Federal crop insurance helped shield taxpayers from additional risk and cost in the wake of the historic 2012 drought. In fact, the decrease in corn production per acre in 2012 was the largest caused by a drought since 1988, a once-in-25-year event. But farmers were not pressing Congress for help because most were protected by their Federal crop insurance policies. This was good news for taxpayers, who would have been on the hook for 100 percent of disaster payments before the emergence of Federal crop insurance as the cornerstone of U.S. farm policy.
Following the 2012 drought, farmers received $17.4 billion in indemnity payments, which was well below the $30 billion to $40 billion initially predicted by some analysts and critics. Importantly, before farmers received a single dime in crop insurance indemnity payments, they shouldered $14.5 billion in losses as part of their crop insurance policy deductibles and paid an additional $4.1 billion to purchase their policies. Thus, farmers absorbed more than $18 billion in uninsured losses and premium expenditures out of their own pockets before crop insurance began to pay indemnities.
In addition, private insurers suffered a $1.3 billion net underwriting loss in 2012 because claim payments greatly exceeded premiums collected. For its part, the government fulfilled its role as a reinsurer under the terms of the Standard Reinsurance Agreement stepping in to share in the severe and catastrophic losses – just as Congress intended.
This public-private partnership performed extremely well under the pressure of finalizing nearly one million claims following one of the worst disasters to hit agriculture in decades. Former USDA Under Secretary Michael Scuse summed up the performance in 2013, when he told crop insurers: “To this day, I have yet to have a single producer call me with a complaint about crop insurance. That is a testament to just how well your agents, your adjusters, the companies, and Risk Management Agency (RMA) worked together in one of the worst droughts in the history of this nation.”
Watch a video about the drought of 2012 here.
* Updated April 2020
Watch a video about the drought of 2012 below.