Agriculture’s opponents use terms like “guaranteed profits” to disparage the crop insurers that protect America’s food and fiber supply, help farmers pick up the pieces after disasters, and shield taxpayers from footing the whole bill through unbudgeted ad hoc disaster packages.
These criticisms unfairly confuse basic business concepts like gross returns and net income. The National Corn Growers Association (NCGA) asked economists from the University of Illinois and Cornell University to study this issue in depth, and noted:
“What we discovered is that the returns private crop insurance companies receive are much smaller than opponents claim, and they are well within the standards set by [the USDA].”
It’s easy to see how this conclusion was reached once you compare the expected versus actual returns under the current Standard Reinsurance Agreement (SRA) – the business agreement between the government and crop insurers.
The 2011 SRA set a target gross return of 14.5%. This measure of revenue does not include business expenses or reflect profit. But the target has not been met, according to the Government Accountability Office, which calculated returns of 13.7% from 2011-2016.
After subtracting expenses like technology and compliance costs for government regulations, the net income realized by insurers is even lower, as the chart below from the NCGA study shows.
*2016 data not yet available
In other words, there are no guaranteed profits in crop insurance. In fact, crop insurers had underwriting losses in 2012, 2002, 1993, 1988, 1984 and 1983 – a far cry from other lines of insurance, which are historically more profitable than crop insurance.
As a result, the crop insurance industry has witnessed consolidation and the exit of major agribusinesses since the implementation of the 2011 SRA. If farm policy critics are successful in their efforts to reduce returns by another 33%, other providers will follow suit, and farmers could be left without the tools necessary to manage falling crop prices and extreme weather events.
Then, the burden of providing billions in disaster assistance will again fall squarely to U.S. taxpayers.