Did the 2012 drought put unnecessary burden on the taxpayer?

No. If anything, crop insurance helped shield taxpayers from additional risk and cost.

Consider these two important factors. First, large loss years do not occur very often. For example, the drop in corn production per acre in 2012 was the largest caused by drought since 1988, a once-in-25-year event. Insurance payouts, by definition, are largest when the loss is greatest. Secondly, if there was no crop insurance program, taxpayers would still be called upon to provide disaster assistance.

When a very large loss occurs, the cost of the loss is shared by farmers through their premium payments and deductibles, as well as crop insurance companies and taxpayers. This is in sharp contrast to natural disasters that occurred before crop insurance gained high participation. In the past, after a large disaster, farmers had to appeal to Congress to fund ad hoc disaster bills to help farmers overcome their losses. Taxpayers shouldered all the costs of these disaster bills.

Crop insurance is an evolving approach to risk management that requires farmers to put “skin in the game” for their own risk protection. In 2012, farmers spent $4.1 billion to purchase crop insurance policies. Once indemnities exceed the level of premiums in a state, crop insurance companies also pay part of the costs. As a reinsurer, the government absorbs a growing percentage of losses as indemnities increase relative to premiums.

In 2012, indemnity payments were $17.4 billion, well below the $20 billion to $40 billion initially predicted by some analysts and critics.  The final taxpayer cost of the 2012 disaster was $13.5 billion including delivery expense payments, much less than initially claimed, thanks to farmers and insurance companies paying part of the cost.

Watch a video about the drought of 2012 below.