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Crop Insurance
The Future Cornerstone of U.S. Agricultural Policy?

by Alan Ker

Federally regulated crop insurance programs have been a part of U.S. agricultural policy since the 1930s. In 1996, structural changes elevated the crop insurance program to greater prominence. The 1996 Farm Act signaled a new policy regime under which farmers would no longer be as insulated from market forces. As a result, crop insurance is, in some respects, the only remaining government-subsidized, income stabilizing mechanism available to farmers.

The importance of crop insurance to the future of the U.S. agricultural sector was substantiated in President Clinton's 1999 State of the Union Address:

"As this Congress knows very well, dropping prices and the loss of foreign markets have devastated too many family farmers. Last year, the Congress provided substantial assistance to help stave off a disaster in American agriculture, and I am ready to work with lawmakers of both parties to create a farm safety net that will include crop insurance reform and farm income assistance."

Traditionally, crop insurance products have offered farmers the opportunity to insure against yield losses resulting from all risks, including such things as drought, fire, flood, hail, and pests. Over most of their existence, these all-risk products have been characterized by low participation and somewhat spotty actuarial performance.

As crop insurance is ushered forward as the cornerstone of U.S. agricultural policy, many changes have either been initiated or are under consideration. For example, revenue-based insurance products were introduced in 1996 to complement the traditional yield-based insurance products. These products insure farmers against low revenues caused by any combination of low commodity prices and/or low yields. A new form of revenue insurance based on a farmer's income tax records is under evaluation.

Unfortunately, some changes may be politically rather than economically based. Agricultural interest groups have come to realize that crop insurance is the government's chosen vehicle to support agricultural incomes. Perhaps then it is not surprising that livestock insurance has come under discussion. Admittedly the crop insurance program has expanded in recent years. However, there is pressure to expand even more with respect to the forms of insurance available and the array of commodities eligible for government subsidized coverage.

Congress is attempting to heighten farmer participation in the crop insurance program. To that end, $400 million in additional premium subsidies for the 1999-2000 crop year was part of the previous year's disaster aid package. Ironically, it is the past behavior of Congress that is widely believed to be the greatest disincentive for farmers to participate in the crop insurance program.

Consider last year's disaster aid package. Congress provided substantial premium subsidies as an incentive for farmers to participate in the crop insurance program. At the same time, they passed disaster aid, which is a form of free crop insurance. Why would farmers pay even subsidized premiums for crop insurance when Congress will provide free disaster aid if conditions are bad enough?

Many believe that the historical lack of farmer participation and poor actuarial performance can be attributed to disaster aid and, thus, to the actions of Congress. Many important questions need to be addressed as Congress leads the crop insurance program forward. For example, the insurance products that have recently been introduced (e.g., revenue insurance) and those that remain under consideration (e.g., livestock insurance) present unique challenges for measuring risks and thus calculating the premiums. How should the premiums for these products be estimated?

An additional $6 billion may be funneled into the crop insurance program over the next four years. At the end of the day, in whose pockets will these dollars reside? Will there be any unintended consequences?

Although the government administers the crop insurance program, the policies are marketed by private insurance companies, who share the profits and losses with the government. What percentage of the funds will remain with the private insurance companies rather than the farmers? Do both the government and private insurance companies need to be involved in a viable crop insurance program? On the one hand, why are the private insurance companies participants in the government-administered program? On the other hand, why is the government involved at all in crop insurance? Could there exist a viable private crop insurance market?

These and many other important questions need greater consideration. Each has provoked considerable research and policy debates. Most issues, however, remain unanswered.

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