Time to Revisit Crop Insurance Premium Subsidies?

Bruce A. Babcock
March 2011  [11-PB 4]

In 2000, Congress decided to move away from a fixed-dollar-per-acre premium subsidy to a subsidy percentage that applies to any crop insurance product offered. This change reduced the cost to farmers of moving from yield insurance to revenue insurance by more than 50%. In addition, Congress decided to pay a large proportion of the additional premium for higher coverage levels, paying for more than half the cost of moving from the 65% to the 75% coverage level and about 25% of the additional cost of moving from 75% to 80% coverage. Not surprisingly, farmers responded to these lower costs by moving to more expensive revenue insurance policies and higher coverage levels. This response is part of the reason why the Congressional Budget Office projects that the cost of the crop insurance program exceeds $7 billion per year.

The changes to the premium subsidy structure were made in an era of projected budget surpluses. Does this change still make sense now that federal deficits and overall debt levels are so high? How much could spending be reduced if the premium subsidy structure were changed back? This policy briefing paper provides insights into these questions.

Congress has demonstrated repeatedly that it wants a large proportion of acres to be enrolled in the crop insurance program. The proven way to expand insured acreage is to subsidize farmers’ crop insurance premiums with either a “lump sum” subsidy that gives farmers a set amount to participate in the program or a proportional subsidy that pays a set fraction of a farmer’s premium. The added benefit to the crop insurance industry of a proportional subsidy is that it incentivizes farmers to buy higher coverage levels and more expensive revenue insurance.

If Congress had decided in 2010 to move away from the current system of proportional subsidies to the amount of premium subsidy available for yield insurance, then the 2011 projected cost of the crop insurance program would have declined by about $1.4 billion from the direct savings in premium subsidies, and by another $300 million in lower underwriting gains as farmers moved away from expensive revenue insurance. Further savings would accrue if premium subsidies were fixed at a set dollar amount because this would remove the incentive for farmers to buy more crop insurance than they would buy if they were spending their own money rather than taxpayer dollars. Total savings approaching $2 billion would likely accrue by simply returning to the premium structure that we had before the Agricultural Risk Protection Act.

Farmers would respond to this policy change by buying less revenue insurance and lower coverage levels. This would also reduce their out-of-pocket expenditures. Farm groups would undoubtedly oppose this change, but such opposition would be tempered if the choice were between this change and a reduction in a more valued program, such as direct payments.

Underwriting gains to crop insurance companies would decline significantly. Both companies and agents would have the most to lose from this policy change so they would be expected to oppose it strongly. But in an era of tight budgets, the tax dollars spent on subsidies that incentivize farmers to buy more and different types of crop insurance than they would buy with their own dollars could fall under intense scrutiny.

Keywords: crop insurance, premium subsidies, program costs, revenue insurance.

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