Absent crop insurance, the cost of natural disasters that harm America’s farmers would fall solely on the laps of taxpayers.
The 2014 Farm Bill cemented crop insurance as the cornerstone of farm policy. Today, farmers are asked to pay for part of their own safety net and risk is more evenly distributed among three parties through a cost-sharing structure.
- Farmers must first purchase crop insurance before being protected, and must shoulder a portion of the losses through deductibles before receiving an indemnity for the verifiable loss. On average, a farmer in the United States must lose at least 25 percent of the value of their crop before a crop insurance policy kicks in – losses that taxpayers may have been asked to cover in ad hoc disaster bills.
- Crop insurance providers pay indemnities from their own coffers on most claims, thus minimizing cost to taxpayers. And when indemnities paid are greater than premiums received, companies experience an underwriting loss and lose money. Since the inception of the public-private partnership, insurers have experienced net underwriting losses in 1983, 1984, 1988, 1993, 2002 and 2012.
- The Federal government acts as a reinsurer by providing insurance for the insurance companies. As such, the government bears an agreed-upon portion of the companies’ underwriting losses, and in return, the government takes a share of the companies’ underwriting gains. In short, as a reinsurer the government will help shoulder excessive losses in bad years like 2012, but will receive underwriting gains from farmer premiums in good years.
* Updated August 2018