What Harm Is Done by the Federal Crop Insurance Program Today?

Key Points

• Supporters of the current federal crop insurance program often claim that the program is actuarially sound, that program growth has been driven by the private sector, and that government-supported crop insurance is essential for the survival of a financially healthy and stable farm sector.
• In contrast, evidence from a substantial body of research indicates that farmers are unwilling to pay premiums that would cover the commercial cost of crop and other forms of agricultural insurance because they have cheaper ways of managing risk.
• The heavily subsidized US crop insurance program encourages farmers to adopt risky production strategies that have adverse environmental and climate change implications because the associated losses are largely borne by taxpayers, not the farmers.

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Introduction

Myths and legends surround the federal crop insurance program through which farmers typically pay far less than 40 percent of the actuarial cost of the coverage they purchase to insure against lower-than-expected yields and revenues. The actual cost is even higher, since the loads required in private markets (to build capital reserves and profits and cover operating costs) are paid for by the taxpayer. Ten years ago, we questioned those myths and legends, exploring the actual impacts of subsidized crop insurance rather than the stories often put forward by farm and private-sector agricultural insurance interest groups.¹ In the intervening decade, changes in the federal crop insurance program have not eroded the relevance of our critiques or the extent of the damage the program does.

If anything, new initiatives have magnified the issues noted in our work. Two obvious changes are glaring examples of how the public partnership between the government and private insurance companies, coupled with an alliance between farm and private insurance interest groups, has exacerbated the costs and harm associated with the program.

The first is the introduction of subsidized coverage that enables farmers to “buy down” the deductible associated with yield and revenue-based policies. Such policies include the Enhanced Coverage Option (ECO), Margin Protection, and the Supplemental Coverage Option (SCO). The second is the substantial funding increase in the 2018 Farm Bill for livestock insurance program subsidies. That change has led directly to an explosion in the use of those programs and their costs to taxpayers, as Joseph W. Glauber recently discussed.² In the context of the current debate over what programs should be included in the new 2023 Farm Bill, we reexamine the long-standing issues associated with subsidized crop insurance and consider the impacts of these two major changes to the program.

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Notes

1. Barry K. Goodwin and Vincent H. Smith, “What Harm Is Done by Subsidizing Crop Insurance?,” American Journal of Agricultural Economics 95, no. 2 (December 2012): 489–97, https://doi.org/10.1093/ajae/aas092.
2. Joseph W. Glauber, “The Growth of the Federal Crop Insurance Program, 2010–22,” American Enterprise Institute, February 1, 2023, https://www.aei.org/research-products/report/the-growth-of-the-federal-crop-insurance-program-2010-22.