Crop Insurance in the News

Posted by Tatyana Deryugina on Sep 19, 2013

Filed Under (Environmental Policy)

Bloomberg recently published a series of articles criticizing the United States crop insurance program. Given my own interest in insurance generally and crop insurance specifically, I wanted to address some of the claims made by the articles.

There is no doubt that the federal crop insurance program is very flawed, with the largest flaw, by far, being the insane premium subsidies. Farmers currently pay less than half of their premiums, on average, with the rest being covered by the government. Moreover, between 1990 and 2009, Congress has routinely passed additional legislation giving special payments to farmers who suffered crop losses due to disasters.

However, there two features of crop insurance that Bloomberg portrayed as negatives but that are actually positive. First, one article quotes an “uneasy” beneficiary as saying, “I like to think of myself as an independent who’s willing to take risk. [...] With insurance, it takes the risk out of it.” This is actually a good thing from society’s point of view. No one goes around saying, “Man, things are just not fun anymore now that I have health insurance. If I fall down and break my leg, I no longer have to spend thousands of dollars.” The notion that farming should remain risky is simply misguided (of course, farmers are free to forgo insurance if they wish).

Second, the fact that “more than seven in 10 policies guarantee income rather than yield” is actually a good thing from an insurance point of view. Farmers care about their income rather than just about how much corn they have. They face both the risk that their yields will be low and the risk that prices will be low. Considering the two in combination rather than focusing on yields alone is preferable from the point of view of risk reduction.

So the real problem with crop insurance is not that it takes the risk out of farming, but that it is heavily subsidized by the government and supplemented with extra disaster payments. The subsidies have previously been justified by the adverse selection that would result if premiums were not subsidized. However, a much cheaper way to deal with adverse selection is to mandate that every farmer buy insurance. There are probably better things to do with taxpayer money (for example, see this recent National Review article).