Enhancing Producer Participation in the Federal Crop Insurance Program via a Reallocation of the Producer-Premium Subsidy

The issue of enhanced risk-management tools for farmers and ranchers continues to play a prominent role in agricultural policy debates and one of the central issues is participation of producers in the federal crop insurance program.  Lawmakers have increasingly sought to promote increased farmer participation in Federal crop insurance programs, aiming (in part) to forestall future ad hoc disaster payments.  This fact has made the issue both a political and a policy debate.

The federal crop insurance program is administered by the Risk Management Agency (RMA) and is designed to protect crop producers from unavoidable risks associated with adverse weather, plant diseases, and insect infestations.  Insurance policies are sold and completely serviced through approved private insurance companies that have their losses reinsured by the United States Department of Agriculture (USDA).

The basic policy for all eligible producers – and the one which the government pays 100 percent of the premium – is the fully subsidized catastrophic (CAT) coverage.  Under this policy producers are covered for 50 percent of his or her expected yield indemnified at 55 percent of the expected price.  In many cases this basic coverage is not enough and a producer will purchase buy-up coverage which guarantees up to 75, or in some cases 85, percent of expected yield or revenue.  He or she chooses the level of insurance protection which, along with the potential risks involved in the producer’s individual situation, determines the premium.  Producers pay only a portion of the actuarial or risk-based premium plus a small administration fee.  The United States government, through the Federal Crop Insurance Corporation (FCIC) pays the balance.  Premium subsidy rates specify the percentages of total premium paid by the government.  These percentages vary by coverage level and decline as coverage levels increase.

Crop insurance is a critical tool in a producer’s risk-management toolbox but questions continue to surface as to it’s affordability at the highest levels of coverage.  This leads to the issue of producer participation in the program, as well as the fact that the higher producer premium subsidies provided by the government are at the lower levels of coverage.  For example, the producer premium subsidy 50/100 coverage is currently 67 percent while the subsidy for the higher level of protection of 85/100 is 38 percent (Agriculture Risk Protection Act of 2000, Sec. 101). This dynamic is otherwise known as the “reverse incentive”. 

In addition to the premium subsidies included in the Federal Crop Insurance Reform Act of 1994 (Public Law 103-354), the Agriculture Risk Protection Act of 2000 (Public Law 106-224) also increased premium subsidies and addressed a number of underlying issues relating to crop insurance and the utilization of risk-management tools. Although increases in premium subsidy rates and the addition of premium discounts have reduced producer costs and increased participation, they have also increased government expenditure.  As producers have moved to higher coverage levels and to products with higher premiums, subsidies have increased both as a total dollar amount and a proportion of total premium.   

Statement of the Problem:

Despite substantive reforms to the Federal crop insurance program over the years, a “reverse incentive” still remains.  Many producers continue to assert that crop insurance is cost prohibitive.  The problem is exacerbated by the fact that the government continues to provide higher producer-premium subsidies for lower levels of coverage, thereby providing a disincentive for producers to protect themselves at higher levels.  The question before policymakers and producers is how to increase participation by making higher levels of coverage more affordable while at the same time holding down subsidy costs to the government. 

When studying this issue they must explore the impact of shifting a percentage of the current premium subsidy at the lower levels of coverage to higher levels of coverage, study the impacts of such a shift on participation decisions by producers, will such a policy change bring more young and beginning producers into the program, and evaluate the impacts of shifting the premium subsidy vis-à-vis its relative impact on government expenditures.

Rationale:

It is generally accepted that higher producer premium subsidies have led to increased participation in the Federal crop insurance program.  Previous research as validated this claim and, although the increased producer premium subsidies and discounts contained in ARPA and subsequent disaster assistance packages have increased producer participation in the program, this has primarily been achieved via additional federal funding.

Many producers and policymakers continue to argue that the program is not working and that certain policies are not as affordable as they should be.  By continuing to provide higher premium subsides at the lower levels of coverage the Federal government is creating a “disincentive” for producers to fully participate in the crop insurance program.  By undertaking a study of a premium subsidy shift on producer participation decisions there can be a better understanding of what percentage of the premium subsidy can be shifted before a producer will either purchase buy-up coverage or simply revert to utilization of CAT coverage.  In addition, it is important to correlate the incidence of crop insurance participation with farm size and structure in order to determine what types of producers have historically purchased crop insurance versus those who would be drawn to the program as a result of a premium structure tilted toward higher levels of coverage.

The core question is that of additional funding versus a reallocation of current premium subsidies within the existing framework.  Over time the first approach may prove to be less sustainable than the second.  The direction of this study will challenge a number of the currently accepted norms regarding crop insurance premiums and will seek to create a new paradigm which is based upon affordability and positive incentives.

In a time of burgeoning budget deficits it is critical that cost effective tools be made available to producers without unduly increasing the exposure of the federal government and the American taxpayer.  As farmers, ranchers and policymakers continue to look for ways to make the federal crop insurance program more affordable and efficient, they must also explore ways to remove the reverse incentive – thereby allowing producers to insure their operations at higher levels of coverage.

Copyright © 2011 RDL & Associates, LLC.  All rights reserved.

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