2012 Crop Insurance Indemnities Set New Record, But Are Far Lower Than Critics Warned

(INDIAN WELLS, Calif.) — Crop insurance indemnity payments associated with the historic 2012 drought hit a record $14.2 billion Monday and will continue to climb as insurers work to finalize the remaining claims. But according to projections released last week by the Congressional Budget Office (CBO), total indemnities and the taxpayer-funded portion of those losses, will be much lower than crop insurance critics warned last summer.

CBO predicted $16 billion in expected indemnities as a result of last year’s catastrophic weather; however, CBO foresees a sharp decline in indemnities in 2013 with a return to more normal weather conditions. Since August, the CBO has lowered its projections for total federal outlays for crop insurance by nearly $8 billion over the next 10 years.

This stands in sharp contrast to the wild claims made last summer by crop insurance opponents who were angling to weaken farmers’ most important risk management tool. Academics and think tanks with an anti-farm-policy agenda supplied the media with sloppy estimates ranging from more than $20 billion to $40 billion in total indemnities.

Critics also led people to believe that taxpayers would be on the hook for nearly all crop insurance payments to farmers, which is another fallacy. Final program costs will reflect the $4.1 billion in premiums farmers paid to purchase insurance policies, losses by private crop insurance companies, as well as government investment.

The previous indemnity record of $10.8 billion was set to cover flooding in the Midwest and drought losses in the Southern Plains during 2011.

“The ability of the crop insurance industry to sustain back-to-back insured losses exceeding $10 billion, as it has done in 2011 and 2012, is a testament to the sound financial underpinning of the public-private partnership,” said Tom Zacharias, president of National Crop Insurance Services, a trade association representing crop insurers. “More importantly, unlike natural disasters before the emergence of crop insurance, all of the cost is not falling on the laps of taxpayers.”

Zacharias explained that before crop insurance became such an affordable and widely available tool, natural disasters like last year’s drought would have triggered costly ad hoc disaster bills, fully funded by taxpayers. Forty-two such agriculture disaster bills have cost taxpayers $70 billion since 1989, according to the Congressional Research Service.

“In addition to reducing taxpayer risk exposure, crop insurance receives high marks from those who buy it – our farmer customers – because of its efficiency and speed of delivery,” said Zacharias. “Farmers will use their indemnities to recover from their loss and then plan for next year’s crop,” he said.

By comparison, the recent Hurricane Sandy disaster assistance bill took three months to be signed into law. Relief payments to the victims, authorized by that legislation, have yet to be delivered.