Is crop insurance a risk management tool, or a dependable source of revenue for your farm? That depends on where you live, and farmers in some states will be quite upset with this report and farmers in other states will be upset their secret is out in the open. Nevertheless, there are some distinctive inequities to be discussed.

Someone with an idea for a crop insurance program may likely consult with agricultural economist Bruce Babcock at Iowa State University. That is one of his specialties, and he knows the process inside and out. In the Spring edition of the Iowa Ag Review, Babcock reveals how the Cornbelt farmer is more of a contributor than beneficiary to the crop insurance program, in addition to the financial benefits received by crop insurers that administer the program for USDA’s Risk Management Agency.

In 2007:
1) Farmers paid in $6.5 billion in premiums.
2) $3.2 billion was paid out in losses to farmers.
3) $2.8 billion (Babcock’s estimate) will be paid to insurers by taxpayers.

Since 2000:
1) $11.3 billion in net payments to farmers (indemnities received minus farmer-paid premiums)
2) $22 billion paid by taxpayers to deliver $11 billion in net payments to farmers.

Babcock is critical of the inefficiency of the program and alleges that campaign contributions from insurance companies to Congress have maintained the status quo. He also says the benefits to farmers in certain geographical regions have been excessive and their Congressional representatives have kept the program from being overhauled. Babcock says the funding for the program comes from Cornbelt farmers who use crop insurance for risk management, and if that diminished, the program would falter.

Typically, insurance companies offer auto, health, life, and homeowners insurance that is “actuarially sound.” The premiums paid in must cover losses, plus return a profit to the company, but premiums must be competitive within the industry. In crop insurance, the USDA subsidizes the program, which means farmer premiums are not as high as they would be to be actuarially sound. But just focusing on the premiums paid by farmers, Babcock says farmers in Illinois, Indiana, and Iowa have paid in more dollars in premiums than have been returned in indemnity payments.

His research indicates Minnesota and Nebraska farmers have received about $1.25 for each $1 paid in premiums. Dakota, Kansas, and Texas farmers receive $2.25 to $2.75 back for each $1 paid in premiums. Montana and Oklahoma farmers pay $1 in premiums and receive $3 in indemnity checks. Those are averages from 2000 to 2007 that Babcock has calculated. As a result of the computations, Babcock says, “Clearly, the recent experience in crop insurance suggests that Corn Belt farmers are paying too much in premiums, and Great Plains farmers are paying too little.”

In addition to his criticism about the administrative rules of the crop insurance program benefiting insurance companies, Babcock says the profits recorded indicate that Cornbelt farmers are paying premiums that are too high. He says the insurance rates are based on a rolling 25 year average of losses within each state, and excluding some regional droughts in 2002 and 2005, there has not been a serious drought since 1988. Therefore, he says the Cornbelt farmer should receive lower premiums. But in conjunction with that, production risks are falling because of technology advances, and crop insurance premiums have not responded. He does point to the Biotech Yield Endorsement available to farmers planting certain biotech seeds.

As a result of the apparent inequities, Babcock rhetorically asks:
1) Why should (Cornbelt farmers) be asked year after year to generate large underwriting gains so that the industry will be willing to offer insurance in other states?
2) Why should (Cornbelt farmers) keep generating excessive annual (crop insurance companies) agent commissions when they rarely receive payments that exceed their premiums?

Babcock assisted the National Corn Growers Association in the development of its farm policy proposal for the 2007 Farm Bill, which was based on a county-level revenue program, but it was not adopted by either the House or Senate because of opposition by the crop insurance industry and commodity groups in the Great Plains states.

Summary:
Cornbelt farmers have paid more into crop insurance than they have received in indemnity payments for losses, but just the opposite is true for Great Plains farmers who have received more than paid in. While this is not the typical practice of an insurance industry which follows actuarial tables, it has been maintained by politically strong crop insurance companies which have benefited from the way the Congress has kept the program designed.