What would means testing do to America’s crop insurance system?

The idea of means testing measures (adjusted gross income [AGI] limits or premium support caps) will have unintended consequences for all farmers and they will be detrimental to the long–term viability of crop insurance program.

• Every single farmer who purchases crop insurance would be affected.  It might only be a small number of farmers who are directly subject to a premium subsidy cap or an AGI limit, but every single farmer in the program will be affected.  As support limits increase the cost of crop insurance, farmers will buy less crop insurance or not buy it at all. The impact would be largest for lower risk farmers, crops and regions. That would change the composition of the “risk pool,” which in turn would increase the premiums for every farmer in that risk pool. (By statute, the premiums should be adequate to pay out the expected losses.). When premiums start to increase for that reason, the exit from the program may accelerate, which then may produce a “death spiral” effect. Economic literature indicate that lower risk farmers, which are more likely to be affected by means testing, are more responsive to premium changes than higher risk farmers.
• 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 hard hit.  North Dakota, South Dakota, Texas, Minnesota, California, Arizona, Mississippi, Utah and Hawaii have all been singled out by USDA as shouldering disproportionate effects under a cap on premium support.
• Any proposal, whether an AGI limit or a premium subsidy cap, that has significant budget savings directly translates into an increase in premium costs to farmers.  A dramatic increase in premium costs on a large percentage of acres would inevitably lead to decreased participation in the crop insurance program.
  • Over years, a higher and more diverse participation, combined with better data, improved the program’s actuarial performance by reducing adverse selection and enhancing underwriting and ratemaking.
  • Reduced participation can only lead to an increase in calls for off-budget, ad hoc disaster programs that have been largely averted since the Federal crop insurance program was modernized in 2000. In fact, there were no calls for disaster assistance in 2012, a major drought year.