Why is the crop insurance premium discount provided by the Federal government so important?

The government provides a premium discount to farmers to encourage their participation in crop insurance and provide for the financial stability of agriculture. Supporting essential industries is not without precedent. In fact, the Federal government supports a range of high-priority industries, including housing, health care, energy, small business and education.

Prior to crop insurance’s rise to prominence, when widespread natural disasters hit farmers, there was immediate pressure on Congress to pass expensive, unbudgeted ad hoc disaster legislation, since most farmers had not, could not, or would not purchase crop insurance. In fact, from 1989 to 2012, 42 emergency disaster bills in agriculture have cost taxpayers $70 billion, according to the Congressional Research Service.

Following disastrous flooding in 1993 and yet another large ad hoc disaster bill, Congress decided to encourage greater farmer participation in crop insurance by discounting the crop insurance premium paid by each farmer and requiring them to purchase crop insurance to be eligible for farm program payments. Although the purchase requirement was repealed after two years, participation in the program increased but remained inadequate. Congress subsequently increased the premium discount in 2000 to near the current level of 60 percent. As the Government Accountability Office (GAO) noted “the Federal government provides crop insurance subsidies to farmers in part to achieve high crop insurance participation and coverage levels, which are intended, according to USDA economists, to reduce the need for ad hoc disaster assistance payments to help farmers recover from natural disasters, which can be costly.”

This idea worked just as Congress intended. In 2015, 297 million acres were enrolled in the program, equal to 90 percent of planted cropland, with $102 billion in insured liability. When disaster strikes, as it did in 2011 with floods, freezes, hurricanes and droughts; in 2012 with the worst drought in decades; and again in 2013 with notable collapses in farm prices, farmers were not pressing Congress for help, because the vast majority of them were already protected by their crop insurance policies.

Crop insurance has accomplished the mission laid out for it by Congress only because the program is affordable and universally available to farmers. High overall participation has improved the actuarial performance of the program by increasing the participation of lower risk producers, which helps diversify the pool of insured producers. High participation has reduced the tendency of Congress to address annual disasters with ad hoc legislation. Reducing the discount on premiums would reduce participation by farmers and undermine the effectiveness of crop insurance as the principal tool for risk management.

Unlike farm support programs of the past, crop insurance is a risk management tool that only offers protection — in the form of indemnities — to farmers who purchase policies with their own money. Farmers have spent more than $44.6 billion out of their own pockets to purchase crop insurance policies since 2000. And unlike programs of the past, only farmers who have verifiable losses receive payments, in the form of crop insurance indemnities.

Watch the video below that tracks farm policy’s journey from complete government control to being more market-oriented and driven by the private sector.