, developed in 1935 and designed to provide a minimum level of economic security for urban workers and their families, Historically, the problem of providing for the aged in agri­ culture has apparently not seemed a serious one. Farmers were largely self-sufficient and were able to provide the basic necessities of life, while at the same time increase their capital assets through the purchase and improvement of their farms and through increasing land values. There ’was a widely held belief that farming provided a greater degree of job security and independence than other occupations, even though it was not so remunerative. Farmers felt that farm ownership 122 provided their best approach to security, and as a result they faced old age with more assurance than most other persons. These beliefs, however, may be no longer valid. Farmers increasingly face the same problems of insecurity in old age as other occupations. The shift from subsistence to commercial, agriculture, while enhancing farm living, has also increased insecurity. The much larger investment required for profitable farming today, and the many­ fold increases in cash farm expenses, have made it less feasible for farmers to achieve gradual retirement through reducing the size of their operations. Increased mechanization and new technology have reduced the number of job opportunities for the older people in agri­ culture. And finally, there is less parental responsibility among the younger generation of today. Several studies have been made in recent years concerning farmers1 preparations for old age and retirement.^ The Wisconsin study (1953) showed that just under half of the farmers interviewed expected their farms to provide their sole source of income in old age. Over a fourth of the farmers were uncertain or had no source of income for old age and only 2 percent had plans other than their farm savings. ^ H . Sewell Williams, Charles Ramsey, and Louis Ducoff, Farmers Conceptions and Plans for Economic Security in Old Age (Wisconsin Agri­ cultural Experiment Station Bulletin 1&2, 1953)* Vv'alter McKain, Jr., Elmer Baldwin, and Louis J. Ducoff, Economic Security in Old Age; Connecticut Farmers (Storrs Agricultural Experiment Station Inf. 43, 1951). Robert Galloway, Farmers1 Plans for Economic Security in Old Age (Kentucky Agricultural Experiment Station Bulletin 626, 1955). Paul R. Poffenberger, Maryland Farmers Look at Social Security (Maryland Agricultural Experiment Station Bulletin 446^ 1954) • 123 In Connecticut, on the other hand, about one-third of the farmers expected to have income from other sources. It is interesting to note that as the equity of the farmer increased, the more faith he had that his farm would provide for his declining years. In the past farmers have apparently not looked with favor upon retirement, or have at least given it little thought. Approximately two-thirds of those interviewed in Wisconsin indicated that they had given little or no thought to retirement or cutting down on their farm operations in later years. There was a definite correlation between age and equity of the operator a,nd plans for eventual retirement. There are some reasons for this lack of interest in eventual retirement from the farm. In some cases the farm has not provided, sufficient income or equity so that the operator could afford to retire. Then too, in farming it has been possible to tailor the work load to the capabilities of the operator or hire extra labor to do the heavy work, with the farmer continuing the managerial activities. It is also possible that difficulties of liquidation due to taxes have been a factor in continued ownership. ill health or crippling disease. Often retirement has come only after Apparently it is fashionable in agri­ culture to "die in the saddle" because less than a third of the farmers contacted in Wisconsin ever expected to retire. This lack of planning for retirement in agriculture has probably led to inefficient use of resources. Productive farms are allowed to deteriorate as the farmer slows down the pace of his operations in advancing age. Land may be withheld- from production and many small 124 units maintained so as to provide a small source of income for the operator. changes. Units of this type are very slow to respond to price Studies have shown that older farmers are less willing to take risks, have lower production, invest less in machinery, buildings, and fertilizer, and are less willing to adopt new ideas or follow conservation practices. Farmers apparently have little idea of how much it will cost them to live off the farm should they retire. Respondents in the Wisconsin study who were asked this question estimated a range from under $75 to over $200 with the most common figure between $75 and $150 for a family of two. These appear to be unrealistic figures in view of current price levels. The decision to provide for retirement income from sources out­ side of the farm capital structure involves the question of future consumption versus present consumption. It implies a willingness to sacrifice present consumption and possibly future earning power in order to be assured a source of future income. The fact that very few farmers have voluntarily provided for external retirement income would indicate they feel that money reinvested in the firm's capital structure affords a .greater future return. Flans of Vermont farmers. Vermont farmers do not move around very much once they become established. A third of those surveyed had been farming for 25 years or more, 30 percent on the same farm. under a third had been farming for 10 years or less. Just In attempting to discover any retirement plans of these farmers without asking directly, 125 they were asked, "How long do you expect to continue farming?" Two- thirds answered they would continue as long as they were able. Just under 15 percent indicated they would sell out as soon as they could find a buyer. Seven percent were already retired or semi—retired and the remainder specified a definite number of years, ranging from 1 to 20, during which they expected to continue farming. Upon further questioning, it was determined that 15 percent had mad© some definite plans to retire. All 15 percent of these planned to retire upon reaching age 65, and all mentioned the availability of social security retirement benefits as one of the major factors in their decision to retire. It is important to note that the 15 percent of the operators who had made definite retirement plans differed significantly in several respects from those operators who had made no definite plans. XXXVIII summarizes some of these differences. Table In general they were older, had more formal education, were more active in community affairs, and owned larger, more profitable farms, than did those farmers who had made no for retirement. Age would normally be expected to be an important factor in retirement plans. The sample is no exception with a third of all farmers with definite plans in their sixties. However, age was not the deciding factor, since only 22 percent of those farmers in their sixties had An effort was retired. farm. Two—thirds The remaining made any definite plans forretirement. made to determine plans of these farmers once they of the group indicated that they would sell their third planned to either cutdown on the scale of 126 operation and remain on the .farm or rent the farm, using the rent as a source of retirement income. TABLE XXXVIII CHARACTERISTICS OF FARMERS LITH AND WITHOUT RETIREMENT PLANS Age Farmers with retirement plans Farmers without retirement plans Average Farm Educationl size Income Net worth Social participation score 57 13-5 39 $3,666 $41,333 33 UU 9 .a 29 2,131 27,274 22 The respondents indicated that they planned to keep busy after retirement. Half of them planned to continue doing the thing they liked best; that is, they expected to buy a small country home and carry on a subsistence type of farming operation. A third expected to occupy themselves with odd jobs, the remainder wanted to travel and see some of the country. An effort was rrade to determine how much money the farmers felt they would need to live on after retirement. Answers ranged from $150 to $400 a month, with the median at around $200. Current family living expenditures average a.round pl 25 monthly; however, most respondents were very indefinite both as to present and luture expenditures* Most recognized that future expenditures would probably be higher due to less farm—produced food and possibly hagher medical costs. The farmers were asked to list their sources of Income for retirement. All mentioned as one source of income tne capital realized 127 from the sale of the farm or rent from the farm. listed social security as one source of income. About b‘5 percent The amount of total needs which social security was expected to provide varied from onequarter to two—thirds. However, none of the farmers had any very definite idea of the actual amount of old—are survivorfs benefit which they would draw. Other sources of income listed were pensions, retire­ ment annuities, and income from sale of surplus farm products. In general, there would seem to be a lack of planning both as to amount of income needed in retirement and possible sources of income. Few farmers have done any figuring to determine how much they would have left after taxes from the sale of the farm. Too few of them have even a vague idea of the amount available from social security. Prior to making the study, it was believed that the availability of social security payments v;ould be an important factor in farmers' decisions to retire. However, on the basis of answers given to the question, "Mhen did you decide to retire," about half of the farmers indicated they made the decision to retire several years ago. About a third actually stated that they made this decision before they became eligible for social security. However, it may very well be true that while the plans for retirement were made several years ago, it was not until they became eligible for social security benefits that the plans began to crystallize Into something more definite than hopes or dreams. Many things apparently determined the original decision to retire. Among the factors most frequently mentioned were "My health isn't too good and I can't do the hard work," "I can't hire help and can't do the 128 work myself,n "I'm. getting old and slowing down," "My son isn't inter­ ested in the farm," and MI figure as long as I'm paying the tax (social security) I may as well get something for it." These farmers are well aware that today's dairy fa.rms must have efficient management, with high output per man. If the operator is no longer capable of carrying his share of the labor load, it means hiring help, v/hich often isn't available. Therefore, they are willing to turn over the farm unit to s. younger man better able to handle both the management and the manual labor necessary. Farmers with no retirement plans. V«hat of the two-thirds of the formers who have made no plans for retirement? An attempt was made to determine what they plan to do in the latter years of their lives. About half of these farmers indicated that they planned no change in their farming operations after age 65 . About 20 percent indicated they planned to take a son into partnership or would turn their farm over to a son to run. Just under 15 percent wrould cut back the size of the farm end not work as hard. When asked specifically what they v/ould do if they found themselves physically unable to carry on the farm work, about 40 p>ercent stated they wrould sell out, and just under one-third wrould hire help. It is interesting to note that less than 5 percent would consider renting their farm under these circumstances. These farmers were then asked specifically if they thought they might sometime retire from their farms. Again, 50 percent stated that they definitely did not plan to retire, while another 15 percent doubted very much if they would ever retire. The remainder, when 129 specifically queried regarding retirement, indicated hopes of someday retiring, but apparently these hopes were not far enough advanced so that they had been formulated into plans. Factors mentioned most frequently as determining whether or not they would retire were availability of money and health of the operator. About one—third stated that they would never retire because they preferred to keep busy; the idea of "dying in the saddle." Apparently this is an important factor psychologically, because during the inter­ view many farmers, including those with retirement plans, indicated that after a person had worked hard all of his life he shouldn't stop abruptly, but should try and taper off his workload a little at a time. And many mentioned that they wanted a little land, a cow, and some chickens after they retired, so that they could have something to do. Certainly it would be a severe mental and physical strain on many farmers to move directly from the active managerial and laboring position of a farm operator to the idle hours of complete retirement. This is probably one of the more important considerations affecting farmers' decisions not to retire. Attitudes toward social security. The original survey was taken before social security was extended to farmers; the second survey after its extension. Table XXXIX gives information on attitudes tovrard social security from the original survey of 220 farmers. While there was a tendency for fewer of the operators of larger— sized farms to approve of social security, there were no significant differences by educational level, age, or reported income. In the second survey after 130 farmers had been covered by social security for two years, similar questions were asked. In this case 78 percent of those responding felt social security was a good thing for them, and 11 percent were opposed to the program. The remainder expressed some doubt as to the value of the program. TABLE .XXXIX ATTITUDES TOWARD SOCIAL SECURITY BY SIZE GROUP Size group I II III IV V All farms Attitudes toward social security Favor and Favor but not extend to farmers for farmers P e r c e n t S3.4 80.6 72.9 71.4 75.5 77.0 Oppose 7.3 11.1 16.7 17.1 18,7 14.6 7.3 8.3 10.4 11.4 _5*7_ 8.4 The most frequent answers given for favoring social security were "provid.es retirement income," "good for the small farmer who canft afford to retire," and "good for older farmers." The most frequent objections were "don't like the compulsion," "another control over farmers," and "it stifles ambition." Those most strongly favoring social security were farmers in their late fifties or sixties. Farmers on small farms also were generally strongly in favor of the program. Those opposing were younger and had larger than average operations. A surprising fact was that only one man mentioned the survivor's benefits as one of the advantages of the Old Age Survivor's Insurance 131 program. Despite all of the educational work done, it vjould appear that farmers still think of the program as one designed primarily to provide a minimum level of retirement income for old age. There is evidence, although no statistical proof, that older farmers have altered their farming programs somewhat so as to maximize their incomes while building up eligibility for social security bene­ fits. Many farmers indicated that they wore employing this strategy. Certain writers, in discussing the implications of the social security program on agriculture, have commented upon its possible effects on land tenure.^ The general consensus was that farms would not change hands as rapidly for the first three or four years after the program was initiated. While statistical data are not available for Vermont, general observation tends to confirm this. The normal rate of turnover of farms in the state has been between 4 and 5 percent for the last 10 years up until 1954* While figures are not available for the 1954-57 period, credit and real estate agencies indicate that farms are not being sold at this previous rate. However, farms may be priced above their capitalized earning power due to lower present milk prices and this very likely affects the slow turnover. In areas with a high percentage of tenancy, some tenants have expressed the fear that social security may cause landlords to take ^ G e n e Wunderlich, "Social Security in Agriculture ,11 Journal of Farm Economics (February, 1956). Farm Tenure and Family Adjustments to Social Security, Federal Extension Service, United States Department of Agriculture, PA 280 (February, 1956). 132 over the operation of their farms in order to qualify. In Vermont, with a tenancy ra/te of under 5 percent, this has not been a problem. In fact, it was the hope of the writer that social security benefits might make more farms available to tenants. Generally, the rental income from a dairy form is not sufficient to pay taxes, fire insurance, depreciation and upkeep and still provide enough interest income for a landlord to live on. However, there should be enough rental income from many dairy farms to supplement the social security benefits and provide a comfortable retirement. During the survey, an effort was made to determine if more farmers would now consider renting their farms and if not, the reasons why. About one-third indicated that under certain circumstances they would consider renting their farm. However, many of these indicated that they would prefer to sell if they could get their price. Of those who would never consider renting, the majority believed that they couldn't get good tenants. Many correctly recognized that their farm was too small a unit to rent. It is a reasonable hypothesis that farmers will now be more willing than before social security coverage to give up the management and operation of their farms, either by rental or outright sale. This means that the productive commercial farms can be turned over to younger, more able men before the farms have had a chance to depreciate or decline in productivity. This in itself is desirable, since resources will be more fully utilized. 133 Some of the recent literature on the effects of 0 A S l4 3 has made much of the income redistribution which will result from this program being applied to agriculture. two directions: This transfer of income is primarily in from younger farmers to older-aged farmers as they become eligible for social security payments, and secondly, from higherincome to lower—income farmers. There is also income redistribution between single or childless married farmers and those with children. While no one can deny that income redistribution will be a result, in view of the changing value systems in agriculture and in the nonagricultural economy, it is questionable whether vie can brand this redistribution as undesirable. In a state where 37 percent of the farmers are 55 or over, and where 60 percent are on farms which are barely large enough to provide for current living, probably the income redistribution effects from the social security program are no greater than they v/ould be from public welfare or relief. Uncertainty is a definite problem in agriculture and is a limiting factor in the optimum allocation of resources. The OASI program should prove a positive factor in decreasing one phase of uncertainty— insecurity in old age and for survivors— and this may lead to less desire for liquidity of assets resulting in better allocation of resources. The OASI program may improve the credit rating of farmers and result in less stringent credit requirements. /+3ibid. A program which assures 134 the farmer* tnat his family has a minimum of income security through survivor1s oenefits if needed, should result in his being more willing to oocain more credit where justifiable. to the banker as well. This should, also be favorable On the other hand, the tax collection will cut down somewhat on the amount of cash available to repay debts or for family living expenses, and in this respect may prove a limiting factor in loan repayment ability, A final word might be said on the problem of security versus farmers 1 freedom. This was one of the main objections of farmers to the extension of a compulsory social insurance program to agriculture— it was an invasion of the farmers' freedom. This is probably an invasion on the farmers' freedom to invest his money as he pleases. On the other hand, the farmer is receiving a gre: ter degree of security and protection than he could provide for himself at the seme price, and certainly more than he has ever had before. It is interesting to note that compulsory social insurance started in Germany during the rule of Otto von Bis march, the "Iron Chancellor,'" at a time of unrest in that country. program in Germany, S u lz b a c h 4 4 In discussing the says, "In so far as Bis march advocated an institution which he believed would make the common man more secure and content, he acted like any politician in a democracy. But in addition, Bismarch conceived of social insurance as a substitute for ^ W a l t e r Sulzbach, German Experiment with Social Insurance, Studies in Individual and Collective Security, No" 2 ("National Industrial Conference Board). 135 government by the people. He may have been aware of the fact that the economically underprivileged classes, offered the choice between •liberty* and 'security' seem to prefer the latter." It is not necessary to subscribe to Sulzbach's views to ration­ alize the OASI program for agriculture. History is full of conflicts of this sort where social action is taken which reduces the individu­ al's freedom of action in exchange for the gain of some other value which is deemed to be highly prized. As Hatha’,.ay has shown^ this is true in price support and production control programs, and can be demonstrated by indifference analysis. No one can or should try to decide for farmers if this program will be good for them. Indications are that a majority of farmers have been willing to give up a small amount of freedom for the security gained. Their actions at the polls and through pressure groups have shown this to be true. Farmers apparently place a high value on security. In this light, social security is another step toward achieving the goals which farm people hold high, and if the ends are sufficiently important— as they appear to be— the costs can probably be fully justified. ^ D a l e Hathaway, "Agricultural Policy and Farmers' Freedom; A Suggested Framework," Journal of Farm Economics (November, 1953). CHAPTER VIII SUMMARY AND CONCLUSIONS CHAPTER VIII SUMMARY AND CONCLUSIONS This study has been concerned with the insurance programs of a representative sample of Vermont farmers. It has examined the received theory and, the writer believes, found it vanting. It has attempted, within the framework of current theory, to explain and predict the behavior of these farmers in the area of insurance purchases. Uncertainty of the future has a vitally Important effect upon the production plans of farmers; because of uncertainty, production plans must be altered and the use of resources is likely to be differ­ ent than would be the case in a static economic system. imposes costs, either in losses or in forgone production plans to decrease uncertainty. Uncertainty income from modifying Certain types of uncertainty, known as risks, are insurable. Probabilities of occurrence are known and it is actuarially possible to determine premium costs for insurance plans to protect against the loss. It is with the area of insurable risks that this study has been concerned. Formal insurance has definite costs in the form of premium. A farmer who insures willingly sacrifices a known amount of current income to receive a certain future income or to protect future assets. By so doing, he accepts a lower present income plus the security afforded by the insured future income or assets, in preference to a slightly higher present income but uncertain future income or assets. 137 From a monetary standpoint, these costs of providing security are relatively large. While it is difficult to determine accurately on the basis of the information available, the cost of all Insurance premiums approximates 12 percent of net farm income for those surveyed. XL gives figures which compare expenditures by size Table group. TABLE XL AVERAGE INCOME, AVERAGE OF ALL INSURANCE PREMIUMS, AND PERCENT PREMIUMS ARE OF INCOME BY SIZE GROUP, 195 FARMS Group ___ I II III IV V All farms Average'*'' Average Percent premiums net income______ insurance premiums______ are of net income $1,944 $201 10.3 1,865 208 11.2 2,180 367 16.8 2,643 450 17.0 4.794________________J £ 6 _____________________9.9______ $2,786 $345 12.4 •^Adjusted for those insurance costs which are normally included in production costs when determining; net income. Since this expenditure is a relatively important part of income, it behooves those working with farmers to improve the farmers1 welfare to see that the insurance dollar expenditure maximizes the satis­ factions of the farm family. Basically, insurance expenditures have two objectives: those which protect future income or future income-earning ability, and those which protect investment in assets. Both are closely related, and In some instances, one type of insurance will accomplish both objectives. Thus, a fire insurance policy Is designed to protect assets; however, if a barn is destroyed by fire, not only is a capital asset lost, but 138 future earning power may also be temporarily diminished or halted. A life insurance policy protects the survivors of the insured primarily against the loss of future earning power of the insured. A liability policy is one which is designed specifically to protect assets or equity; however, once assets are completely eliminated, the future income of the liable person may also be attached. Medical and hospital­ ization insurance is in part to provide protection against loss of assets (savings) or future income. From an analytical standpoint, it would seem desirable, however, to keep in mind the separation between personal and casualty insurance. It has been assumed that individuals differ psychologically in their reactions toward risk. Some individuals by their actions exhibit a strong preference for security; others in their farming operations and personal lives would seem to be more willing to gamble. However, the economic behavior of most all individuals Is marked by some varying combination of risk-taking and security seeking. The Friedman—Savage utility hypothesis presents a logical explanation of how rational individuals can both insure and gamble, based on a peculiarly shaped utility function. The hypothesis does not, to the writer, demonstrate why individuals will insure quite adequately in some respects and have little or no insurance in other areas. The ansvrer to this problem must be sought in an analysis of the sociological and institutional factors affecting consumer behavior. The requirement that all mortgaged property be insured against loss by fire is a major factor in fire insurance ownership. Financial responsibility laws affect certain 139 kinds of vehicle insurance purchases. Custom, habit, the desire for social standing or acceptance, are all important in determining insurance ownership. The purchase of insurance can probably be best analyzed i-/ithin a modified framework of consumption theory. The product of the insurance dollar input cannot be measured in physical units; rather it is measured in satisfaction or utility— in peace of rnind. However, the concept of personal utility maximization must be broadened to allow for the maximization of utility for a fajidly unit which is also a complex of firm-househola values* In Chapter 11^ it was suggested that current utility theory which does not distinguish among the different types of insurance is not realistic. It was hypothesized that farmers look at insurance in at least two broad classifications, personal insurance and casualty-type insurances. It has been shown that farmers do not think in terms of an insurance program, but rather in ter jus of Individual policies. It has also been demonstrated that for certain kinds of insurance, institutional and sociological factors play an important part in explaining consumption patterns, whereas for other types economic factors are largely responsible, bhile it may simplify the theory to abstract it from reality, it also diminishes its usefulness. The ox cart and the big black Cadillac are both means of transportation, but a theory which tries to explain the transportation system by con­ sidering them synonymous will fail to provide much insight into diifer— ences in an economic system utilizing either one. 140 While it is ha.zo.Td.ous to make broad general statements, the writer feels that with most types ox casualty insurcmce; institutional factors or custom largely determine whether or not insurance will be carried and to some extent how much shall be carried. Limits of fire insurance and certain types of auto insurance are related to income and net worth, but the decision making involved in the.se insurance purchases is often overshadowed or greatly diminished by these other factors. And even for the personal types of insurance one should not overlook the desire for social acceptance or standing as important factors affecting consumption. It was also suggested in Chapter II that there are certain mis­ givings about the reliability of present attempts to cardinally measure utility and the use of this method in explaining or predicting insurance consumption. These doubts are based on the complex of value conflicts involving the firm and household, the division of income between present consumption and future consumption, and the difficulty in determining individual satisfaction from family welfare goals. It was hypothesized that some concrete indications of a manager’s reaction to risk could be given without attempting to mathematically measure the utility of the money involved in bne gamble or insurance .scheme. The method tried was to develop a risk— preference scale based on tee farm operator's answers to certain questions pertaining to his farming operations. Scores were to be compared with certain socio-economic fa.ctors pertaining to each farm. 141 The results of this part of the study were disappointing. would appear to be at least two problems involved. There In the first place it Is very difficult to construct questions regarding problem situ­ ations which can be rated In respect to their degree of risk. The rating oC such questions is a function of the scientist’s values as to degree of risk. Secondly, it Is extremely difficult to get farmers to actually imagine themselves in the problem situation and to answer accurately as to how they would act if the situation were actually facing them. However, the same criticisms can be leveled against the mathematical approach to utility measurement. This study has shown that the farm people interviewed were lacking In information about insurance. They knew very little about life insurance, either as to the types of policies available or the kind of life insurance they themselves had. regarding vehicle insurance. There was much confusion Were better information available, a more economical expenditure of the insurance dollar woulcj be possible, and farm families could get more protection for less cost than they are presently getting. What conclusions can be drawn specifically concerning the insurance programs of Vermont farmers and insurance theory in general? The different kinds of insurance will be discussed separately. Life insurance. Although family protection was given as the primary reason for owning life insurance by the farmers questioned, by far the greater proportion of policies were of the high-Investrnent type. Ownership was distributed over all members of the family, rather 142 ■than being concentrated on the life of the breadwinner. For the most part, the amount of coverage per insured person was low, barely enough to cover burial expenses* The amount of coverage on the breadwinner was significantly correlated, with income, age, and social status; however, the measured variables explained only 10 percent of insurance coverage * The activity of the agent is a very important factor in life insurance ownership. While it was impossible to determine just how important this salesmanship is, coversations with insured farmers left no doubt in the writer*s mind as to the importance of the agent. This can be unfortunate from the viewpoint of the fan... family!s welfcre if the agent is most concerned with meeting quotas or so M i n g high commi ss ion polic ie s . It bus also been shorn that increases in income are probably more important, than present income levels in affecting increases in life insurance consumption. One factor which 'was not investigated, but should have been, was the number of .insurance policies owned by adults but taken out bp' parents when the adult was a child. For those in the 20-40 year age group, this is probably an important factor. Finally, the ignorance of life insurance principles is wide­ spread, and if one attempts to explain life insurance ownership patterns by first assuming perfect knowledge, he is bound to be frustrated. Vehicle insurance. Institutional factors a.re important in determining automobile insurance purchases. Also important is custom 143 op habit, particularly lor collision insurance. For many purchasers of collision insurance, habit or custom overrides economic considerations. This must oe recognised if the actions of farmers .are to be considered economically rational. Fire, theft, and comprehensive auto coverage appear to be more closely associated with income or farm size tin n any of the other coverages. coverage is This is probably because the purchase of these types of usually the result of actual decision making, mad axe not likely to be governed by institutional arrangements. Property fire insurance. Institutional factors divorce the purchase of fire insurance from the decision making function for many Vermont- farmers, both as to the decision of actually owning fire insurance and as to percent of value to be insured. For many other farmers, there would appear to be no actual decision as to whether or not to insure; the only decision involved is the extent of coverage. Those farmers with the largest farms and greatest net worth tended to be more heavily insured chon the smaller farmers. A fc ctor in this higher percent of coverage is probably the fact that in the event of loss, the amount of loss would be sufficient to put them on a much lower socio-economic plane, and so they wore willing to insure heavily. Income level was not too closely associated with fire insurance ownership and changes in income would result in changes in lire cover­ age for few far me r s . 144 General liability insurance. coverage for most farmers. This is a relative?Ly new type ox To date, ownership is primarily by the larger farmers employing hired help. However1, as more farmers learn of the chance of loss and the costs of coverage, the ownership increases. It often takes some near loss for a farmer to be motivated to purchase general liability. The activity of agents is also an important factor in this type of coverage, and an agent can easily advance a farmer from an inaction or learning knowledge situation to at risk—action situation. Hos pit alia at ion insurance. about half* of the f armers surveyed. This type of cover .age vas owned by Ownership does not a'/pear to be associated with f-•rm size or income, but may be associated with educational level. Ib may be the b actual decision making is more a factor in health insurance than most other kin Is. Vermont families do not have as high medical expenses as the notional average, probably bee./use of relatively low incomes and a lack of nearby medical facilities. Retirement programs and social secunity. The agricultural sector of the economy is still behind most other segments in its plans for retirement. This is probably due to many factors; among them low incomes, the belief that it is preferable to "die in the saddle,n and the fact that farming has in the past lent itself to a modified type of on-the-job retirement through decreasing the scale of operations with advancing age. There is evidence that the OASI program has st irted farmers to thinking more about actual retirement from the farm. This 145 is particularly true of older farmers• Among those f.rmer s actually in;iking retirement plans, however, th.ere is a decided need for infor­ mation on living costs and other problems. It is too early to determine the effects of the social security program on land tenure patterns, rental of farms and income distri­ bution. It would appear from preliminary evidence that the avail­ ability of social security payments would have some effect on the number of rental units available. Most farmers have op parently accepted social security as a desirable farm program. Those who have reservations arc generally opposed to the compulsion Involved. One surprising fact is that hardly a. f irmer recognized the survivor1s benefits as a part of the social security program. Insurance theory re-exairiined. It would seem desirable to re— examine present insurance theory in the light of some of the findings included in this study. The concept of the economic man going through the decision making process in insurance consumption, weighing alterna­ tives and choosing that alternative which maximizes cither his own or some complex interrelated family utility must be questioned. Insti­ tutional and sociological arrangements> and h bituul behavior may supersede personal utility maximization in explaining much insurance ownership. The activity of agents may be a most important factor in influencing farmers' decisions. And finally, the state of knowledge oossessod by farmers concerning Insurance is fir from perfect. Further 146 research is also needed on the determination of subjective risk— preference; if this inf or mat i on were available in a reliable form it would undoubtedly shed nev: light on some apparent inconsistencies in insurance behavior. However, present methods of measurement, either by mathematical computation or relative methods, do not seem adequate. This study, then, has. had as oris of its basic aims the critical examination of existing theories pertinent to insurance to determine their effectiveness in explaining farmers' behavior. Secondly, the study has attempted to integrate and modify current theory so that it may have application in this field of consumption. Finally, the study has gathered inform:tion on the state of knowledge about, and. attitudes toward insurance along; with information on >ctual ownership patterns. It has attempted to provide a benchmark for the use of those people counseling with farmers. In this respect the goal has been attained. In respect to insurance theory, the writer believes the study has pointed out some of the shortcomings of existing; theories, and shown areas where further development Is needed. If thus has been done, it has been of some value to the nbv ncement of science. BIBLIOGRAPHY BIBLIOGRAPHY 1. Books Arrow, Kenneth J. Social Choice and Individual Values. John VAlley and Sons, Inc., 1951. New York: Bradford, Lawrence A* and Johnson, Glenn L. Farm Management Analysis. New York: John Wiley and Sons, Inc., 1953* Britt, S. H. Social Psychology of Modern Life. and Company, 1941. New York: Rhinehart Chapin, F. Stuart. Experimental Designs in Sociological Research. New York: Harper and Brothers, 1955. Con;ant, Janes D. Science and. Common Sense. ty Press, 1951- New Haven: Yale Universi­ Goode, W. J. and Hatt, P. K. Methods in Social Research. McGraw-Hill Book Company, 1952. Heady, Sari 0. New York: New York: Econoniics of Agrtcultural Production and Resource Use. Prentice-Hall, Inc., 1952. Huebner, 3. S. Life Insurance. Inc., 1950. New York: Appleton-Century-Crofts, Johnson, D. Gale. Forward Prices for Agriculture. University of Chicago Press, 194-7. Knight, Frank. Risk, Uncertainty, and Prof It. Mifflin Company, 1921. Chicago: Boston: Levy, Michael H. Your Insurance and How to Profit by It. Harcourt Brace and Company, 1956. Mar silull, nil red, Principles of Bconofilc s . C ompany, 1920. London: The Houghton New York: The Macmillan Mow bray, Alb ert H. Insurance, Its Theory and Practice in the United States . Newr York: McGraw-Hill Book Company, 1946. Salter, Leonard A. Land Economics . Minneapolis: Minnesota Press, 1943. Shackle, G. L. 3. Expectations in Economics. The University Press, 1952. The University of Cambridge (England): 2. Bulletins and Monographs Baill, J. M. The Fariiiei's and Old-Age Security. United States Depart­ ment ox agriculture, Agricultural Marketing Service, Agricultural Information Bulletin 151, 1955* Bolts, K. A. Insurance for Fanners. United States Department of Agriculture Farmers' Bulletin 2016, 1950. Bolts, A. i i m Life Insurance for Farm Families. United States Depart­ ment of Agriculture Miscellaneous Publication 621, 1947. Diesslin, H. G. and iuivey, G. A. The Insurance Programs of Indiana Farmers♦ Lafayette, Indiana: Agricultural Experiment Station Bulletin 609, 1954Dinits, Simon. Insurance Consumption Patterns. Columbus, Ohio: Research Division, Nationwide Mutual Insurance Companies, 1955• Hard, T. N. Old Age Plans and Programs of Farmers. Ithaca, Near York: Cornell Agricultural Experiment Station Bulletin 698, 19491 Johnson, G. L. Kentucky: 1954. Managerial Concepts for Agriculturists. Lexington, Kentucky Agricultural Experiment Station Bulletin 619, Johnson, G. L. arid Haver, Cecil B. D e cis i on-Maki ng PiInc in Farm Management. Lexington, Kentucky: Kentucky Agricultural Experi­ ment Station Bulletin 593, 1953. Kelsey, ii- VJ. and Daniels, A. C. Handbook of Life Insurance. Now York: Institute of Life Insurance, 1953. 1956 Life Insurance Fact Book. Insurance. New York, New York: New Yorl Institute of Life Matteson, V. J. and Harwood, E. C. Life Insurance and Annuities from the Buyers Point of View. Great Herrington, Massachusetts: American Institute for Economic Research, 1935McKain, hi S.; Baldwin, E. D. ; and Ducoff, E. J. Economic Security in Old Age , Connec ticub Farm Operators t 19J51 • Storrs Experiment Station Information Bulletin 43, 1952. Pi’oceedings of Research Conference on.xlisk and Uncertainty in A q-r— culture . Fargo, North Dakota: Agricultural. Experiment Station, North Dakota agricultural College, Great Plains Council Publi­ cation 11, 1953. 149 Tabb, John R, Insurance Programs on 5&7 New York Farms. Ithaca, New York: Cornell University Agricultural Experiment Station, Agri­ cultural Economics Publication 953* 1954. Williams, H* Sewell; Ramsey, Charles; and Ducoff, L. J* Farmers Conceptions and Plans for Economic Security in Old Age. Madison, Wisconsin: Wisconsin Agricultural Experiment Station Bulletin 1S2, 1953. 3. Journal Articles, Speeches, Unpublished Data Friedman, Milton, and Savage, L. J. The Utility Analysis of Choices Involving Risk; The Journal of Political Economy. August, 1943. pp. 279-304. Greenfield, John E. "A Planning Technique for Farmers* Insurance Needs*" Unpublished Ph.D. thesis submitted to Purdue University Graduate College, 1956. Halter, Albert E. "Measuring Utility of Wealth Among Form Managers." Unpublished thesis submitted to Graduate School, Michigan State University, 1957 * Johnson, Glenn. The Friedman—Savage Utility Hypothesis in the Inter­ state Managerial Study. Journal of Farm Economics. Proceedings Number, December, 1955* pp. 1110—1114* Vermont Commission on Country Life. ing Company, 1931. Rural Vermont. Wunderlich, Gene. Social Security in Agriculture. Economics. February, 1956, pp. 17-29. Free Press Print­ Journal of Farm APPENDIX APPENDIX A SAMPLE GHAR ACTEiilSTICS AND DISTRIBUTION 150 TJ %-i CD CV CV CV -4 H > a c \J H O CM N CV x t N JO - C x - x O O x - 4 CV O x C O - 4 - 4 C O O C O *-C\ c c \ x O O C O O C O C O rH t o O CO rH CO 0 0 x 0 C O H o iA C x P - cm i? q o ctJ q CD d - p •H r q bO q a o q o -CPD CO • H tO O O •rH CD - p "O p j r H • H "O CD <4 x : '-4 m o o q •H rH X CD CO CO cq o CD ■— CO CD JH rH — H r2 • o H CD a j q rP .5 Exr 1 -1 aj C 0 1 1^ hfl SO § < 1 CbDO q 8 H •H X ! C D tj q CD r H jd to q CO tcJ r H tO -P q q q o o Pci -P O !H - P ° CO (D 'd -P 54 4 «r-i ’H *3^ -P CO 151 TTS! P i CD1 0> i— 1 p j -3 3 a -P PO CD rH & Pi •H 5-. 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S-i - P o < CO ''0 •rH .j— 0 rH J^4 i— 1 ±2 w •■ F I Pi Si CO Pi P i ■ r- 1 & H cis rH O O O 5=1 0 01 0 * 3•H 0 -P 0 •H _o 1c IS cb 152 TABLE XLII SAMPLE SIZE COMPARED TO TOTAL NUMBER OF Fa RMS , BY SIZE GROUP Total number Number of of farms in farms Size group_____________ group-*-______________ sampled Units 1 12 20 30 40 -11 - 19 - 29 - 39 and over Total 5,700 2,726 2,739 1,637 1.538 14,440 Percent of total sampled 42 37 50 35 56 220 0.74 1.36 1.79 2.10 3.53 1.52 -''-Based on Vermont Town Listers Reports. table xliii' JOMPARISON OF SELECTED CHARACTERISTICS OF SVTPLS FARMS IN FIRST AND SECOND SURVEYS _ average Number Average Average Average Average life of number age education number insurance Average farms cf of of in on farm surveyed cows __ operator op r v t or family operator valuation First survey Second survey 220 29 47.5 9*6 4*1 .>247 $26,667 41 29 47.9 9.0 4.1 4 >343 27,274 APPENDIX B FIRST QUESTIONNAIRE USED FOR 220 FARMS 153 Farm Number: SURVEY OF POLICYHOLDER NEEDS AND ATTITUDES Interview Schedule ^ “ driving Characteristics and Attitudes 1. About how many miles a year do you drive your car(s)? 2* Who does most of the driving? 3. What is the principal use that you make of your car? a. Driving in connection c . ____ Shopping with farming_______________ d.____Other b. Pleasure 4* Who do you think cause most of the accidents? 5. What do you think causes most of the accidents?____________ _______ 6. Which aae groan do vou think has the poorest auto accident record? a. ___ 16-25 b. ___ 26-50 c♦ 50 and over 7. (Not used) S. Do you believe that Vermont should have a law requiring every driver to carry insurance to pay for damages he causes? Yes ___ No____ Undecided ___ 9. Suppose, for the sake of argument, that Vermont did require every driver to carry liability insurance. car: Husband truck: Husband a. Do you think this requirement would: (1 ) ___ increase the cost of insurance (2 ) ___ decrease the cost of insurance (3) ___ have It unchanged (4 ) ___ undecided b. Would this requirement (1 ) ___ decrease accidents (2 ) ___ increase them (3 ) ___ have no noticeable effect (4) ___ undecided Wife Wife truck(s) Ghildren_ Children (Kinds of drivers) 154 10. Which of the following do you think insurance companies should do? a* insure all drivers, even if this Alight mean higher rates to you or b. ________ insure only drivers with good driving records. c. ___ Other (merit, demerit plan, etc.) 11. Do you think having auto insurance tends to make most oeoole more or less careful as drivers? More careful ___ Lesscareful____ No difference ___ "" 12. Have you ever served on a jury, in the last five years? Yes____ No_ 13* Have you ever been excused from jury duty in the pa.stfive years? Yes No___ 14. Do you think that juries generally award auto damages that are too high, too low or fair? Too high Too low__ Fair_Don't know___ 15. In your opinion, 16. If yes, do you favor its extension to u rmers? 17. Do you think the Government should pay a pension to all people over 65 even if they never paid for Social Security? Yes No___ 18. Do you think the Federal Government shouldgo further into the insurance business or should they stay out of it. Go further___ Stay out DK___ 19* Do you expect the cost of living to increase in the next year or two? Yes No Neither DK__ 20. In your opinion are farmers havingprosperity now? Yes 21. Considering the country as a whole, do you think farmers will have good or bad times in the next year or so? Good Bad Neither__ DK__ 22. Do you expect prices of farm products to incree.se in the next year or two? Yes No Neither DK__ 23. Would you say you are better or worse off financially now than you were a year ago? Better Worse Neither_____ DK _ 24. In your own case, do you think you will be better off or worse off next year as compared to this year? Better Worse Neither__ DK is Social Security a good thing? Yes Yes No___ No___ No DK___ 155 25- How do you feci about government price supports for agricultural products? Favor Oppose___ a. If you nfavor,H at what level do you think suonorts ouaht to bs? a. ___ 100$ of parity b. 90$ d. e. 26. flexible other If things continue as they are, do you expect to carry more or less of the following kinds of insurance in the future? More a. b. c. d. 2?. Less Neither DK Life (self or family) Auto Fire, Theft, General Liability Accident and Health Mould you buy more insurance if: Yes a. b. Your income were to increase by 10$_________ Your income were to increase by 25$_________ No ____ ____ DK ___ ___ 28. (If "yes1* to either) what kind of additional insurance would you buy? a. Lif e b. Auto c. Fire, Theft, General Liability d. Accident and Health 29. Y/ould you dropor decrease income were t o : any of your present insurance if 3^our Yes a. Decrease by 10$________________________ ___ b. Decrease by 25$________________________ ___ c. __ Decrease by 50$________________________ ___ 30. No ____ __ _ ____ (If yes) what kind of insurance would you drop or decrease? a. b. Life Auto c. d. Fire Accident and Health DK 156 31 • What method would you prefer to use in paying your insurance premiums? a * .. 1 aynent b. Payment c. Payment 32* by check or money order through the mail at insurance company office to agent How frequently would you prefer to pay your premiums on auto insurance? a. b. c. Annually Semi—annually ^Quarterly d. ___Monthly e . ___ Other (Specify)___________ 33* Would you be willing to pay for the convenience of having all your premiums lumped together, regardless of company, and billed to you per month? Yes_ No_ 34* -(H yes) would you still feel the same way if only one of your companies would institute such a plan? Yes No___ 35* In your Opinion, is life insurance as good a method of saving money as a savings account? Yes No As Government savings bonds? Yes No___ 36 . In your opinion, is group insurance more or less expensive than the same insurance on an individual basis? More____ Less__ Uncert ain___ 37 * 1^ your opinion, do most insurance agents know more about the kind and amount of insurance that a person needs than the person himself? Yes No Uncertain _ 38. If you wanted to take out an insurance policy, which of these things V'ould you do? a. Ask friends to advise you and then call an agent b. Gall the company to send an agent c. Gall an agent you know 39. From how many different insurance agents do you buy your auto­ mobile, fire and other types of property insurance? _______ 40. How many different agents have sold you life insurance? ______ 41. Approximately how many times have you been approached in a selling interview for life insurance in the last year? ___ 157 II — Background Data 1. How large is your farm? a. b. c. d. 2. No. milking cox^s ______ No. heifers (1—2 yrs. ) No. calves and yearlings (up to 1 yr.) ______ Hens ______ If you have other farms, what are the cox/ numbers? 1st f a r m 3. 2nd farm other f a r m s ____ Family composition First and last name 3,• Relationship Sex Age Marital status M MM C __ ___ b . _____________ c. _______ __ d. e. x*m X s* h. i. 4. Education: Grade 1 2 College 1 2 5. 6. 4 4 5 6 7 3 High Post Graduate If not a fanner, what do you do for a living? Do you do anything else Yes No * a. 7. 3 3 1 2 1 2 4 A ________ _________ for a living in addition to farming? If yes, what do you__do?_______ ___________________________ _ What was your approximate income for 1953?. 3 3 1?3 8. Service status: Veteran___ 9* If veteran, which war? X Non-veteran___ II Korea 10. How many cars do you own? Trucks___ 11. How often do you trade in your car(s)? a. Every year _ b. E v e ^ 2 or 3 years___ c. K e e n car longer than 3 years___ 12. If you could afford It, how oftenwould you trade inyour car(s)? a. Every year _ b. Every 2 or 3 years___ c. Less often than every 3rd year___ 13. Do you rent or ovm your own farm? Rent_ Own 14. If you. now rent, would you like to 15- If you could afford it, would you enlarge your farm? own your farm?Yes No____ Yes No___ 159 & £| u i-j' •H G>! o Q! o *U cj 9h C— -1 o P,J> 0 I Jh D "h Q> *19* :) p c| •H C-■ *H Fh O •H O T' *H 01 C c o •V c 0 O Cl 0 C to c M 0 r;.i •H pH 1 o •rH C 0; P C | *H r— •1 h | o 0 P Ci S-H ’^ 0 0.1 p m| p ti"' •v_'‘ 0 * M f— ( PH r 1 0 >-t 0 rT-' s r-> C-- £ co u o c 0 I-' x: 0 P ^5; 0 0 O C. .; P 3 ^} C 0 c Pa X! CO x: P-i -p •H P o G-1 '"O' M 0 v_/ Cl .,—■ ' o p•rl CP rH O C ■0 "0 H C> o to _p c: <— ■ C X> n3 i— 1 CH PH 0 0 ^r P' o ■> O -P Co( & fO II oj G M r I to '•* -I to 0 M 1P 0 > *rH 1 i-T) 1 r— 1 jzz •H o 0 s 0 o K> •H O 1 •H ^T't 0 r 1 P CD •> 0 0 0 Fh p. •"■* Ho p zz p H zz c C-“ s, H: oQ p PC &J •in ■0 •H 0. •.'! •rH -p X> to § p 0 P 0 i —! 0 o ■T. H o_ K. ■:~3 O p. o O o 0 — 1 cfl fp '5 o 1 0 O • •H '*5‘ d O *Hi IH i—i td -p o O O d pin CH rH O? CH :-0 / —v O rH rH P j J 6 E~* CH 160 i—1 1 -p ' CD -O "CD c3 •H CDi H °l t0 Ph TD p CD C o T} * P •H > P *H P. Q CP <+-i O -P p s g CD (X,

i CD - H PtrH; D, P E-< v-M I—) r-3 0-) o E-» CD o P o E- Ct, ^ 161 C. 1. All Children and Dependents Total number of policies:_____________ Face Amount Type Comn a n v Net Premi um Ac cidental Death Frequency (21) (22) (23) (24) (25) (26) (2?) (28) (29) (30) Total D. Have you ever borroived on your insurance? Yes_ If yes, on which policies did you borrow? (List policy numbers as above_________________ S, Total number all Life Policies__________ F. Total amount all Life Policies__________ G. Total premium all Life Policies____________ . N o „ . 162 XV - Pension Programs and Annuities X. Have you ever paid in for Social Securiby? Yes 2. Have any other members of your family ever paid in for Social 3 ecavity? Yes Wo___ 3. Are you now paying for Social Security? Yes Ho Wo___ Is any member of your family now receiving Social Security benefits? Yes No Vdiich member _______ _____________________ 5* Do you or members of your family have any additional retirement or pension benefit programs? Yes No___ 6, Nature of plan: 7. _______________________________ _________________ a. Expected monthly retirement benefits b. Your monthly payments Do you own an annuity? a. y p_______ or percent of gross Yes No___ Face Amount Net Premium Frequency of Payment a) ____________ ______________________ (2) ________________ 163 V — Automobile Insurance Gar or truck No 1 - Limits 1. 2. 3• 4. 5. 6. 7. 8. 9. 10. Fire Theft Comprehensive Collision Property Damage Liability (Limit) Bodily Injury Liability (Limits) Medical Payments (Limits) Emergency Road Service D.O.C. Broad Form D.O.C. Limited a. b. Gar or truck No 2 - Limits ------------- — _____________ _____________ Premiums paid semi-Annually Premium paid Annually 11. 12. 13. 14. 15. 16. Type Model 17. Have you ever filed a claim under any auto policy? 18. Do you think you are likely to keep your auto policy for the next few years? Yes No If planning to drop, why do you plan to ____________ ______ __ do so? ___ _________ ________________ _____________ _____________ Year_______________________________ ____________ ____________ New or Used ____________ _______________ Insurance carrier(s)___________________________________________ Do you think that you are receiving adequate protection, consider­ ing the amount of premiums you are paying? Yes No__ Yes No__ 164 -p O 0 £ X X o X o £ • C D cr C D e £ sc3 IX CD & w X X > £ CD a 0 £ X 1 •rH bO X to £ M co 03 CD i —1 X X £ O '1 CD X X o ,£ X £> 1 £ £ i— 1 £ £» o CD £ CD £ H X o£J t>> X CO £ Xi CD £ rH O ,X £ cd O O bO CD x : £ °a CO £ 0) £ CD «s £ *H XJ Is X X £ CD CD <=y £ -H g X X o a} S £ O c r* x CD co £ _P co X *H o C£-H OX H. j£ 4-> co x S o bOi—| bO O $ X! £ > X CD a, o £ O X X O co •rH •H X I ! £ •H o CD X X co £ £ X £ CD X •H £ o to g cd CD cd -8 0) o X £ S ’ £ CD £ X O o •rH £ X O •rH X cd C^- Ti £ O X cd CDl bC cd bC X 1 —I CD X £ o CD • X CO CD X £ O £ s X rH 0X O *H X CD •rH • £ rH o •H O S3 X X X CO CD X £ 10 CD •H O o CD 1 —I E> O x o ,Q O £ X o O cbO £ •H X £ - id " H CD •rH &* CD CD O £ CD > X X X £ £ O £ r-s O > X £ £ ' CD X O X X CD £ X X X cd xl -cd i—IOH CX U~N 'X 00 165 Bo Comprehensive Personal Liability Coverage Limits 1. 2. 3. Liability (occurrence) Medical Payments (person) Additional Charges A* Company Tot al Premium Frequency ~ *’ " (b) C. __________________ Residence and Outside Theft 1. 2. 3. Theft from premises or depository All other property Percent of limit _ Theft away from premises Inc. , Exc. , Auto property Limits Total Dedc. Premium _____ ____ _____ ____ ________ ______ Freq. ______ ______ Specified articles (a) (b) (o) (d) 4. D. (e) Company_______________________________ Householders' Limited Theft Limits 1. Theft from Premises 2. (a) (b) (c) (d) 3. Theft away from premises (a) Money (b) Securities and U.S. stamps (c) Jewelry, silver, furs (a) (b) 4. Company Money Securities & U.S. stamps Jewelry, silver, furs Other (a) (b) ___________ _____ Total Premium 166 E. Personal Property Floaters Type of Property All Location Main Other 1 . Dedc. $15 $25 $50 Amount ^ ___ 2. Premium _______ _ _ 3 . _______ A 9 _________ _ . ______ ___________________ __ ______ VII - Medical Care 1. Have you or any other earners in your family been disabled because of sickness or injury during the past year? Yes No___ Breadwinner a. Days of Disability b. Total Loss of earnings c. Total amount reimbursed by i n s u r a n c e Qfcjdeig corners _.______ ______ ______ ______ ___ _______ _ (1) Kind of insurance 2. I,'ere any of these injuries or illnesses work connected? a. If j'-Sj on the farm _ Off the f > r m Yes_ Yes, No _ 3. Are any of these injuries permanent? No___ 4- Have you or any members of your faiidly been treated at home bp- a doctor during the past year? Yes No other Bre..dvrinner a* Number of doctor’s calls b. Total amount of bills c • Total .mount paid by insurance (l) Kind of insurance Fami ly_ M a?nb ers „ _____ ___ ____ _______________________ _______ ___ __________ ____ 167 5* Have you or any member of your family been treated by a doctor at his office during the past year? Yes No Breadwinner a« Number of office calls b. Total amount of bills c . Amount paid by insurance ___________ All Other Family Members ~ (1) Kind of insurance 6. Have you or any member of your familybeen a patient in any kind of hospital during the past twelve months?Yes No_____ a. Number of times in hospital b. Total number of days in hospital c. Total amount of bills (exclusive of surgery) d. Total amount paid by insurance Breadwinner All Other Family Members ___________ ___________ ______________ ______________ ___________ ___________ ______________ ______________ (l) Kind of insurance 7. Have you or any member of your family had any operations during the past year? Yes No___ All Other Breadwinner Family Members a. Number of operations b. Total cost of operations (exclusive of hospital expenses) c. Total amount paid by insurance (l) Kind of insurance _ ___________ __________ _ ______________ ______________ 168 8. Have you or any members of your family had any: Total Cost a* b. c* d. e. 9* Amount Paid by Insurance Home nursing care Doctor's prescriptions Dental care Optometrist (glasses, etc*) Other expenses Do you have a regular "family doctor"? Yes No___ 10. Have you (the breadwinner) had a physical check-up during the past year? Yes No___ 11. Would you rather have a: a. Medical expense policy which took care of all billsover $100 or b. Medical expense policy which took care of all bills under $100. 12. Would you rather have a: a. Medical expense policy which took care of all doctor and hospital bills over $300. b. Medical expend© policy which took care of all doctor and hospital bills under $300. 13. In your opinion, do doctors charge a patient more money when they find out he has medical expense insurance? Yes No How about hospitals? Yes No___ 14. Do you think that a person uses a doctor more or less often if he has insurance to cover doctors' bills? More often Less often__ 15. Do you think that doctors will send a patient to a hospital more or less often if they know that the patient has hospital Insurance? More often Less often__ 169 to P P P )I>? h ; o X) P cm 'i 1 p o 1 S O Y es O P rt Lo? |I X> | P x -p co ■'a P P fM P P X o(H p ^^ > p x 1 1p O i—i bO P *H P C D C C S •rH to p o o p o ■H P o p p o P P. Hospital and Surgical Expense Insurance Policies P 16* p o fx to 1 C Op P -H cd P U ■HI CO aJ Pi P c~ •H to X p P •H O P •rl O rH >> o O Ph C o5 P to P O p C o x o p & P X P X> bO •H t> •rH P O P P P P G J p X X P •3 1 O 1 P I O to t>5 p P 05 X <>• bO P P x oJ Q-> p P p P. o o3 r'S. P o o Q !>> cv I—I CV XI —I P i>^ cm cm •H P 1? P P P P X M P X P

? O o p o X o P P P •rx P !>> X cm P P 05 <1)1 cm o* to S-, P P «\ P P £j oJ o rH O g oJ to p P P ► '’"a i—1 $ •H pH, cm p P •H p t> P p •rH P P •» o W P p > > *x I—I o p •H X ■H •§ rH 1 1 p Ph p O 05 P X p O o >-2 P X p •H X P bO § P rH o P, l>3 cm P =m X l—l o X CO CTv M 170 20# Accident and Health Insurance: Accidental Death and Dismemberment Insurance: Travel Accident Policies:_________________ a. Breadwinner Amount Weekly Type of Group or Freq. of Disability Ho. of PrinciPolicy Individual Company Prem. Payment Payment Weeks pal Sum a)______________________________ (2) . ; ______________________________ b. Wife or Other Family Members (X)___________________________________________________ (2 ) ________________________________________________ 21. Do you think that you are receiving adequate protection by these policies considering the amount of premiums you are paying? Yes No___ 22. Have you ever filed a claim under these policies? Yes No___ If yes, did it pay as much of the loss as you think it should have? Yes No 23* Do you think you are likely to keep the policies for the next few years? Y e s _ No If planning to drop, which do you plan to drop and why? (Identify by number as above)______________________ 24* Major Medical Expense: Polio Policies:_______ Type of Group or Pol1 cy Individual Company Freq. of Maximum Premium Payment Benefit Deductible a)______________________________ (2 ) : __________________________________ APPENDIX C SUPPLEMENTAL UESTIONNIlIRE USED FOR 41 FARMS 171 Farm Number: SUPPLEMENTAL QUS3T IONNAIHE INSURANCE STUDY PART I: Retirement and Social Security Number of milk cows Composition of labor force 1, How long have you been farming?_____ 2. How long have you lived on this farm? 3. How long do you expect to continue farming? farm 6, 5. If on another farm, a larger On this or smaller one? (Determine from question 3 or from further probing, if respondent expects to voluntarily discontinue farming.) 7. 4. Yes No If answer to 6 is Yes, what do you plan to do when you stop farming?___________ _____________ __ ____ ___________________ ANSWER FOLLOWING QUESTIONS ONLY IF 'RESPONDENT HAS MENTIONED RETIREMENT IN QUESTION 7. OTHERWISE, GO TO QUESTION 19. 8. At what age do you plan to retire? 9. What do you plan to do with your farm? _ 10. Where do you plan to live?________________ ______ ______________ 11. Have you made any plans as to what you will do after you retire from your farm?_____________ __ ______ _____ _____________ _____ _ 12. How much 13. money do you think you will need to live on? $>__ per___ About how much do you spend now for actual living expenses? (Include food, clothing, medical, entertainment, insurance, etc.) 172 H/-. If answers for 12 and 13 are different, how do you explain the difference? 15. Check sources of income during retirement: ____ Income from sale of farm Retirement insurance _______ Social Security ____ Other (Specify)____________ 16. _ __ ____ What percent of total income needed for retirement do you expect Social Security to provide?____ 17. When did you make this decision to retire? ___________________ __ 18. Do you remember what things you considered in making the decision? ANSWER FOLLOWING QUESTIONS ONLY IF RETIREMENT NOT MENTIONED IN QUESTION 7. OTHERS TO QUESTION 24. 19. Do you plan to make any changes in your farming operations, say, after reaching age 65? 20. No , Yes If yes, what changes? What will you do if you find yourself physically unable to carry on your farm work in the latter years of your life?_____________ 21. Do you think that you may sometime decide to retire from your farm?_____________ _____________________________________________ ____ 22. If yes, what things would be important in making this decision? 23. If no, why not? 173 ALL ANSWER 2A* Do you think that Social Security is a good, thing for you? Yes 25. , No Yes , No . Why?___________________ Would you consider renting your farm or part of your farm? Yes 27. Why?_______ Do you think Social Security is a good thing for the average farmer? 26. . No . If no, why not?_______________________ ___________ Assuming you were to rent a piece of land, or even your whole farm, which of these rental systems would you prefer? _____ A share of the proceeds _____ A set cash rent 2&. Suppose that I were to tell you that I knew of a new feeding method that could increase your milk production by 10 percent, with no increase in costs. Which do you think that you would do? _____ Try it out yourself to see how it worked. _____ Wait until some of yourneighbors had tried it out. 29. How let's imagine that I work for an insurance company and that I can write an insurance policy on your cows with one of the following provisions: 1. We will insure you against the loss from any cause of any four cows in your herd for a value of $100 per cow. The premium will be $10 per year. 2. We will insure all of the cows in your herd against loss from any cause, for a value of $50 per cow. The premium is §1.00 per coxv. If you have 20 cow herd, which would you prefer: Plan 1____ , Plan 2____ , Neither____ . Why?______________________________________________ __ _______________ 174 30• Suppose that you had a cull cow to sell and a reputable cattle dealer offered you what you thought was a fair price for the cow. Now suppose that he offered to toss a coin with you, and if you won the toss, he would pay $10 more, but if he won, he would pay $10 less than the offered price. Would you: Take the offered price Take the gamble 31. Now imagine that you have 1/L of your hay crop cut, dry, and ready to bale, your baler is broken, and the weather report says scattered showers for the next two days. Would you: Take your chances on the weather and try to get jrour baler repaired. Hire a neighbor to bale your hay at the going custom rate. 32. Did you invest or spend any money in your farming operation in the past year which you feltwas a particularly risky expenditure at the time? 33. Yes , No___ * If so, what was it?_________ _ As you think about your fanning operations would you say that you are: Cautious Conservative An innovator Speculative 175 PART I I : Insurance Motivation In 1954 when we visited you before, you indicated that you owned the following life insurance policies: Fa.ce Amount _Type Person Covered Premium a. b. ' 1< ------------------- : ---------- c. --- d. e. - . ---- - , . jI ym - ------ --------- &* , - ,, r . h.______________ ------- ; -------- ------ ----------------------- ---------------- 34* Are you still paying premiums on the policies listed above? If any are dropped, list with reasons why: 35. If you have no life insurance, why not?__________________________ 36. Have you taken out any additional life insurance? Yes , No___ ____________ Person covered ___Amount of policy ______________ .Type.of policy ^37 . Have you been visited by a life insurance agent in the past year? Yes , No • J 176 38. Now I'd like to get your ideas on what a fanner should consider in deciding whether or not to buy a life insurance policy. First, let's consider insurance itself. What do you feel are the main reasons for buying life insurance? Try and list them in their order of importance to you. 1. 2 . ________________ __________________________________ 3. ______________________________ 4*______________________ 39. ' No you think that farmers in general should carry as much life insurance as non-farm workers? 40. What things do you feel should Yes , No . Why?______________ determine the amount of life insurance a farm family should have? 1.__________________ ___ __________ _________ __________________________ ___ 3.____ _________________ -_____ ____________ 4 --------- _----------------------------------- 41 . bo you feel that the life insurance should all be on the farm owner's life, or should other members of the family be insured? _____ All on the farm owner _____ Other members of the family insured also Why do you feel this way?__________________________________________ 42. Can you tell me the main types of life insurance policies? (Check those listed.) _____ Ordinary life Limited payment Term Endowment — - 2. 177 43* Gould you tell me which of these you feelgives the mostsurvivor protection per dollar of premium paid? 44* Which of these types do you feel has the best savings fea.ture? 45* uliich of the four main types do you feel would best meet your insurance needs?________________ Why? 46. _____ If you were to start over again, would you make any changes in your life insurance program? Yes , No . If yes, what changes and why?_____________ _______ _________ 47. 48. Now let's consider auto insurance. have liability insurance on their cars and trucks? Why? _______ Do you have collision insurance on your car? , No . yes, age of car 49* Do you feel farmers should ^ Yes If Why or why not?______________________________ _ What should a farmer consider in trying to decidewhether or not to carry collision?_________________________________________ _______ 50. Now let's take a look at fire insurance. Do you think most farmers have enough fire insurance on their buildings? Yes , No . 51. On their personal property? 52. What do you use as a guide in deciding how much fire insurance to Yes , No . carry?_________________________________________ _______ _____________ 53. Do you have personal liability or workmen's compensation insurance? Yes , No . 178 54. If yes, how did you happen to take out this insurance? 55* If not, has anyone ever discussed liability insurance with you or tried to sell it to you? Yes , No . 56 . Do you have hospitalization or medical insurance? Yes , No___ . What made you decide to carry (not to carry) this type of insurance? 57* When you think of expenditures for insurance, do you consider all of your insurance premiums as a group, or do you separate out life, fire, auto, hospitalization insurance, etc.? _____ Consider all insurancepremiums as a group _____ Consider various insuranceseparately 58. Have you ever tried to develop a "planned” insurance program for your farm and family? 59. Yes _, No . If yes, did anyone help you with the planning? W ho Yes , No . ________________ _ _____ _____________________________________ 60. 61. Do you think that such planning is desirable or necessary? Y N Who do you think could best help you plan such a program? _____ Insurance agent Banker _____ County agent Other ( S p e c i f y ) _______________________________ ________ 62. Can you think of any instances when a man could carry his own insurance; ths-t is, bear all of the risk himself, without formally insuring with some company? (Specify)_____ _______________________ 63. (See Social Participation Scale.) 64 . We would like to get some idea of your income and asset position. This information will help us a great deal in analyzing these ^ records, and will be kept strictly confidential. Would you fill in the card. Card: ■H ^0 O *H St 3 c J -^P O 02 rH +5 O, i— ( 02 Score 63. SOCIAL PARTICIPATION SCALE js; o ISO Schedule No. INCOME AND ASSET POSITION STATEMENT Net Worth Market value of real estate less any mortgage; Market value of cattle and machinery less mortgages Gash in bank, checking accounts, stocks, bonds, etc. $ Cash value of other assets, household goods, car, etc. $ TOTAL NET WORTH POSITION: 0 Income Check approximate income reported for income tax, 1955None to -9500 $ _____ ________ o3,000 to $3,999 501 to $1,000______________ _______ - $4,000 to $4,999 $1,001 to $ 1,500 ____ $1,501 to $2,000 ______ $2,001 to $2,999 Percent of income earned ______ $5,000 to $5,999 ______ $6,000 to $7,499 _ _ _ _ _ $7,500 and over from_ofX’—farm a-ork ________ APPENDIX D ilSK—PRNFERSNCE SCORING SYSTEM 181 METHOD OF DETERMINING RISK-PREFEREMCE SCORE The risk-preference score, used to questions 28, 29, 30, 31, and 32 In in Chapter V isbased on anew ers the supplementalsurvey. The answers to these questions were v.'sighted as indicated below and the weights were surnmed to get the risk—preference score. Question 23: First alternative - 9 points Second alternative — 1 point Question 29: Question 30: Prefer Flan 1 — L points Prefer Plan 2 — 1 point No preference - 0 points First alternative - 1 point Second alternative - 49 points Question 31: First alternative - 24 points Second alternative - 1 point •Question 32: Any answer which indicated an investment in a risky venture — 5 points Question 33: Ansv.rered. cautious — Answered conservative - 3 points Answered innovator 5 points Answered speculative —10 points - 1 point