After raising the question if there is an objective rationale for the high premium subsidy given to farmers who buy crop insurance, economist Carl Zulauf combed years of data for an answer. In a blog at farmdoc Daily, he says the answer may be to consider the types of risks that farmers face.
There are losses felt by a limited number of farmers per year, such as hail, which private insurers can adequately cover. But when crop-killing losses such as drought affect large numbers of growers, these “systemic” risks can cause insurance companies to go bankrupt. They are better covered by the government.
“Loss ratios for the U.S. crop insurance program and Illinois and Kansas farm management association data suggest that 40 percent to 50 percent of U.S. crop risk is systemic.” He also writes, “Premiums subsidies would have been $1.2 billion less if a 50 percent average subsidy rate was applied to 2015 crop insurance purchases instead of the 62 percent rate actually observed.”
At the moment, premium subsidy rates are highest for growers who buy the lowest levels of coverage, intended as an aid to farmers with limited resources. Critics have argued the practice encourages farming on marginal land, since the subsidized insurance would cover losses. But if systemic risk is used to establish subsidy rates, the premium subsidy rate should rise as growers buy higher levels of coverage, says Zulauf.
“The systemic risk approach to setting the crop insurance subsidy rate prompts a question: ‘What is the more appropriate policy approach: to provide free or highly subsidized county insurance, or to set the subsidy rate at the share of risk that is systemic?’ … This question underscores the opportunity for creative research to contribute to the search for an objective metric for the rate at which U.S. crop risk should be subsidized,” concludes Zulauf.