Crop insurance jitters
After drought, crop insurance indemnity payments could be one-sixth of a record $122 billion in 2012 U.S. net farm income. But this success makes it a political target – just one concern farmers have about the program.
Government costs will rise as it pays part of what Kansas State University economist Art Barnaby estimates to be $24 billion in loss claims from farmers for 2012.
Bruce Babcock, an Iowa State University economist who has criticized the size of federal payments to insurers, questions whether insurance is making crop production nearly risk-free for farmers. “The payouts are going to be so large. It's not the crop insurance companies that are going to be paying them out – it's the taxpayers,” he says “One would think that some in Congress would look at that amount and ask, ‘Are we really getting a good deal for our money?’ ”
Babcock believes that one way to cut crop insurance costs for taxpayers would be to offer slightly lower levels of coverage. “The whole idea that you take all of the risk out of crop production would go away,” he says.
“This drought has made me aware of how much risk is being taken out at 85% revenue protection,” says Babcock, who owns a farm in Iowa that he leases on a crop-share basis.
Kansas State's Barnaby is trying to estimate how much the government will actually pay this year on crop insurance losses. It's not easy. USDA's Risk Management Agency (RMA) signs a standard reinsurance agreement with each of 16 companies approved to sell crop insurance. The agreement can vary in each state where a company sells insurance. If a company has an underwriting loss in a state (it pays out more for crop losses than it took in as premiums), then the federal government pays part of the losses. The bigger the loss, the more the federal government kicks in. This fall, state loss numbers by company weren't public. Barnaby could use only nationwide estimates.
Premium subsidies have grown
Crop insurance critics tend to focus on farmers' loss claims like this year's $24 billion. But that overstates government exposure. Last year, for example, insurance companies and USDA made $10.8 billion in indemnity payments for crop losses, a record then. Yet, “2011 was also a record premium year: $11.9 billion,” Barnaby says. “As a result, there was about a $1.1 billion underwriting gain, not a loss.” USDA does subsidize those farmer premiums and part of insurance company costs, as well as pick up a share of the losses. In 2011, the government's share of losses was about $500 million, Barnaby says.
Losses from 2012 will cost more. RMA expects farmer claims to approach $24 billion. Subtracting more than $10.3 billion in premiums leaves an underwriting loss of almost $14 billion.
Another indicator is the loss ratio: total crop loss indemnity payments divided by total premiums. For 2012, it's 2.35, meaning the crop insurance program is paying out 2.35 times more than premiums it took in. It's the second highest in 25 years, topped by a loss ratio of 2.7 in 1988. Most years, the loss ratio is smaller than 1; the program takes in more than it pays out. Some surplus goes into the federal treasury, Barnaby says.