Taxpayers Are Supporting More Than Farmers with Crop Insurance Subsidies

Key Points

• Recently, private crop insurance companies have captured over 40 percent of the annual subsidies for the federal crop insurance program, the purposes of which have expanded well beyond the program’s original intent just to protect farmers against yield and revenue shortfalls. 
• Over the past 15 years, underwriting gains, which mostly accrue to private crop insurance companies, have been substantial because premiums charged have been much higher than losses, leading to much lower loss ratios than the target level of 0.88 established by the US Department of Agriculture (USDA) Risk Management Agency.
• Replacing the current crop insurance program with far simpler, tightly targeted disaster aid programs managed solely by the USDA, and no out-of-pocket costs for farmers, would annually save billions of federal dollars while continuing to protect farmers against potentially devastating crop losses.

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Introduction

With the midterm elections behind us, momentum is building in Congress toward forthcoming discussions over the upcoming farm bill. A common refrain from many lobby groups is to “do no harm” to crop insurance. For example, a letter from the Crop Insurance Coalition, which includes farm, ranch, and crop insurance interest groups, stated, “We urge you to continue to support a linchpin of the safety net for America’s farmers and ranchers and oppose cuts to crop insurance during this year’s budget process.”¹ While the letter emphasizes protecting farmers and ranchers, it ignores the extensive benefits that flow to insurance companies.

The private agricultural insurance sector has experienced significant growth mostly because of the 1980 Federal Crop Insurance Act and subsequent legislation that promotes reliance on a public-private partnership in federal crop insurance program delivery.² In this report, we show that billions of taxpayer dollars are diverted away from farmers every year and used to line insurance companies’ pockets. These funds could be saved or more efficiently used by ending the insurance industry’s federal agricultural insurance program boondoggle and shifting to a much simpler suite of standing disaster aid programs.

As recently shown by Eric Belasco, Joseph Cooper, and Vincent Smith,³ such programs could even be designed to offer farmers protection against crop loss risks at levels similar to what they currently enjoy without requiring any of the out-of-pocket premium costs farmers currently pay. Most importantly, these types of disaster programs would eliminate the need for a public-private partnership, resulting in significant savings to taxpayers and more direct benefits for farmers. The main opponent of this type of more efficient policy would be the crop insurance industry.

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Notes

1. National Crop Insurance Services, “Agricultural Coalition Sends Letters Urging Federal Leaders to Protect Crop Insurance,” March 1, 2021, https://cropinsuranceinamerica.org/agricultural-coalition-sends-letters-urging-federal-leaders-to-protect-crop-insurance.
2. See Vincent H. Smith, “The US Federal Crop Insurance Program: A Case Study in Rent Seeking,” Agricultural Finance Review 80, no. 3 (2020): 337–58; and Jason Pearcy and Vincent H. Smith, “The Tangled Web of Agricultural Insurance: Evaluating the Impacts of Government Policy,” Journal of Agricultural and Resource Economics 40, no. 1 (2015): 80–111.
3. See the analysis of the impacts of a countywide-based standing disaster aid program on farm-level risk protection and total taxpayer costs by Eric J. Belasco, Joseph Cooper, and Vincent H. Smith, “The Development of a Weather-Based Crop Disaster Program,” American Journal of Agricultural Economics 102, no. 1 (2020): 240–58.