FAQ ON CROP INSURANCE

Why should farmers get subsidized insurance? Other companies don’t.


There are many different government programs that support all sorts of businesses, in many different ways, for many different reasons. It especially makes sense to support farmers from one year to the next because of the highly variable nature of farming. Weather is the biggest variable, and that is outside anyone’s control.


Since people in this country and around the world depend on America’s crops, it is critically important farmers are able to stay in business after a year like 2012. Crop insurance allows more farmers to stay in business after a bad year, and that means that food price fluctuations are minimized over time as the industry recovers more quickly from large scale disasters – like the 2012 drought.


Further, providing subsidized crop insurance doesn’t mean farmers get rich off the backs of taxpayers.  When a farmer receives an insurance payment, it’s because that farmer experienced a significant loss. It’s just like automobile insurance. You only receive an indemnity when a loss is incurred and your coverage was in force.


But why should taxpayers subsidize crop insurance?


It’s actually a cost-share arrangement. The federal government pays a portion of crop insurance premiums and farmers pay another portion. Subsidizing crop insurance premiums means that the insurance will be available for farmers. Without government backing, it’s unlikely that any insurance company would offer the coverage because the risk is too high.


Also, farmers themselves do not receive the subsidy.  It is paid to crop insurance companies.  Most farmers in the Midwest have paid far more in crop insurance premiums than they have received in claims. Although the premium subsidy directly accrues to crop insurance companies, all taxpayers benefit from the system as it helps to maintain a consistent supply of food and commodity production for the marketplace. 


As is the case with farm programs in general, the government’s role in supporting the U.S. farm economy is important because it enhances food security, and all taxpayers benefit from that situation.

American consumers continue to benefit from spending the lowest percentage of disposable income on food than anywhere else in the world. 


Won’t crop insurance payments be larger than usual this year?


While crop insurance remains the most important safety net for producers when their crops are impacted by disaster, it doesn’t make a farmer whole.


The 2012 drought is a historically large and devastating drought.  It has impacted a very large area – two-thirds of our country – and has been felt very heavily in the Midwest. The last drought of this size occurred in 1988.  From a rainfall and temperature perspective, the 2012 drought may even be worse than the 1988 drought.


Crop insurance is designed to make payments for this kind of catastrophe.  Yield losses will be large, and consequently, crop insurance will make large payments. The size of payments in this year is one of the main reasons for the need of federal involvement. It is difficult for private insurance companies to withstand the widespread nature of losses in one year.


Nevertheless, the lion’s share of indemnity payments this year will be borne by the private insurers and reinsurers who are well capitalized. This private-public sharing of risk greatly limits the federal government’s budget exposure.

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