Current Program Characteristics
Farm programs have evolved from very market intervening programs to those that let market forces operate more fully, with producers shouldering greater responsibility to manage risks. In line with this evolution, the crop insurance program has a number of appealing features (NCIS, 2011). A producer must consciously elect to manage risks, can design a program to fit individual farm risks, and must share in the program cost, reducing public costs and aiding accountability.
The private sector delivers the crop insurance program as part of a public and private partnership, providing producer choice, and promoting competition in service quality and efficiency and effectiveness in delivery. Through the private sector, producer losses are adjusted and indemnities paid promptly. Congress has enabled the program to largely govern itself—with the USDA responsible for setting premium rates, underwriting and loss adjustment standards, and enforcing compliance. Thus many program provisions can be quickly changed to correct program parameters and reduce costs and inefficiencies. Premium rate changes and a reduction in payments to companies negotiated in the 2011 Standard Reinsurance Agreement (SRA) are examples of such discretionary actions. Little found that the program operates with fraud and abuse levels far below other lines of property and casualty insurance (Review of the Integrity and Efficacy of the Federal Crop Insurance Program, 2007). Crop insurance also allows many producers to secure credit, as an insurance policy serves as collateral, and aids forward marketing by providing resources to meet delivery obligations in the event of a production loss.
While the aforementioned factors help explain the program’s attraction, there are concerns. U.S. loss ratios —indemnities divided by premiums—have been well below the statutory maximum of 1.0 for many years and vary sharply among regions, raising questions about whether the rating system suitably accounts for program improvements over time, changing production technology, and the probabilities of catastrophes. A premium rate review was conducted by the Risk Management Agency (RMA) in 2010 and a major revision in rating methods is now being implemented. Recently, low losses and high crop prices have resulted in higher-than-expected company underwriting gains and delivery payments. Although some argue they remain excessive, the 2011 SRA and the recent rating changes have reduced the expected value of private insurance company underwriting gains and delivery payments, and the long-term average net income of crop insurance companies remains below that in the overall property and casualty industry (Grant Thornton, LLP, 2011). Many producers are concerned that crop insurance yields lag expected yields or reduce coverage after successive years of yield shortfalls, as required by most crop insurance plans. An adjustment to reflect yield trends, recently approved for sale for 2012, may partly address this issue. Another concern is whether the portfolio of insurance plans can be improved for small producers, socially disadvantaged producers, specialty crops and other crops that may not be covered or have atypical or specific risks or lack transparent pricing.