Search Penny Hill Press

Thursday, June 17, 2010

Federal Crop Insurance: Background and Issues

Dennis A. Shields
Specialist in Agricultural Policy

The 111th Congress is considering the effectiveness and operations of the federal crop insurance program. The House Committee on Agriculture has been seeking input from farmers and others on the program in advance of the next farm bill debate. Meanwhile, concern about the federal budget deficit is coinciding with the rising cost of the federal crop insurance program. This report provides a primer on the federal crop insurance program and discusses related issues.

The federal crop insurance program began in 1938 when Congress authorized the Federal Crop Insurance Corporation. The current program, which is administered by the U.S. Department of Agriculture's Risk Management Agency (RMA), provides producers with risk management tools to address crop yield and/or revenue losses on their farms. In purchasing a policy, a producer growing an insurable crop selects a level of coverage and pays a portion of the premium—or none of it in the case of catastrophic coverage—which increases as the level of coverage rises. The federal government pays the rest of the premium (averaging nearly 60% of the total).

Insurance policies are sold and completely serviced through 15 approved private insurance companies. The insurance companies' losses are reinsured by USDA, and their administrative and operating costs are reimbursed by the federal government.

In 2009, federal crop insurance policies covered 265 million acres. Major crops are covered in most counties where they are grown. Four crops—corn, cotton, soybeans, and wheat—accounted for 73% of total acres enrolled in crop insurance. Most crop insurance policies are either yieldbased or revenue-based. For yield-based policies, a producer can receive an indemnity if there is a yield loss relative to the farmer's "normal" (historical) yield. Revenue-based policies protect against crop revenue loss resulting from declines in yield, price, or both. The most recent addition has been insurance products that protect against losses in whole farm revenue rather than just for an individual crop.

Government costs for crop insurance have increased substantially in recent years. After ranging between $2.1 and $3.6 billion during FY2000-FY2006, costs rose to $5.7 billion in FY2008 and $7.3 billion in FY2009 as higher policy premiums from rising crop prices drove up premium subsidies to farmers and expense reimbursements (which are based on total premiums) to private insurance companies. Reimbursements and risk-sharing between USDA and private insurance companies are spelled out in a Standard Reinsurance Agreement (SRA), which plays a large role in determining program costs. USDA is currently renegotiating the SRA for the 2011 reinsurance year (which begins July 1, 2010) to address issues such as the calculation of reimbursements.

Insurance companies, farm groups, and some Members of Congress remain concerned that significant reductions in federal support, including possible cuts stemming from the new SRA, will negatively impact the financial health of the crop insurance industry and possibly jeopardize the delivery of crop insurance. The crop insurance industry argues that cuts to the program were already made in the 2008 farm bill, and additional cuts would be unfair. Others point to recent increases in operating expense reimbursements and underwriting gains, questioning whether these higher levels are necessary for maintaining a viable crop insurance industry. A main concern for most would likely be saving federal dollars without adversely affecting farmer participation, policy coverage, or industry interest in selling and servicing crop insurance products to farmers.

Date of Report: May 28, 2010
Number of Pages: 20
Order Number: R40532
Price: $29.95

Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.