Order Code RL34207
Crop Insurance and Disaster Assistance: 2007
Farm Bill Issues
October 15, 2007
Ralph M. Chite
Specialist in Agricultural Policy
Resources, Science, and Industry Division

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Crop Insurance and Disaster Assistance: 2007 Farm
Bill Issues
Summary
The federal government has relied primarily on two policy tools in recent years
to help mitigate the financial losses experienced by crop farmers as a result of natural
disasters — a federal crop insurance program and congressionally mandated ad-hoc
crop disaster payments. Congress has made several modifications to the crop
insurance program since the 1980s, in an effort to forestall the demand for
supplemental disaster payments. Although the scope of the crop insurance program
has widened significantly over the past 25 years, the anticipated goal of crop
insurance replacing disaster payments has not been achieved.
The federal crop insurance program is permanently authorized and hence does
not require periodic reauthorization in an omnibus farm bill. However,
modifications to the crop insurance program are being discussed in the context of the
omnibus 2007 farm bill currently before Congress. Some policymakers have
expressed interest in expanding the crop insurance program and/or complementing
it with a permanent disaster payment program. Others view the crop insurance
program as a potential target for program cost reductions, and propose using these
savings to fund new initiatives in various titles of the farm bill.
The Administration’s farm bill proposal contains several crop insurance
recommendations that it claims will enhance participation; address issues of waste,
fraud and abuse; reduce costs; and reduce the need for emergency supplemental
disaster payments. The Administration is opposed to a permanent disaster payment
program, and contends that its proposed supplemental crop insurance coverage for
the deductible portion of a policy would help preclude the need for supplemental
disaster payments.
The House-passed version of the farm bill (H.R. 2419) contains several
revisions to the crop insurance program, most of which are cost-saving measures.
Farmers would be required to pay higher fees for catastrophic coverage and
participating insurance companies would see smaller reimbursements for their
operating expenses and would be required to share more of their potential
underwriting gains with the government.
To date, the Senate Agriculture Committee has not yet marked up its version of
the 2007 farm bill. Meanwhile, the Senate Finance Committee approved legislation
that, among its many provisions, would authorize a permanent trust fund to make
agricultural disaster payments available on an ongoing basis over the life of the next
farm bill. According to CBO, the program would cost $5.1 billion over five years,
which is approximately equal to the annual average amount of ad-hoc disaster
payments that have been provided by Congress over the past 20 years.

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Contents
Crop Insurance Program Design and Operation . . . . . . . . . . . . . . . . . . . . . . 1
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Reducing Crop Insurance Program Costs . . . . . . . . . . . . . . . . . . . . . . . 4
Permanent Disaster Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Waste, Fraud, and Abuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Specialty Crop and Livestock Concerns . . . . . . . . . . . . . . . . . . . . . . . . 5
2007 Farm Bill Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Administration Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
House-Passed Farm Bill (H.R. 2419) . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Senate Finance Committee Permanent Disaster Trust Fund . . . . . . . . . 9
List of Figures
Figure 1. Crop Insurance and Disaster Payments: Total Federal Cost,
By Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
List of Tables
Table 1. Government Cost of Federal Crop Insurance . . . . . . . . . . . . . . . . . . . . . 2
Table 2. Selected Crop Insurance Provisions in the House-Passed Farm Bill
(H.R. 2419) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

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Crop Insurance and Disaster Assistance:
2007 Farm Bill Issues
Agriculture is generally viewed as an inherently risky enterprise. Farm
production levels can vary significantly from year to year and by location, primarily
because farmers operate at the mercy of nature, and frequently are subjected to
weather-related and other natural disasters. Since the Great Depression,
policymakers have decided that the federal government should absorb some portion
of the weather-related production losses that otherwise would depress farm income
and could alter farmers’ decisions about what to produce in some high-risk locations.
Federal crop insurance is the primary ongoing crop loss assistance program. It
is permanently authorized by the Federal Crop Insurance Act, as amended (7 U.S.C.
1501 et seq.), and is administered by the U.S. Department of Agriculture’s Risk
Management Agency (RMA). This is complemented with the Non-Insured
Assistance Program, administered by the Farm Service Agency (FSA), which is
available to producers not offered insurance coverage. Lack of insurance availability
occurs in locations where there is insufficient production history to determine
actuarial risks of a crop or in regions where production of a specific commodity is
relatively small. Following a widespread and severe drought in 1988, Congress
approved a large ad hoc disaster assistance program to supplement the ongoing
disaster programs. Such ad hoc assistance subsequently has became routine.
For more information on currently available agricultural disaster assistance, see
CRS Report RS21212, Agricultural Disaster Assistance.
Crop Insurance Program Design and Operation
Federal crop insurance policies are marketed and serviced by private insurance
companies. In purchasing a policy, a producer growing an insurable crop may select
a level of crop yield and price coverage and pay a portion of the premium, which
increases as the levels of yield and price coverage rise. The remainder of the
premium is covered by the federal government. Coverage is made available through
various insurance products, including revenue insurance, which allows a participating
producer to insure a target level of farm revenue rather than just production levels.
According to the USDA, the federal crop insurance program provided coverage in
2006 to over 100 crops covering more than three-fourths of planted acreage in the
country. Although the list of covered commodities has grown in recent years, 80%
of total policy premiums (and federal subsidies) are accounted for by just four
commodities — corn, soybeans, wheat, and cotton.

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CRS-2
Table 1. Government Cost of Federal Crop Insurance
(millions of dollars)
Federal
Private Company
Fiscal
Program Losses
Other
Total
Premium
Admin. Expense
Year
or (Gains)a
Costsb
Gov’t. Cost
Subsidy
Reimbursements
1981
97
47
0
105
248
1982
(60)
91
18
110
160
1983
147
64
26
97
334
1984
211
98
76
102
487
1985
216
100
107
98
521
1986
216
90
101
97
504
1987
55
73
107
73
309
1988
609
103
155
78
945
1989
400
190
266
88
945
1990
234
213
272
87
806
1991
247
196
245
84
772
1992
232
197
246
88
764
1993
750
197
250
105
1,303
1994
(127)
247
292
78
489
1995
188
774
373
105
1,440
1996
88
978
490
64
1,621
1997
(373)
945
450
74
1,096
1998
(75)
940
427
82
1,374
1999
(74)
1,295
495
66
1,783
2000
196
1,353
540
86
2,175
2001
725
1,707
648
83
3,163
2002
1,182
1,513
656
114
3,466
2003
822
1,873
743
150
3,589
2004
(303)
2,387
899
142
3,125
2005
(591)
2,368
782
139
2,698
2006
(298)
2,782
960 126
3,571
Source: USDA Office of Budget and Program Analysis. Totals may not add due to rounding.
a. The difference between total premiums (farmer and government paid) and total indemnity payments
for crop losses, plus or minus any private company underwriting losses or gains.
b. Other costs primarily include federal salaries of USDA’s Risk Management Agency and beginning
in 2002, various research and development initiatives mandated by ARPA of 2000 (P.L. 106-
224).

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CRS-3
Because the program is not subject to periodic reauthorization, major changes
to the crop insurance program usually are not addressed in the context of an omnibus
farm bill. Over the past 25 years, the program has been subject to three major
legislative enhancements (in 1980, 1994, and 2000),1 each of which has pumped
additional federal dollars into the program in order to enhance farmer participation
levels in anticipation of precluding the demand for ad hoc disaster payments.
Since the last major modification in 2000, the federal subsidy to the crop
insurance program has averaged about $3.25 billion per year, up from an annual
average of $1.1 billion in the 1990s and about $500 million in the 1980s. Nearly
two-thirds of the current federal spending is used to subsidize insurance policy
premiums, and the balance primarily covers the government share of program losses
and reimburses participating private insurance companies for their administrative and
operating expenses. (See Table 1.)
Although the scope of the program has widened significantly over the past 25
years, the anticipated goal of crop insurance replacing disaster payments has not been
achieved. In virtually every crop year since 1988, Congress has provided ad hoc
disaster payments to farmers with significant weather-related crop losses. These have
been made available primarily through emergency supplemental appropriations, and,
until recently, regardless of whether a producer had an active crop insurance policy.
The exception to the historical pattern is the FY2007 supplemental appropriations act
(P.L. 110-28), which provided an estimated $1.5 billion in crop disaster payments for
2005, 2006, or early 2007 crop losses, but only to those producers who held an active
crop insurance policy or enrolled in the noninsured assistance program in the year of
the crop loss.2
Since FY1989, total disaster payments have amounted to more than $20 billion,
or just over $1 billion per year. Over the past six years (FY2001-FY2006), the federal
cost of the crop insurance program combined with ad hoc supplemental disaster
payments has averaged $4.5 billion per year. (See Figure 1.)
For a summary of all agricultural disaster assistance provided by Congress since
1988, see CRS Report RL31095, Emergency Funding for Agriculture: A Brief
History of Supplemental Appropriations, FY1989-FY2007.
1 Federal Crop Insurance Act of 1980 (P.L. 96-365), Federal Crop Insurance Reform Act
of 1994 (P.L. 103-354), Agriculture Risk Protection Act (ARPA) of 2000 (P.L. 106-224).
For information on ARPA of 2000, see CRS Report RL30739, Federal Crop Insurance and
the Agriculture Risk Protection Act of 2000 (P.L. 106-224).
2 This assistance was provided in Title IX, Section 9001 of the FY2007 Iraq War
Supplemental Act (P.L. 110-28). The projected spending of $1.5 billion for 2005, 2006 and
early 2007 crop losses will be made in FY2008. For a description of this and other types of
agricultural assistance made available in P.L. 110-28, see CRS Report RS21212,
Agricultural Disaster Assistance.

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CRS-4
Figure 1. Crop Insurance and Disaster Payments: Total Federal Cost,
By Fiscal Year
Source: Primary data are from USDA’s Table 35, CCC Net Outlays by Commodity & Function for disaster
payments, and USDA’s Office of Budget & Program Analysis for crop insurance.
Current Issues
Reducing Crop Insurance Program Costs. Although crop insurance is
sold and serviced by private insurance companies, the federal government absorbs
a large portion of program losses and reimburses the companies for their
administrative and operating (A&O) expenses. Loss sharing and A&O
reimbursements currently are spelled out in a Standard Reinsurance Agreement
(SRA) between USDA and the private companies.3 The Administration and others
contend that the private insurance companies should be required to absorb more of
3 For more background and for the text of the SRA, see [http://www.rma.usda.gov/pubs/ra/].

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CRS-5
the program losses, and that the reimbursement rate for company A&O expenses
needs to be reduced as a means of reducing federal costs. Under the SRA, the
reimbursement rate for A&O expenses currently averages about 22% to 24% of total
premiums. Proponents for change point out that A&O reimbursements to the
companies have doubled over the last seven years (see Table 1), mainly because
farmers have been buying up to higher levels of insurance coverage, causing total
premiums to rise. Since A&O reimbursements are based on a percentage of total
premiums, the Administration contends that the companies are being
overcompensated for their expenses. The private crop insurance companies contend
that any reductions in their A&O reimbursement would negatively impact the
financial health of the crop insurance industry and possibly jeopardize the delivery
of crop insurance, particularly in high-risk areas.
Permanent Disaster Payments. Some policymakers want to make
permanent in the farm bill some level of disaster payments to supplement the crop
insurance program. Supporters say that ongoing farm disaster programs do not
adequately address emergency needs when a major disaster strikes and that USDA
should have at its disposal a permanent source of disaster funds in the same manner
as the Federal Emergency Management Administration (FEMA). Questions in the
debate include how such a program would be funded given current budget
constraints, and whether the permanent availability of disaster payments would
adversely affect participation in the crop insurance program, and possibly encourage
production on high-risk lands.
Waste, Fraud, and Abuse. For many years, policymakers have been
concerned about waste, fraud, and abuse within the federal crop insurance program.
The Agricultural Risk Protection Act (ARPA) of 2000 (P.L. 106-224) contained
several provisions that were designed to enhance USDA’s recognition of and
response to challenges to program compliance and integrity. In response to the
ARPA requirements, USDA used “data mining” techniques to compile an annual list
of producers who either exhibit high loss ratios (i.e., high indemnity payments
relative to total premiums), high frequency and severity of losses, or who are
suspected of poor farming practices that might contribute to production losses.
USDA estimates that the use of the spot-check list has prevented between $70
million and $110 million each year in improper payments. Mandatory funding
authorized by ARPA for data mining and other ARPA-related program integrity
activities expired at the end of FY2005. The FY2006 agriculture appropriations act
(P.L. 109-97) and the FY2007 continuing appropriations resolution (P.L. 110-5)
each allowed $3.6 million in discretionary funds for data mining and warehousing
activities, within the regular annual appropriation for the Risk Management Agency.
However, future funding for this activity remains uncertain. Some would like to see
permanent funding for program integrity activities addressed in the farm bill.

Specialty Crop and Livestock Concerns. Some specialty crop growers
(mainly fruits, nuts, and vegetables) contend that insurance products for their
commodities are not available or are developed more slowly than for the more
traditional crops. In part, this is because of the large number of specialty crops that
are grown. Furthermore, because specialty crops have unique production and risk
characteristics, each of the many types of produce require customized insurance
programs. Consequently, some specialty crop growers have expressed interest in the

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CRS-6
expansion of whole-farm insurance programs, which allow farmers in some regions
to insure the revenue of the entire farm rather than on a crop-by-crop basis. Others
have proposed the formulation of farm savings accounts as a new risk management
tool, which would allow farmers to contribute income to an account in a high-income
year, and defer paying taxes on the contribution until it is withdrawn in the future in
a low-income year.4 Similarly, livestock growers have expressed interest in
expanding pilot programs and developing new programs to assist them in managing
their price risks.
2007 Farm Bill Action
Some policymakers have expressed interest in expanding the crop insurance
program in the context of the 2007 farm bill and/or complementing it with a
permanent disaster payment program. However, many view the crop insurance
program as a potential target for program cost reductions, and propose using these
savings to fund new initiatives in various titles of the farm bill.
Administration Proposal. The Administration’s farm bill proposal contains
several crop insurance recommendations that it claims will enhance participation;
address issues of waste, fraud and abuse; reduce costs; and reduce the need for
emergency supplemental disaster payments.5
One Administration-proposed change to the program would allow participating
farmers to purchase insurance for the portion of their production that is part of their
deductible, and not currently covered by crop insurance. The Administration is
opposed to a permanent disaster payment program, and contends that its proposed
deductible or “gap” coverage would help preclude the need for supplemental disaster
payments. Under this proposed supplemental deductible coverage plan, a producer
could purchase an additional policy, and a payment would be made when losses in
the producer’s county exceed a certain threshold.
The Administration also recommends several cost-saving measures to the
program, including reducing premium subsidies by 2 to 5 percentage points, and
charging premiums for the catastrophic level of coverage (which currently is
premium-free). The Administration proposal would require the private insurance
companies to absorb more of the cost of the program through a proposed 2
percentage point reduction in the A&O expense reimbursement and by requiring the
companies to absorb more of the program losses. The Administration also proposes
a requirement that farmers purchase crop insurance as a prerequisite for participating
4 Such tax-favored saving accounts for farmers have been introduced in past Congresses
under such names as Farm And Ranch Risk Management (FARRM) Accounts and Farm,
Fish, And Ranch Risk Management (FFARRM) Accounts.
5 For the Administration’s summary of its farm bill proposals addressing the crop insurance
program, see 2007 Farm Bill Proposals, United States Department of Agriculture, pp.149-
164.

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CRS-7
in the farm commodity support programs.6 The Congressional Budget Office
estimates that all of the Administration’s cost-saving proposals would reduce federal
outlays by $882 million over five years (FY2008-2012), while the proposed
supplemental deductible coverage would increase spending by $148 million over the
same period.
House-Passed Farm Bill (H.R. 2419). As passed by the House, H.R. 2419
contains several revisions to the crop insurance program. Virtually all of these
changes are cost-saving measures, which CBO preliminarily has estimated at $4.0
billion in reduced federal outlays over five years (FY2008-2012). (See Table 2 for
a description of the major cost-saving provisions.)
Nearly $2.7 billion of this estimated savings is attributable to changes in the
timing of premium receipts from farmers, and payments to the companies. Neither
would directly affect the final monetary amounts for participating farmers or insurers,
but would still be scored as savings within the five-year horizon of the bill.
However, $1 billion of the five-year savings is realized by requiring insurance
companies and farmers to share more in program costs. Farmers would be required
to pay higher fees for catastrophic coverage and some plans would provide somewhat
lower premium subsidies. Participating insurers would see smaller reimbursements
for their operating expenses and would be required to share more of their
underwriting gains with the government. The House-passed bill also authorizes $11
million in mandatory funding in FY2008 and $7 million in FY2009 and subsequent
years for data mining activities of USDA’s Risk Management Agency, in an effort
to reduce waste, fraud, and abuse within the program. Based on past experience of
agency activities to monitor program abuses, CBO estimates that this funding will
generate $125 million in program savings, more than offsetting the cost of the
initiative.
The House-passed bill does not include a provision for a permanent disaster
payment program. The House Agriculture Committee reported version of the bill
would have authorized USDA to implement a permanent disaster payment program,
but only if a budgetary offset was made for the additional cost. CBO projected that
this permanent program for crops, livestock, and trees, as proposed by Chairman
Peterson, would have cost approximately $950 million per year. The House-passed
bill also does not contain a committee provision that would have allowed insured
farmers to opt for additional coverage on the deductible portion of their policies,
which was similar in concept to the Administration-proposed supplemental
deductible coverage plan (see “Administration Proposal” above).
6 Such a requirement was instituted in 1994 crop insurance legislation (P.L. 103-354), but
was subsequently rescinded in the 1996 farm bill (P.L. 104-127).

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CRS-8
Table 2. Selected Crop Insurance Provisions in the
House-Passed Farm Bill (H.R. 2419)
Current Law or Policy
House-Passed Farm Bill (H.R. 2419)
Timing of Payments and Receipts: The
Three provisions would change the
federal government provides three levels
timing of crop insurance receipts
of subsidy to the crop insurance program,
(premium collections) and the timing of
by: 1) subsidizing a portion of the
payments to the private companies.
premium paid by farmers, 2) reimbursing
These changes are timed so that in the
the private crop insurance companies for
final year of the five-year farm bill
most of their administrative and operating
(FY2012) revenues will be received twice
expenses, and 3) absorbing most of the
in the fiscal year and reimbursements will
program losses.
be delayed until the next fiscal year.
Total budget authority will not be
affected, but because of the one-year
adjustment in FY2012, CBO scores
outlay savings of $2.7 billion in FY2012.
Private Insurance Company Subsidies:
Beginning in the 2009 reinsurance year
Participating private crop insurance
(July 1, 2008), the reimbursement rate to
companies are reimbursed by the federal
the private crop insurance companies for
government for their administrative and
their administrative and operating
operating expenses at rates determined in
expenses would decline by 2.9 percentage
a Standard Reinsurance Agreement
points from the rate in effect at the time
(SRA). Current law prohibits companies
of enactment of the 2007 farm bill.
from receiving a reimbursement greater
Hence, the range of reimbursement rates
than 24.5% of total premiums. However,
would decline to a range of 15.2% to
the current SRA establishes the
21.3%. CBO estimates this provision
reimbursement rate below the statutory
will reduce outlays by $612 million over
maximum for all plans of insurance,
five years. (Separately, a provision in
ranging from 18.1% to a maximum of
Title XII (Additional Offsets) would
24.2%.
require the maximum statutory
reimbursement rate to be adjusted
downward in 2012 through 2017, if
offsetting oil and gas receipts collected
by the Secretary of the Interior fall short
of estimates.)
Fees for Free Coverage: Producers
Increases the producer-paid fee for
opting for the most basic level of crop
catastrophic coverage under the crop
insurance (catastrophic (CAT) coverage)
insurance program and the Noninsured
pay no premium for the coverage, but are
Assistance Program to $200 per crop per
required to pay an administrative fee of
county, saving a combined CBO-
$100 per crop per county. Producers who
estimated $228 million over five years.
grow an uninsurable crop can also
receive the equivalent of CAT coverage
under a separate Noninsured Assistance
Program (NAP) and must also pay a $100
administrative fee.

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CRS-9
Current Law or Policy
House-Passed Farm Bill (H.R. 2419)
Risk Sharing: The current Standard
Requires the private insurance companies
Reinsurance Agreement between the
to reinsure at least 22% of their retained
federal government and the private crop
premiums with the government, and in
insurance companies determines levels of
return the government will provide a
risk sharing between the government and
ceding commission of 2% to the
the companies. The current agreement
companies. (The net effect is to raise the
requires the companies to reinsure 5% of
requirement to 20%.) This will allow the
their retained premium with the
government to receive some underwriting
government.
gains that would otherwise accrue to the
companies, which CBO estimates would
save $121 million over five years.
Senate Finance Committee Permanent Disaster Trust Fund. To date,
the Senate Agriculture Committee has not yet marked up its version of the 2007 farm
bill. Committee consideration had been delayed until the Senate Finance Committee
reported related legislation for various changes to the tax code related to agriculture
and other agricultural provisions. On October 4, 2007, the Senate Finance Committee
approved legislation that, among its many provisions, would authorize a permanent
trust fund to make agricultural disaster payments available on an ongoing basis over
the life of the next farm bill. According to CBO, the program would cost $5.1 billion
over five years, which is approximately equal to the annual average amount of ad-hoc
disaster payments that have been provided by Congress over the past 20 years. Most
of the cost would be funded through a mandated transfer of 3.34% of annual customs
receipts from the U.S. Treasury to the new trust fund.
According to a Senate Finance Committee summary of the legislation, the
proposed disaster payment program would supplement the current crop insurance
program, and would require a farmer to carry at least the catastrophic level of
coverage as a prerequisite for a payment. An eligible farmer in a disaster-declared
county would receive 52% of the difference between an established guaranteed level
of revenue and actual total farm revenue. The target level of revenue would be based
on the level of crop insurance coverage selected by the farmer, thus increasing if a
farmer opts for higher levels of coverage.
The Finance Committee proposal also allows the trust fund to be tapped for
indemnity payments to livestock producers and orchardists to compensate for
significant mortality losses caused by a natural disaster. Up to $35 million annually
from the fund also could be used for livestock, honey bee, and farm-raised fish losses
caused by adverse weather or other environmental conditions.

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