The ascendency of crop insurance
The use of crop insurance by U.S. farmers has grown sharply, increasing from 45 million insured acres in 1981 to 262 million in 2011 (Figure 1). Insured liability shows a sharper increase, rising from $6 billion in 1981 to more than $113 billion in 2011. More acreage, higher crop prices, and increased coverage levels explain the dramatic rise in liability.
Several factors explain greater use of crop insurance by farmers. Today’s insurance program structure began with the Federal Crop Insurance Act of 1980, which required crop insurance to be sold and serviced by the private sector. With private sector compensation based on the volume of premium sold, companies and agents had a strong incentive to bring crop insurance to producers. Increases in premium subsidies and government payment of insurance company delivery costs made crop insurance increasingly affordable over time, boosting participation and coverage levels.
Figure 2 illustrates the share of premium subsidized by the Federal government for an individual policy at the 75% coverage level. The 1980 Act set the premium subsidy at 16.9% for a policy with 75% coverage. Despite the subsidy, demand remained limited by reliance on other programs such as ad hoc disaster assistance, target price coverage, and commodity loan programs. The subsidy rate was increased slightly by the Federal Crop Insurance Act of 1994. Temporary economic loss assistance in the late 1990s provided a premium discount, which continued until a permanent increase was provided in the Agricultural Risk Protection Act of 2002 (ARPA). ARPA raised subsidies, particularly at the higher coverage levels, with the 75% coverage level subsidy more than doubling. The 2008 Farm Bill did not change subsidy rates for individual insurance plans but increased subsidy rates for enterprise and whole farm units to 77% for a policy with 75% coverage on an enterprise unit.
Other factors also contributed to higher demand for coverage. The Federal Crop Insurance Reform Act of 1994 required producers to have crop insurance to be eligible for farm program benefits. While short lived, this requirement introduced many producers to crop insurance. Reductions in the level of protection provided by farm programs and requirements to have crop insurance in order to be eligible for the receipt of ad hoc disaster payments encouraged participation and higher coverage levels. Greater volatility in commodity markets (Figure 3) and efforts to acquaint producers with risk management strategies may have also increased insurance demand. Program improvements have attracted additional producer participation. These improvements, introduced during the late 1990’s, included more appropriate premium rates for some crops; reduction of waste, fraud, and abuse; and new and better plans of insurance, such as revenue plans.