Now that the House and Senate Agriculture Committees have started hearings preparing for a 2018 farm bill, special interests that benefit from federal agriculture spending are pleading for more cash.
Amongst the most vocal are private companies that receive taxpayer subsidies to sell policies and process claims in the federal crop insurance program. These insurance companies are crying poor in an attempt to preempt any common sense reforms to the $9 billion per year federal program. Rather than listening to these self-interested appeals, lawmakers should explore taxpayer and farmer-friendly reforms to inject competition into crop insurance. This will allow the market, rather than the agriculture committees or federal regulators, to determine “fair” compensation for these subsidized companies.
Under the federal crop insurance program, private insurance companies are subsidized to process the paperwork associated with selling crop insurance policies and managing claims. Crop insurance companies receive taxpayer dollars to defray their “administrative” costs and they also get to keep the bulk of the revenue that comes from “underwriting gains” (premiums from insurance policies that did not end up needing a payout). Put together these two subsidies are expected to cost more than $2.5 billion annually. All told from 2000-2015 companies received almost 45 cents out of every dollar spent on federal crop insurance.
Despite these significant taxpayer costs, recently both a report commissioned by the National Corn Growers Association and a “Myth vs Fact” handout distributed amongst lawmakers make the claim that insurance companies just aren’t profitable enough, at least when compared to companies choosing to provide other types of insurance. And this self-proclaimed lack of adequate profitability means the crop insurance program should be spared any sort of reforms in the next farm bill.
Rather than debate whether or not private companies that choose to receive subsidies for being the face of the federal crop insurance program are receiving enough taxpayer dollars to make them as profitable as other non-subsidized insurance companies, Congress should explore ways to allow crop insurance companies to utilize time-tested market principles to provide better products and improve their profitability. But to do this, Congress will first need to reform the crop insurance program to be in practice what its name implies…an insurance program.
The federal crop insurance program is not actually insurance, at least not like the car, health, or homeowners insurance most people are familiar with. For one, most insurance policies in this program don’t guard against an unexpected crop loss, but actually ensure the policyholder obtains an expected level of revenue. And people buying this unique insurance typically don’t cover most of the cost. In the last ten years taxpayers have paid $59 billion in crop insurance premium subsidies with farmers and ranchers contributing only $37 billion.
But what most distinguishes the federal crop insurance program from actual insurance is how the companies can, and more importantly, cannot make a profit while providing a product that people want. Every company selling federally subsidized crop insurance is selling the exact same, government approved product. Companies don’t get to design policies and charge rates based on their assessment of underlying risks and market demands. Rather premium rates are set and approved by federal regulators and don’t differ between companies. Companies don’t get to add into the premiums the cost of delivery (expense loading). Bundling and rebating, when you get a discount for say buying homeowners and car insurance from the same company, is prohibited. Unlike most insurance, crop insurance premiums are paid months after a contract is signed, as opposed to immediately, meaning companies have little opportunity to make investment profits from premiums before having to make insurance policy payouts. Finally, and most shockingly, a company is required to write all federal crop insurance lines in a State if they decide to operate in that State. That means they can’t turn away customers that meet the definition of an agricultural business, or change rates for one customer that is obviously more, or even less, risky than another.
Federal lawmakers have many more important things to do instead of debating if crop insurance companies are receiving enough subsidies to make their business as profitable as other types of insurance. Federal crop insurance needs to be reformed to allow more competition and to allow “fair” compensation and profits be set by the market rather than Congress or federal regulators. That’s why TCS commissioned a report that cuts through some of the myths surrounding the highly subsidized federal crop insurance program and offers a number of options for injecting time-tested market principles of competition and innovation into the program.
Crop insurance companies that can more efficiently deliver risk management products that better serve the needs of farmers and ranchers should be given the opportunity to do so. But first lawmakers will have to turn a deaf ear to companies clamoring for increased taxpayer subsidies and instead make room for people who want to improve the federal crop insurance program by having it resemble actual insurance.