The idea of means testing measures (adjusted gross income [AGI] limits or caps on premium support) or removing tools that provide protection against losses in revenue would have unintended consequences for all farmers and be detrimental to the long–term viability of Federal crop insurance.
While it might only be a small number of farmers, initially, who are targeted by legislative efforts that will likely make crop insurance less affordable and available, all farmers may eventually be affected because for a risk pool to remain viable and affordable for all, it must be of sufficient size and comprised of a broad cross section of risks to be covered.
Capping crop insurance premium subsidy benefits for some translates to fewer policies sold and a higher concentration of risk. Likewise, the elimination of revenue-based tools, the product most utilized by farmers, would undoubtedly lead to a decline in program participation – especially among lower risk farmers, crops and regions.
That would change the composition of the “risk pool,” which in turn likely increases the premiums for remaining farmers with insurance coverage. When premiums start to increase for reasons tied to manipulation of the risk pool, the exit from the program may accelerate, thus exacerbating the problem of what to do when future disasters strike for farmers not covered by crop insurance, farmers who are under-insured due to high premium costs, lenders finding themselves short on operating loan repayments, and many other unintended consequences few have considered or thought of without the backstop of a strong Federal crop insurance program.
Economic literature indicates that lower risk farmers, who are more likely to be affected by means testing, are more responsive to premium changes than higher risk farmers. The USDA has called a cap on premium support “ill advised,” noting regions with high-value crops, large-acreage farms, and/or a higher risk of crop loss would be especially impacted. North Dakota, South Dakota, Texas, Minnesota, California, Arizona, Mississippi, Utah and Hawaii have all been singled out by USDA as shouldering a disproportionate amount under a cap on premium support.
Critics’ demands for the release of personal information about Federal crop insurance participants are presumably predicated upon the hope that public identification of larger farm operations or an individual’s government payments may prove embarrassing and dissuade some from participation in the program. But decreasing participation is undesirable as mentioned previously and to sanction public disclosure of personal information is entirely inconsistent with the rules governing most other federal programs that prohibit or restrict disclosure of personal information. No rational case has been, or could be, made to support different treatment in relation to crop insurance.
The farmer enters into a contract with a private-sector insurance provider and pays a premium for the policy. The farmer writes a check for crop insurance. The farmer only receives an indemnity after suffering a verifiable loss and shouldering a portion of the loss, a deductible. The farmer gets a discount on the actuarial-based risk premium rate established by the government and pays the discounted premium based on the level of coverage purchased.
In addition, the USDA’s Risk Management Agency provides wide-ranging data on the payments made and costs of Federal crop insurance (see here, particularly the section titled Summary of Business Reports and Application). Additional analysis and data on the distribution of program benefits has been reported by the Government Accountability Office (GAO). And the since the Federal Crop Insurance Corporation must complete and report audited annual financial statements of its activities and operations, the existing information provides all the data needed to evaluate the cost, efficiency and effectiveness of the Federal crop insurance program.
* Updated April 2020