In Contrast to the Critics, Crop Insurance Does Not Discriminate

Perennial critics of farm policy have taken aim at one of the key risk management tools for farmers – crop insurance – and are ramping up efforts to spread misinformation about the program. Specifically, they are trying to distort how the premium discount works to leave some farmers with fewer risk management options.
Their claims include that this discount only goes to large farming operations, not small and beginning farmers, and that the discount should be capped for certain farmers.

These claims demonstrate a fundamental lack of knowledge on how insurance works and are out of step with the views of most Americans.

First, farmers purchase policies to protect their crops and operation from a loss. Crop insurance treats all farmers equally, regardless of operation, size, region, or crop. There is a discount for premiums so farmers – most of whom borrow more money each year than the rest of us borrow in a lifetime – can afford to purchase protection.

The crop insurance premium discount is not a cash payment to farmers, but rather a credit to farmers.  The only way producers actually receive money from their crop insurance policies is if they suffer a verifiable loss. This is an indemnity payment to help them recover. Further, the farmer must shoulder a deductible before receiving an indemnity.

A few years ago, Politico, a Washington, D.C.-based paper, described the premium discount this way:

“The premium discount is really an inside-the-government book transaction, involving no cash payment to the farmer, who must still make a hefty contribution as well.

“For example, a Washington state apple and cherry operation is credited with having received a $1.3 million premium subsidy on a policy covering more than 5,000 acres of orchards and $33.7 million liability. But the same farmer paid $627,409 in premiums for the coverage and got nothing back since no losses were reported.”

Most Americans support the mechanics of modern-day crop insurance because farmers are helping to fund their own safety net and taxpayers are not left paying for the entire cost of assistance when a natural disaster strikes.

A new national poll reveals that more than 80 percent of Americans believe that a thriving farming industry is critical for national security. Further, 79 percent of Americans support providing a premium discount to farmers so that crop insurance is affordable.

Yet, the affordability of crop insurance will be greatly diminished if critics have their way in preventing certain farmers from receiving discounted premiums. This is because the purpose of any insurance program is to diversify the risk pool. Insurance functions more efficiently when the pool is large and diverse, which only happens when insurance is widely available. This keeps insurance affordable, especially for beginning farmers, who typically have reduced access to credit and capital.

In the same vein, automobile insurers want older, more experienced drivers to balance losses from younger and possibly more accident-prone drivers. If there is a cap on who receives the discount it will shrink the risk pool and undermine the effectiveness of crop insurance.

Also, placing a cap on premium discounts would disproportionately affect certain growers, especially specialty crop growers and organic growers whose crops tend to have higher values and therefore more likely to have higher premiums for coverage.

In short, crop insurance does not discriminate against certain types of farmers in this country by making risk management tools affordable for some, but not to others. Rather, it is widely available and affordable for all producers. Americans support and appreciate this approach to public policy.