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Federal Crop Insurance: Background
Dennis A. Shields
Specialist in Agricultural Policy
January 9, 2015
Congressional Research Service
7-5700
www.crs.gov
R40532
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Federal Crop Insurance: Background
Summary
The federal crop insurance program began in 1938 when Congress authorized the Federal Crop
Insurance Corporation. The current program, which is administered by the U.S. Department of
Agriculture’s Risk Management Agency (RMA), provides producers with risk management tools
to address crop yield and/or revenue losses for about 130 crops. The federal farm safety net also
includes the farm commodity support programs, which provide price and income support for a
much narrower list of “covered and loan commodities” such as corn, wheat, rice, and peanuts.
In purchasing a crop insurance policy, a producer growing an insurable crop selects a level of
coverage and pays a portion of the premium—or none of it in the case of catastrophic coverage—
which increases as the level of coverage rises. The federal government pays the rest of the
premium (62%, on average, in 2014). Insurance policies are sold and completely serviced through
18 approved private insurance companies. As spelled out in a Standard Reinsurance Agreement
(SRA), the insurance companies’ losses are reinsured by USDA, and their administrative and
operating costs are reimbursed by the federal government.
In 2014, federal crop insurance policies covered 294 million acres. Major crops are covered in
most counties where they are grown. Four crops—corn, cotton, soybeans, and wheat—typically
account for more than 70% of total acres enrolled in crop insurance. Most crop insurance policies
are either yield-based or revenue-based. For yield-based policies, a producer can receive an
indemnity if there is a yield (production) loss relative to the farmer’s “normal” (historical) yield.
Revenue-based policies protect against crop revenue loss resulting from declines in yield, price,
or both. Other insurance products protect against losses in whole farm revenue (rather than just
for an individual crop) or gross margins for livestock enterprises.
Government costs for crop insurance have increased substantially during the last decade. After
ranging between $2.1 billion and $3.9 billion during FY2000-FY2007, costs rose to $7 billion in
FY2009 as higher policy premiums from rising crop prices drove up premium subsidies to
farmers and expense reimbursements (which are based on total premiums) to private insurance
companies. Costs peaked at $14.1 billion in FY2012 when crop prices surged again and poor
weather resulted in program losses. With a return to more favorable weather and smaller crop
losses, total program costs declined to $6.0 billion in FY2013 and were $8.7 billion in FY2014.
Federal outlays for crop insurance exceed those for the farm commodity support programs,
making crop insurance the most significant cost component of the farm safety net and a potential
target for deficit reduction. Insurance companies, farm groups, and some Members of Congress
are concerned that any reductions in federal support could negatively impact the financial health
of the industry and possibly jeopardize the delivery of crop insurance to farmers. Supporters of
federal crop insurance do not want to make changes that would adversely affect farmer
participation, policy coverage, or industry interest in selling and servicing insurance products to
farmers. Critics argue that premium subsidies are higher than necessary for farmers to adequately
protect themselves, and significant federal dollars could be saved if subsidies were lowered. From
a farm policy standpoint, policymakers and observers alike remain concerned about how the crop
insurance program interacts with farm commodity support programs and whether together they
help farmers deal with business risk at a cost that is acceptable to taxpayers.
In the 2014 farm bill (P.L. 113-79), Congress expanded the federal crop insurance program by
authorizing additional policies and requiring examination of potential new products, including
those that would benefit specialty crops and animal agriculture. These changes are summarized in
CRS Report R43494, Crop Insurance Provisions in the 2014 Farm Bill (P.L. 113-79).
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Contents
Crop Insurance History .................................................................................................................... 1
Program Basics ................................................................................................................................ 2
Policy Availability ..................................................................................................................... 4
Regions Without Coverage .................................................................................................. 5
Enhancing Existing Coverage ............................................................................................. 5
Actuarial Soundness .................................................................................................................. 6
Types of Insurance ..................................................................................................................... 6
Yield-Based Insurance ......................................................................................................... 6
Revenue-Based Insurance ................................................................................................. 10
Whole Farm Revenue Protection (WFRP) ........................................................................ 10
Crop Insurance Premium Subsidies ......................................................................................... 10
Geographic Distribution of Program Participation and Indemnities ....................................... 11
Distribution of Producer Subsidies .......................................................................................... 13
Federal Program Costs ................................................................................................................... 15
Standard Reinsurance Agreement (SRA) ....................................................................................... 17
Administrative and Operating (A&O) Reimbursement ........................................................... 17
Private Company Risk Sharing................................................................................................ 17
Trends in A&O Reimbursement and Underwriting Gains ....................................................... 19
Crop Insurance in the 2014 Farm Bill ........................................................................................... 20
Views on Federal Crop Insurance .................................................................................................. 21
Figures
Figure 1. Federal Crop Insurance Program ...................................................................................... 3
Figure 2. Insured Acres by Crop Year .............................................................................................. 4
Figure 3. Types of Crop Insurance Policies ..................................................................................... 7
Figure 4. Acres Enrolled in Crop Insurance, 2012 ......................................................................... 12
Figure 5. Crop Insurance Indemnities in 2014............................................................................... 12
Figure 6. Estimated Average Crop Insurance Premium Subsidy Per Farm in 2013 ...................... 13
Figure 7. Crop Insurance Premium Subsidies by Crop in 2013..................................................... 14
Figure 8. Crop Insurance Premium Subsidies for Top 20 States in 2013 ...................................... 14
Figure 9. Locations of Participating Farmers Receiving Premium Subsidies of More Than
$40,000 in 2011 .......................................................................................................................... 15
Figure 10. Government Cost of Federal Crop Insurance ............................................................... 16
Figure 11. Risk Sharing for the Commercial Fund ........................................................................ 19
Tables
Table 1. Crop Insurance Premium Subsidies ................................................................................. 11
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Table 2. Government Cost of Federal Crop Insurance................................................................... 16
Table 3. Share of Crop Insurance Company’s Gains/Losses by Fund and Loss Ratio .................. 18
Table 4. Federal Crop Insurance Program and Company Data ...................................................... 20
Contacts
Author Contact Information........................................................................................................... 22
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Federal Crop Insurance: Background
or many farmers, federal crop insurance is the most important component of the farm
safety net, given the breadth of commodity coverage, from apples to wheat, and the
F capability to reimburse producers for crop losses. The federal crop insurance program
makes available subsidized policies to help farmers manage risk associated with natural disasters,
including drought, excess moisture, and other perils. The average annual federal cost is
approximately $8 billion.
This report provides a primer on the federal crop insurance program and highlights changes to the
program by the 2014 farm bill (P.L. 113-79). For details on crop insurance in the farm bill, see
CRS Report R43494, Crop Insurance Provisions in the 2014 Farm Bill (P.L. 113-79).
The farm safety net also includes the farm commodity support programs, which provide price and
income support for a much narrower list of “covered and loan commodities” such as corn,
soybeans, wheat, rice, and peanuts. Agricultural disaster programs are available for producers
owning livestock or fruit trees. For information on these programs, see CRS Report R43448,
Farm Commodity Provisions in the 2014 Farm Bill (P.L. 113-79), and CRS Report RS21212,
Agricultural Disaster Assistance.
Crop Insurance History
Farming is generally regarded as a financially risky enterprise. Most agricultural production is
subject to the vagaries of weather, and shifts in agricultural supply and demand often result in
volatile market prices. Farm financial risk, periods of low returns, and the importance of
agriculture in the nation’s economy during the early to mid-1900s led to the development of
federal policies that financially supported farmers, primarily through commodity price
mechanisms. Today’s farm commodity policies—authorized in the 2014 farm bill—have their
roots in the 1930s.
During the same era, Congress also first authorized federal crop insurance as an experiment to
address the effects of the Great Depression and crop losses seen in the Dust Bowl. In 1938, the
Federal Crop Insurance Corporation (FCIC) was created to carry out the program, which focused
on major crops in major producing regions. The availability of federal crop insurance remained
limited until passage of the Federal Crop Insurance Act of 1980 (P.L. 96-365), which expanded
crop insurance to many more crops and regions of the country. Congress enhanced the crop
insurance program, including greater subsidy levels, in 1994 and again in 2000 in order to
encourage greater participation. The changes also expanded the role of the private sector in
developing new products that would help farmers manage their risks.1 Today, many banks, when
making operating loans, require that farmers purchase crop insurance.
1 For more on the history of federal crop insurance, see http://www.rma.usda.gov/aboutrma/what/history.html. Law
citations are the Federal Crop Insurance Act of 1980 (P.L. 96-365), the Federal Crop Insurance Reform Act of 1994
(P.L. 103-354), and the Agriculture Risk Protection Act (ARPA) of 2000 (P.L. 106-224). Additional background on the
program’s rationale is available the following three articles: (1) Joseph W. Glauber, “The Growth of the Federal Crop
Insurance Program, 1990-2011,” Amer. J. Agr. Econ., vol. 95, no. 2 (January 2013), pp. 482-488; (2) Keith H. Coble
and Barry J. Barnett, “Why Do We Subsidize Crop Insurance?,” Amer. J. Agr. Econ., vol. 95, no. 2 (January 2013), pp.
498-504; and (3) Barry K. Goodwin and Vincent H, Smith, “What Harm Is Done by Subsidizing Crop Insurance?,”
Amer. J. Agr. Econ., vol. 95, no. 2 (January 2013), pp. 489-497.
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Federal Crop Insurance: Background
The federal crop insurance program is permanently authorized by the Federal Crop Insurance Act,
as amended (7 U.S.C. 1501 et seq.). It is periodically modified. For example, Congress chose to
revise the statute in the 2008 farm bill (P.L. 110-246) to achieve budget savings and to
supplement crop insurance with a permanent disaster payment program. The 2014 farm bill (P.L.
113-79) expanded the program and increased budget outlays.2 The U.S. Department of
Agriculture’s (USDA’s) Risk Management Agency (RMA) operates and manages the FCIC.
Program Basics
The federal crop insurance program provides producers with risk management tools to address
crop yield and/or revenue losses on farms. Guarantees are established just prior to planting, based
on historical yields and expected market prices (not statutory prices used in farm programs).
Insurance policies are sold and completely serviced through 18 approved private insurance
companies. Independent insurance agents are paid sales commissions by the companies. The
insurance companies’ losses are reinsured by USDA, and their administrative and operating costs
are reimbursed by the federal government (see Figure 1 and “Federal Program Costs,” below).
In purchasing a policy, a producer growing an insurable crop selects a level of coverage and pays
a portion of the premium, which increases as the level of coverage rises. The remainder of the
premium is covered by the federal government (about 62% of total premium, on average, is paid
by the government).3 In the case of catastrophic coverage, the government pays the full premium.
Also, the government, not the farmer, pays for the cost of selling and servicing all policies. In the
absence of premium subsidies and free delivery, farmer participation in the crop insurance
program and/or purchased coverage levels would be lower. A major benefit for producers is the
timely payment for crop losses (about 30 days after the farmer signs the claim form).
In 2014, crop insurance policies covered 294 million acres (Figure 2). Major crops are insurable
in most counties where they are grown, and approximately 83% of U.S. crop acreage is insured
under the federal crop insurance program.4 Four crops—corn, cotton, soybeans, and wheat—
typically account for more than 70% of total enrolled acres. For these major crops, a large share
of plantings is covered by crop insurance. In 2014, the portion of total corn acreage covered by
federal crop insurance was 87%; cotton, 96%; soybeans, 88%; and wheat, 84%.
Policies for less widely produced crops are available in primary growing areas. Examples include
dry peas, blueberries, citrus, pumpkins, and walnuts. In total, policies are available for about 130
crops (including coverage on a variety of fruit trees, nursery crops, pasture, rangeland, and
forage).5
2 CRS Report R43494, Crop Insurance Provisions in the 2014 Farm Bill (P.L. 113-79).
3 In practice, the crop insurance company bills the farmer for the producer’s portion of the premium (i.e., excluding the
government portion). The company then sends the entire producer-paid premium to RMA. When a producer files a
claim and the company pays an indemnity, RMA reimburses the company in full for the loss. At the end of the
reinsurance year, there is an annual settlement whereby the company’s proportion of any underwriting gain or loss is
determined and paid.
4 Insured percentage is for 2011. For a detailed analysis by crop, see USDA Risk Management Agency, The Risk
Management Safety Net: Portfolio Analysis-Market Penetration and Potential, Washington, DC, August 2013,
http://www.rma.usda.gov/pubs/2013/portfolio/portfolio.pdf.
5 A complete list of 2015 crops is available at http://www.rma.usda.gov/policies/2015policy.html.
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Figure 1. Federal Crop Insurance Program
Farmers
• 1.2 million policies in 2014
• 294 million acres insured
• $110 billion in loss coverage (total liability)
Within approximately
Farmers pay a portion
30 days of loss,
of total premium to
indemnity is paid to
insurance companies,
farmer by FCIC
who forward funds to
through insurance
FCIC
companies’ claims
adjustment and
payment process
19 Private Insurance Companies
•
sell crop insurance policies through 12,500 agents
•
collect and forward premiums to FCIC
•
determine individual crop losses through 5,000 adjusters
•
pay claims with funds from FCIC
•
share gains/losses with federal government
FCIC pays A&O
In an annual settlement for each
expense
company, FCIC determines and
reimbursement to
pays (receives) the company
each company for
portion of any underwriting gain
delivery costs
(loss)
(subsidy to farmer)
Federal Crop Insurance Corporation (FCIC)
• sets standards and premium rates
• approves new products
• subsidizes farmer premiums (62% on average)
• pays 100% of delivery costs through Administrative and Operation (A&O)
reimbursement to companies
• shares gains/losses with private companies
• reinsures insurance company losses
• USDA’s Risk Management Agency operates the program (employees: 68 in
DC Headquarters and 399 in field offices)
Source: CRS, adapted from U.S. Department of Agriculture and industry sources.
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Figure 2. Insured Acres by Crop Year
Million acres
300
Other
250
Pasture, Rangeland, &
200
Forage
Cotton
150
Wheat
100
Soybeans
50
Corn
0
2008 2009 2010 2011 2012 2013 2014
Source: U.S. Department of Agriculture, Risk Management Agency.
Many specialty crop producers depend on crop insurance as the only “safety net” for their
operation, unlike field crop producers, who are also eligible for farm commodity program
payments.6 In the specialty crop category, insured acreage as a share of total acreage is 73% for
fruits and nuts and 32% for vegetables.7
Crop insurance is not necessarily limited to crops. Relatively new or pilot programs protect
livestock and dairy producers from loss of gross margin or price declines.8 Livestock producers
can also insure against hay and forage losses through the Pasture, Rangeland, and Forage
program, which uses a rainfall index or vegetative index to determine loss.9 A pilot program
began in 2014 for annual hay production in North Dakota, South Dakota, Nebraska, Kansas,
Oklahoma, and Texas.10
Policy Availability
The availability of crop insurance for a particular crop in a particular region is an administrative
decision made by USDA. The decision is made on a crop-by-crop and county-by-county basis,
6 Carey Frick, “Frick: Not So Peachy,” The State, May 26, 2010.
7 USDA Risk Management Agency, The Risk Management Safety Net: Portfolio Analysis-Market Penetration and
Potential, Washington, DC, August 2013, http://www.rma.usda.gov/pubs/2013/portfolio/portfolio.pdf. For additional
information, see Federal Crop Insurance Corporation, Report to Congress: Specialty Crop Report, Washington, DC,
November 2010, http://www.rma.usda.gov/pubs/2010/specialtycrop.pdf.
8 For descriptions of Livestock Gross Margin (margin protection) and Livestock Risk Protection (price protection), see
http://www.rma.usda.gov/livestock/.
9 For more information, see http://www.rma.usda.gov/policies/pasturerangeforage/. Also see Monte Vandeveer,
Pasture, Rangeland, and Forage Insurance: A Risk Management Tool for Hay and Livestock Producers, University of
Nebraska-Lincoln, October 2012, http://cropwatch.unl.edu/c/document_library/get_file?uuid=3f25e3ef-68d1-4489-
a7dd-7daba3c2d385&groupId=1841&.pdf.
10 For a description of the program, see http://www.rma.usda.gov/policies/ri-vi/annualforage.html.
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based on farmer demand for coverage and the level of risk associated with the crop in the region,
among other factors. Developing new products can be costly, and a significant challenge is
obtaining credible data (yield and price) to create an actuarially sound product. The process
usually starts with a pilot program, which is conducted for about three years in order for RMA to
gain experience and test the program components before it becomes more widely available.
Alternatively, a policy can be reviewed and later discontinued if it fails to perform at an
acceptable level (e.g., low participation or high losses).
Some policies remain as a pilot for years. For example, the forage (alfalfa) seed insurance policy
was introduced in 2002 as a pilot program to provide insurance coverage to alfalfa seed farmers.
On May 29, 2014, USDA announced that it would be converted to a permanent policy for the
2015 crop year. During the pilot period, USDA determined an insurance need for hybrid
production and made a program change to provide coverage for growers contracting for
production of hybrid alfalfa seed.
Regions Without Coverage
In regions where a policy is not available, farmers may request from the appropriate regional
office that RMA expand the program to their county.11 A producer also may request insurance
coverage under a written agreement, which is a document designed to provide crop insurance for
insurable crops when coverage or rates are unavailable.12
When crop insurance is not available, USDA’s noninsured crop disaster assistance program
(NAP) provides the equivalent of catastrophic coverage (for yield losses greater than 50%) if
purchased by the producer. Additional coverage (for yield losses greater than 35%) has been
made available by the 2014 farm bill. To be eligible for a NAP payment, a producer first must
apply for coverage under the program by the application closing date, which varies by crop, but is
generally about 30 days prior to the final planting date for an annual crop. As with catastrophic
crop insurance, NAP applicants pay an administrative fee (currently $250 per crop). No premiums
are required.13
Enhancing Existing Coverage
RMA also regularly responds to requests from commodity organizations or industry
representatives for enhancements to existing coverage, such as adding revenue coverage and
organic practice coverage or trend yield adjustments to better reflect a producer’s liability. In
some cases, RMA has not pursued policies for particular commodities because producers have
expressed concerns that offering insurance could adversely affect the market (i.e., because an
insurance policy reduces producer risk, farmers may plant more acreage, which could drive down
prices and total crop revenue). This has been a concern for many vegetable crops and explains in
part lower levels of insured vegetable acreage compared with other crops.14
11 A list of RMA regional offices is available at http://www.rma.usda.gov/aboutrma/fields/rsos.html.
12 For more information, see USDA, Risk Management Agency, Requesting Insurance Not Available in Your County,
Program Aid 1929, September 2013, http://www.rma.usda.gov/pubs/rme/requestinginsurance.pdf. See also the FCIC
“Written Agreement Handbook,” http://www.rma.usda.gov/handbooks/24000/2013/24020.pdf.
13 For more information on NAP, see the USDA fact sheet at http://fsa.usda.gov/Internet/FSA_File/nap09.pdf.
14 Growers have expressed a preference for no development of insurance products for a number of crops; see
(continued...)
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Actuarial Soundness
Current law requires that RMA strive for actuarial soundness for the entire federal crop insurance
program (that is, indemnities should equal total premiums, including premium subsidies).15 As a
result, RMA must set premium rates to only cover expected losses and a reasonable reserve. The
agency is also required to conduct periodic reviews of its rate-setting methodology, which sets
premium rates according to the average historical rate of loss (e.g., if policies pay out 10% of
their value, on average, then the rate should be 10%). Based on a review completed in July 2011,
RMA adjusted its methodology for several major commodities to give more weight to recent
years and to make other changes.16
Types of Insurance
Federal crop insurance policies are generally either yield-based or revenue-based. For most yield-
based policies, a producer can receive an indemnity if there is a yield loss relative to the farmer’s
“normal” (historical) yield. Revenue-based policies were developed after yield-based policies, in
the mid-1990s, to protect against crop revenue loss resulting from declines during the growing
season in yield, price, or both. The most recent addition has been products that protect against
losses in whole farm revenue rather than just for an individual crop. For both yield- and revenue-
based policies, the price used to set the guarantee is based only on the expected price for the
upcoming season, and is reset every year. This is in contrast to farm programs which either have
price guarantees set in statute or use historical average prices and are designed to protect against
longer-term price declines.
These two basic forms—yield-based and revenue-based—are discussed below, followed by a
brief explanation of whole farm insurance. The text boxes in this report entitled “Crop Insurance
Examples: Yield-Based vs. Revenue-Based” and “Federal Crop Insurance: Range of Coverage
and Policies” explain program operation within the two broad categories.
Slightly more than 1.2 million crop insurance policies were active in 2013, with revenue-based
policies accounting for three-quarters of the total (Figure 3), and the remainder being yield-based
policies. On a premium basis, revenue policies account for 84% of all policies.
Yield-Based Insurance
When purchasing a crop insurance policy, a producer is assigned (1) a “normal” crop yield based
on the producer’s actual production history, and (2) a price for his commodity based on estimated
market conditions. The producer can then select a percentage of his normal yield to be insured
and a percentage of the price he wishes to receive when crop losses exceed the selected loss
(...continued)
Attachment 2 in USDA Risk Management Agency, The Risk Management Safety Net: Portfolio Analysis-Market
Penetration and Potential, Washington, DC, August 2013, http://www.rma.usda.gov/pubs/2013/portfolio/portfolio.pdf.
15 U.S. Department of Agriculture, Risk Management Agency, http://www.rma.usda.gov/help/faq/basics.html.
16 For a detailed discussion, see U.S. Department of Agriculture, Risk Management Agency, Premium Rate Adjustment,
November 2012, http://www.rma.usda.gov/news/2012/11/2013premiumrateadjustment.pdf.
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threshold. The level of crop yield coverage is viewed by farmers as a critical feature of crop
insurance, and a major determinant of whether a farmer will purchase insurance.17
Figure 3. Types of Crop Insurance Policies
(policies earning premiums in 2014 = 1.2 million)
Yield-
based
(23%)
Revenue-
based
(77%)
Source: U.S. Department of Agriculture, Risk Management Agency.
Notes: When calculated by share of premiums paid, yield-based policies account for 20% of total policies and
revenue-based policies account for 80%. Index and “dollar” policies are included in yield-based total.
In determining what a normal production level is for an insurable farmer, USDA requires the
producer to present actual annual crop yields (usually stated on a bushel-per-acre basis) for the
last 4 to 10 years. The simple average of a producer’s annual crop yield over this time period then
serves as the producer’s actual production history (APH). If a farmer does not have adequate
records, he can be assigned a transition yield (T-yield) for each missing year of data, which is
based on average county yields for the crop.
The most basic policy is called catastrophic (CAT) coverage. The premium for this level of
coverage is completely subsidized by the federal government. The farmer pays an administrative
fee for CAT coverage ($300 per crop per county), and in return can receive a payment on losses in
excess of 50% of normal yield, equal to 55% of the estimated market price of the crop (called
50/55 coverage).
Coverage levels that are higher than CAT are called “buy-up” coverage, and most farmer
purchase buy-up policies because of the additional protection.18 For an additional premium paid
by the producer, and partially subsidized by the government (see “Crop Insurance Premium
Subsidies,” below), a producer can “buy up” the 50/55 catastrophic coverage to any equivalent
level of coverage between 50/100 and 75/100 (i.e., up to 75% of “normal” crop yield and 100%
of the estimated market price). In limited areas, production can be insured up to the 85/100 level
of coverage.
The policy name depends on how pricing is determined for the crop. “APH” policies use a
projected price determined by RMA, while “Yield Protection” policies use a projected price
17 A number of university and Extension Service offices provide information to farmers when making crop insurance
decisions. Some examples include http://www.agmanager.info/crops/insurance/risk_mgt/default.asp,
http://www.ag.ndsu.nodak.edu/aginfo/cropmkt/cic.htm, and http://www.farmdoc.uiuc.edu/cropins/index.asp.
18 Participation at the CAT level has steadily decreased, particularly since subsidies on buy-up levels were increased in
the Agriculture Risk Protection Act (ARPA) of 2000. In 2014, only about 5% of insured acres were insured at the CAT
level.
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based on the commodity exchange markets. For example, polices are APH for plums and Yield
Protection for wheat.
Several other policies, including Area Yield Protection (formerly called Group Risk Plan) and
Dollar Plan (see box), are not widely used but can be important for certain crops. Some of these
policies use an area-wide index—such as county-level yield in the case of the Area Yield
Protection—to measure losses.
Crop Insurance Examples: Yield-Based vs. Revenue-Based
Two basic forms of crop insurance are yield-based and revenue-based. Yield-based insurance provides an indemnity
when the actual yield falls below the guarantee level. Revenue-based insurance provides an indemnity when the
revenue (actual yield x price) falls below the guarantee.
Actual Production History (APH) Example:
A loss occurs when the bushels of soybeans produced for the insurance unit (insurable acreage) fal below the
production guarantee as a result of damage from a covered cause of loss. Assumptions: “normal” production = 48
bushels / acre; yield coverage level = 75%; established price coverage = 100%; price election = $9.90 / bushel; actual
production = 20 bushels per acre.
48 bushels per acre APH yield
x .75 coverage level
36.0 bushel / acre guarantee
- 20.0 bushels / acre actual y produced
16.0 bushels / acre of covered loss
x $9.90 per-bushel price election
$158.40 per-acre gross indemnity payment
- $6.00 estimated producer-paid premium per acre (varies)
$152.40 per-acre net indemnity
Revenue Product Example:
36.0 bushels / acre guarantee (see prior example)
x $11.00 per-bushel base price (announced in March)
$396.00 per-acre guarantee
20 bushels / acre actual y produced
x $10.00 per-bushel harvest price (announced in November)
$200.00 per-acre revenue
$196.00 per-acre gross indemnity payment ($396.00 - $200.00)
- $13.00 estimated producer-paid premium (varies)
$183.00 per-acre net indemnity
Source: U.S. Department of Agriculture, Risk Management Agency, 2009 Commodity Insurance Fact Sheet - Soybeans -
Iowa, January 2009, http://www.rma.usda.gov/fields/mn_rso/2009/2009iasoybeans.pdf.
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Federal Crop Insurance: Range of Coverage and Policies
I. Catastrophic Coverage (CAT) pays 55% of the established price of the commodity on crop losses in excess of
50%, which is the deductible or out-of-pocket loss absorbed by farmer. The premium on CAT is paid by the federal
government; however, producers must pay a $300 administrative fee for each crop insured in each county. Limited-
resource and beginning farmers may have this fee waived. CAT coverage is not available on all types of policies.
II. Buy-up Coverage offers higher coverage (a lower deductible) and is purchased instead of CAT. Policies include:
Yield-based policies:
Actual Production History (APH) and Yield Protection (YP) policies insure producers against yield losses due
to natural causes such as drought, excessive moisture, hail, wind, frost, insects, and disease. The farmer selects the
amount of average yield he or she wishes to insure, from 50% to 85%. The farmer also selects the percentage of the
projected price he or she wants to insure—between 55% and 100% of the crop price (for APH, the price is
established annually by RMA; for Yield Protection, the price is based on futures market prices). If the harvest is less
than the yield insured, the farmer is paid an indemnity based on the difference. Indemnities are calculated by
multiplying this difference by the insured percentage of the selected price.
Area Yield Protection (formerly Group Risk Plan or GRP) insures against widespread loss of production based on
county average yields. When the county yield for the insured crop falls below the trigger level selected by the farmer,
an indemnity is paid regardless of the individual farmer’s actual yield. Coverage is available for up to 90% of the
expected county yield. This protection involves less paperwork and costs less than the farm-level coverage described
above. However, individual crop losses may not be covered if the county yield does not suffer a similar loss. This
insurance is suitable for farmers whose crop losses typically follow the county pattern.
Dollar Plan provides protection against declining value due to damage that causes a yield shortfall. (Crop examples
include cherries, chili peppers, citrus, and nursery crops.) Amount of insurance is based on the cost of growing a crop
in a specific area. A loss occurs when the annual crop value is less than the amount of insurance. The maximum dollar
amount of insurance is stated on the actuarial document. The insured may select a percentage of the maximum dollar
amount equal to CAT (catastrophic level of coverage), or additional coverage levels.
The Vegetation Index and Rainfall Index do not measure direct production or loss; rather the farmer is insuring
against an index that is expected to estimate production. The Pasture, Rangeland, and Forage (PRF) pilot program and
the Apiculture pilot program (for beekeepers) use an index for different parts of the country.
Revenue-based policies:
Revenue Protection (RP) insures producers against yield losses due to natural causes such as drought, excessive
moisture, hail, wind, frost, insects, and disease, and revenue losses caused by a change in the harvest price from the
projected price. The producer selects the amount of average yield he or she wishes to insure, from 50% to 75% (in
some areas to 85%). The projected price and the harvest price are 100% of the price determined by futures
contracts. The amount of insurance protection is based on the greater of the projected price or the harvest price. If
the harvested plus any appraised production multiplied by the harvest price is less than the amount of insurance
protection, the producer is paid an indemnity based on the difference. The policy “Revenue Protection With Harvest
Price Exclusion” is based on the projected price only (i.e., the amount of insurance protection is not increased if the
harvest price is greater than the projected price).
Actual Revenue History (ARH) insures an average of historical grower revenues instead of insuring historical
yields as done under APH. Like other revenue coverage plans, ARH protects growers against losses from low yields,
low prices, low quality, or any combination of these events.
Area Revenue Protection (formerly Group Risk Income Protection or GRIP) makes indemnity payments only
when the average county revenue for the insured crop falls below the revenue guarantee selected by the farmer;
Area Revenue Protection with Harvest Price Exclusion is available if upside harvest price protection is not desired.
Whole-Farm Revenue Protection (WFRP) insures revenue of the entire farm rather than an individual crop by
guaranteeing a portion of whole-farm historic average revenue (both crops and livestock). To calculate the guarantee,
the plan uses five consecutive years of a producer's Schedule F tax form and current-year expected farm revenue.
Beginning in 2015, it replaces Adjusted Gross Revenue (AGR) and AGR-Lite.
Livestock Policies insure against declining market prices or gross margins for swine, cattle, lambs, and milk.
III. Supplemental Coverage Option (SCO) may be purchased with CAT or Buy-up to cover part of the
deductible of underlying policy. Eligible crops in 2015 are corn, cotton, sorghum, rice, soybeans, barley, and wheat.
Source: USDA’s Risk Management Agency, http://www.rma.usda.gov/policies/.
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Revenue-Based Insurance
Revenue insurance accounts for more than half of all crop insurance policies (Figure 3). It began
in 1997 as a buy-up option on a pilot basis for major crops. By 2003, acreage under revenue-
based insurance exceeded acreage covered by yield-based policies.19
A “Revenue Protection” policy combines the production guarantee component of crop insurance
with a price guarantee to create a target revenue guarantee. Under revenue insurance programs,
participating producers are assigned a target level of revenue based on expected market prices for
the upcoming season and the producer’s yield history. A farmer who opts for revenue insurance
can receive an indemnity payment when his actual farm revenue (crop-specific or entire farm,
depending on the policy) falls below a certain percentage of the target level of revenue, regardless
of whether the shortfall is caused by low prices or low production levels. The price portion of the
guarantee rises if the market strengthens between planting and harvest, unless the producer
purchases “Revenue Protection With Harvest Price Exclusion.” Insurable crops are barley,
canola/rapeseed, corn, cotton, grain sorghum, peanuts, rice, soybeans, sunflowers, and wheat. For
selected other crops such as tart cherries and strawberries, Actual Revenue History (ARH) insures
historical revenues and protects growers against losses from low yields, low prices, low quality,
or any combination of these events.
Whole Farm Revenue Protection (WFRP)
The Whole-Farm Revenue Protection (WFRP) policy insures revenue of the entire farm rather an
individual crop. The policy is designed for highly diverse farms that are growing a wide range of
commodities, including farms selling to local or regional, and farm-identity preserved, markets
and growing specialty crops and animals and animal products. The amount of farm revenue that
can be protected is the lower of the revenue expected on the current year’s farm plan or five-year
historic income adjusted for growth. All commodities produced by the farm are covered under
WFRP except timber, forest, and forest products, and animals for sport, show or pets. Maximum
total coverage per farm is $8.5 million.20 WFRP replaces the Adjusted Gross Revenue (AGR) and
AGR-Lite pilot programs and provides additional enhancements, such as a range of coverage
levels from 50%-85% to fit the needs of more farming and ranching operations; replant coverage
for annual crops; the ability to consider market readiness costs as part of the insured revenue and
expenses; provisions to adjust the insurance guarantee to better fit expanding operations; and an
improved timeline for operations that operate as fiscal year filers.
Crop Insurance Premium Subsidies
The producer’s premium for a policy increases as coverage levels rise, and the premium on buy-
up coverage is subsidized by the government at amounts from 38% to 100%, depending on the
19 After years of development, USDA’s Risk Management Agency issued the “COMBO” rule in late March 2010 to
consolidate several crop insurance plans into a single “Common Crop Insurance Policy” beginning with the 2011 crop
year. The biggest change was the consolidation of several previous revenue products (Crop Revenue Coverage, Income
Protection, Indexed Income Protection, and Revenue Assurance) into a single revenue product called Revenue
Protection. See USDA, Risk Management Agency, “RMA Releases New Common Crop Insurance Policy Basic
Provisions,” press release, March 31, 2010, http://www.rma.usda.gov/news/2010/03/combo.html.
20 Additional information on WFRP is available from USDA/RMA at http://www.rma.usda.gov/policies/wfrp.html.
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coverage level (Table 1). The subsidy rate declines as the coverage level rises (i.e., deductible
declines).
Subsidy rates range from 38% to 67% for policies using either “basic” or “optional” units. Basic
units cover all plantings in a single county of a crop with the same tenant/landlord. Optional units
are basic units divided into smaller units by township section. As authorized under the 2008 farm
bill, a higher subsidy rate (up to 80%) is provided for policies using enterprise units (all land for a
single crop in a county, regardless of the tenant/landlord structure). Because the premium for
policies using enterprise units is lower (a discount is given because the combined unit has greater
geographic diversity and hence is less risky), a higher subsidy rate for enterprise units provides
for an equal dollar amount of premium subsidy regardless of the type of unit used. Overall, the
average subsidy rate across all policies purchased was 62% in 2014.
Table 1. Crop Insurance Premium Subsidies
(government-paid portion of premium as a percent of total premium)
Coverage Level (%)
CAT
50 55 60 65 70 75 80 85
Premium subsidy (%) for most polices
100 67 64 64 59 59 55 48 38
(including those using basic and optional units)
Premium subsidy (%) for enterprise units
n/a
80
80
80
80
80
77
68
53
Premium subsidy (%) for area plans (yield)
n/a
n/a
n/a
n/a
n/a
59
59
55
55
Premium subsidy (%) for area plans (revenue)
n/a
n/a
n/a
n/a
n/a
59
55
55
49
Premium subsidy (%) for whole farm units
n/a
80
80
80
80
80
80
71
56
Source: 7 U.S.C. §1508(e).
Notes: n/a = not applicable. A basic unit covers land in one county with the same tenant/landlord. An optional
unit is a basic unit divided into smal er units by township section. An enterprise unit covers al land of a single
crop in a county for a producer, regardless of tenant/landlord structure. A whole farm unit covers more than
one crop. For CAT, a loss beyond 50% is indemnified at 55% of the expected price. For coverage level of 50%, a
loss beyond that percentage is indemnified at a higher percentage of price (selected by the purchaser) within a
minimum and maximum range set by RMA. Whole farm subsidy is for farms with three or more commodities; if
commodity count is less than three, coverage is not available at 80% and 85%.
Geographic Distribution of Program Participation and Indemnities
With widespread use of crop insurance products for major crops (corn, cotton, soybeans, and
wheat), the geographic distribution of acreage enrolled in crop insurance mirrors that of major
producing areas (Figure 4). Crop insurance indemnities follow the same pattern, but with an
emphasis on producing areas with less rainfall and more variable crop-weather conditions. For
example, in 2011, relatively high indemnities were paid in the Great Plains, where drought
reduced crop yields in the south and central areas while excessive moisture affected plantings and
production in the north.21 In 2012, a major drought affected a large portion of the United States,
and crop insurance indemnities totaled $17.4 billion in 2012, compared with $10.9 billion in 2011
and $4.3 billion in 2010. With improved weather, indemnities declined to $12.1 billion in 2013
and $4.2 billion in 2014 (as of early December 2014). As was the case in 2013, losses in 2014
were extensive across the Plains due to continued drought conditions (Figure 5).
21 Adverse weather can affect crops in various ways. For example, in some North Dakota counties in 2009, the cause of
loss was drought for some wheat policies, while it was excess moisture for other wheat policies in the same county.
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Figure 4. Acres Enrolled in Crop Insurance, 2012
Source: USDA, National Agricultural Statistics Service, 2012 Census of Agriculture.
Figure 5. Crop Insurance Indemnities in 2014
2014 Crop Indemnities by County
Source: USDA, Risk Management Agency, http://www.rma.usda.gov/data/indemnity/.
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Distribution of Producer Subsidies
Producer subsidies for crop insurance are proportional to the value of the premiums and
underlying liability of the policies. Compared with small farms, larger operations have greater
crop liability, which increases the total costs of insurance and value of the government-paid
portion of the total premium. Based on federal crop insurance expenditures data from USDA’s
Agricultural Resource Management Survey (ARMS) and the average subsidy percentage (62%)
from RMA, CRS estimates that the producer subsidy in 2013 averaged about $19,000 per farm
for farms purchasing crop insurance. By farm size, the calculated average ranged from $2,300 per
farm for operations with less than $10,000 in sales to $115,000 for farms with at least $5 million
in sales (see Figure 6). Unlike farm commodity programs, subsidies received under the crop
insurance program are not subject to payment limits.
By crop, the bulk of producer subsidies are for corn, wheat, soybeans, and cotton, which together
account for more than 80% of the premium subsidies (Figure 7). By state, premium subsidies are
greatest in states where these crops are grown, primarily across the Great Plains, Corn Belt, and
parts of the South (Figure 8). An analysis by the Government Accountability Office shows a
similar geographic distribution for farmers receiving at least $40,000 in producer premium
subsidies (Figure 9).
Figure 6. Estimated Average Crop Insurance Premium Subsidy Per Farm in 2013
$ per farm
120,000
100,000
80,000
60,000
40,000
20,000
0
All
Less than
$10,000 to
$100,000 to
$500,000 to
$1,000,000 to $5,000,000 or
$10,000
$99,999
$499,999
$999,999
$4,900,000
more
Farm sales class
Source: CRS calculation using average premium subsidy of 62% from USDA’s Risk Management Agency (RMA)
and total federal crop insurance expenditures by farm sales class from USDA’s Agricultural Resource
Management Survey, provided by USDA’s Economic Research Service.
Notes: The calculated average was $18,900 per farm (calculation includes only farms that pay federal crop
insurance premiums). Total premium subsidy reported by RMA was $7.3 billion for crop year 2013.
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Federal Crop Insurance: Background
Figure 7. Crop Insurance Premium Subsidies by Crop in 2013
$ billion
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Corn
Soybeans
Wheat
Cotton
Rice
Fruit, Veg.,
Other
Tree Nuts,
Nursery
Source: USDA’s Risk Management Agency, Summary of Business, http://www.rma.usda.gov/data/sob.html.
Notes: Total is $7.3 billion in crop year 2013. Corn, soybeans, wheat, and cotton account for 83% of the total.
Other includes minor oilseeds, other feed grains, tobacco, peanuts, sugar beets and sugar cane, pasture, and
other crops.
Figure 8. Crop Insurance Premium Subsidies for Top 20 States in 2013
MS
AR
NC
MI
MT
CO
OK
WI
CA
OH
IN
MO
NE
IL
MN
IA
KS
SD
TX
ND
$ million
0
100
200
300
400
500
600
700
800
Source: USDA’s Risk Management Agency, Summary of Business. http://www.rma.usda.gov/data/sob.html.
Notes: Total producer subsidy was $7.3 billion in crop year 2013. States in chart accounted for 87% of the total.
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Federal Crop Insurance: Background
Figure 9. Locations of Participating Farmers Receiving Premium Subsidies of More
Than $40,000 in 2011
Source: U.S. Government Accountability Office, Crop Insurance: Savings Would Result from Program Changes and
Greater Use of Data Mining, GAO-12-256, March 2012, p. 45, http://www.gao.gov/assets/590/589305.pdf.
Federal Program Costs
The annual agriculture appropriations bill traditionally makes two separate appropriations for the
federal crop insurance program. It provides discretionary funding for the salaries and expenses of
the RMA. It also provides “such sums as are necessary” for the Federal Crop Insurance Fund,
which finances all other expenses of the program, including premium subsidies, indemnity
payments, and reimbursements to the private insurance companies.
Government costs for crop insurance have increased substantially in the last decade (Figure 10
and Table 2). After ranging between $2.1 billion and $3.9 billion during FY2000-FY2007, costs
rose to $5.7 billion in FY2008 and $7.0 billion in FY2009 as higher policy premiums from rising
crop prices drove up premium subsidies and expense reimbursements to private insurance
companies. After a decline in FY2010 following a drop in crop prices and good weather, program
costs rose sharply to $11.3 billion in FY2011 and $14.1 billion in FY2012, when crop prices
surged again and poor weather resulted in program losses. With a return to more favorable
weather and smaller crop losses, total program costs declined to $6.0 billion in FY2013 and were
$8.7 billion in FY2014.
The largest cost component of federal spending on crop insurance is for the subsidy on policy
premiums for producers, which totaled $6.3 billion in FY2014. Historically, the next largest item
is reimbursement of administrative and operating (A&O) expenses to private insurance
companies ($1.4 billion in FY2014). With premiums reflecting only costs associated with policy
risk, the A&O reimbursement is meant to pay delivery costs. In four of the last 10 years, the
federal government also has realized underwriting losses (indemnities in excess of premiums
received). In the other six years, the government has realized gains, which has partially reduced
total costs. The underwriting gains (or losses) are derived in part from the federal government’s
role in providing the first level of reinsurance—that is, insurance for insurance companies.
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Federal Crop Insurance: Background
Figure 10. Government Cost of Federal Crop Insurance
Producer premium subsidy
Admin. & operating expenses
Other (incl. RMA salaries)
Program loss (gain if negative)
$ bil ion
Total gov. cost
16
FY2007 = $3.9 bil. FY2011 = $11.3 bil.
FY2008 = $5.7 bil. FY2012 = $14.1 bil.
14
FY2009 = $7.3 bil. FY2013 = $6.0 bil.
FY2010 = $3.7 bil. FY2014 = $8.7 bil.
12
10
8
6
4
2
0
2000
2002
2004
2006
2008
2010
2012
2014
-2
-4
Fiscal year
Source: CRS using data from U.S. Department of Agriculture, Risk Management Agency,
http://www.rma.usda.gov/aboutrma/budget/costsoutlays.html.
Table 2. Government Cost of Federal Crop Insurance
(millions of dollars)
Program
Federal
Private Company
Total
Losses or
Premium
A&O Expense
Other
Government
Fiscal Year
(Gains)a
Subsidy
Reimbursementsb
Costsc
Cost
2004 (305)
2,387
900
143
3,125
2005 (293)
2,070
783
139
2,699
2006 (32)
2,517
960
126
3,571
2007 (1,068)
3,544
1,341
124
3,941
2008
(1,717)
5,301
2,016
137
5,737
2009
340
5,198
1,602
131
7,271
2010
(2,523)
4,680
1,371
143
3,671
2011 2,392
7,376
1,383
144
11,295
2012 5,370
7,149
1,411
141
14,071
2013 (2,827)
7,279
1,350
149
5,951
2014 (est.)
847
6,272
1,407
133
8,659
Source: U.S. Department of Agriculture, Risk Management Agency, http://www.rma.usda.gov/aboutrma/budget/
costsoutlays.html.
a. Government’s underwriting loss (gain if negative) = the difference between total indemnity
payments for crop losses and total premiums (farmer and government paid), plus or minus any
private company underwriting gains or losses.
b. A&O = administrative and operating.
c. Other costs include federal salaries of USDA’s RMA and, beginning in 2002, various research and
development initiatives mandated by the Agriculture Risk Protection Act of 2000 (P.L. 106-224).
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Federal Crop Insurance: Background
Standard Reinsurance Agreement (SRA)
The administrative and operating (A&O) expense reimbursement to the companies and risk
sharing between USDA and the private companies are spelled out in a Standard Reinsurance
Agreement (SRA), which plays a large role in determining program costs. The current SRA was
completed in summer 2010. As authorized by the 2008 farm bill, USDA may renegotiate the SRA
once every five years starting with the 2011 reinsurance year (the 12-month period beginning July
1, 2010). The 2014 farm bill requires that any renegotiated SRA must be budget-neutral, with the
congressional intention that it not be used to cut federal funding of the crop insurance program.22
Administrative and Operating (A&O) Reimbursement
Under the current SRA, the calculated reimbursement rate for A&O has been approximately 12%
of total premiums since 2011, compared with an average of 20% in 2006-2010.23 This means that
for every $100 in total premiums (farmer-paid plus government-paid), the companies receive a
reimbursement of $12 from the federal government. The reimbursement rate varies by insurance
product, depending on whether it is for a yield-based or a revenue insurance product.
The SRA places a maximum for A&O reimbursements at $1.3 billion per year (adjusted annually
for inflation) and a minimum at $1.1 billion. The cap controls government costs when crop prices
rise (price levels directly affect policy premiums), while the minimum is intended to protect
companies against low market prices that could reduce reimbursement amounts.
Private Company Risk Sharing
The SRA also defines risk-sharing between the government and private insurance companies.
Under the SRA, insurance companies may transfer some liability associated with riskier policies
to the government and retain profits/losses from less risky policies.24 This transfer of risk is
accomplished through a set of reinsurance funds maintained by FCIC. Within 30 days of the sales
closing dates for each crop, companies allocate each policy they sell to one of two funds that are
maintained for each company by state: Assigned Risk or Commercial. Each company then
decides what proportion of premiums (and potential for losses/gains) to retain within each
reinsurance fund, subject to required retention limits of individual funds. The by-state retention
requirements are 20% for the Assigned Risk Fund and at least 35% for the Commercial Fund. The
ceded (i.e., not retained) portion of premiums goes to the government.
22 For more information on the SRA and related issues, see CRS Report R40966, Renegotiation of the Standard
Reinsurance Agreement (SRA) for Federal Crop Insurance.
23 The lower calculated rate is a result of a significant rise in premiums between the two periods and legislative
changes. The 2008 farm bill (§12016(E)) reduced the A&O reimbursement by 2.3 percentage points beginning with the
2009 reinsurance year (July 1, 2008). The farm bill also reduced the A&O reimbursement rate to 12% for any plan of
insurance that is based on area-wide losses and reduced the target loss ratio (indemnities paid divided by premiums
collected of the entire program) from 1.075 to 1.00.
24 Dmitry V. Vedenov et al., “Portfolio Allocation and Alternative Structures of the Standard Reinsurance Agreement,”
vol. 31, no. 1 (April 2006), pp. 57-73, http://ageconsearch.umn.edu/bitstream/10145/1/31010057.pdf. See also Joseph
W. Glauber, “Crop Insurance Reconsidered,” American Journal of Agricultural Economics, vol. 86, no. 5 (2004), pp.
1179-1195.
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Federal Crop Insurance: Background
The assigned risk fund is used for policies believed to be high-risk because it provides the most
loss protection to insurance companies through “stop-loss” coverage that reinsures against state-
level disasters. For producers, it helps ensure that benefits of the federal crop insurance program
are extended to all eligible farmers, regardless of risk. Because companies retain only 20% of
their business as specified in the SRA, the federal government assumes a large portion of liability
associated with high-risk policies. The SRA also specifies a 75% limit (by state) on the proportion
of a company’s business that may be placed in the Assigned Risk Fund.
The Commercial Fund is for policies that the companies expect to have the greatest opportunity
for profit and only a small amount of losses. While the profit potential is greater compared with
the Assigned Risk Fund, so is the loss potential.
Once the policies are allocated to one of the two funds, the gain/loss sharing for a company’s
retained business is based on loss ratios (indemnities paid divided by premiums collected) as
established in the SRA. As a general rule, the higher the loss ratio, the lower the company share
of gains or losses (and vice versa, except at very low loss ratios when the company share of gains
declines). See Table 3 for the schedule contained in the current SRA. Figure 11 illustrates risk
sharing for the Commercial Fund.
Table 3. Share of Crop Insurance Company’s Gains/Losses by Fund and Loss Ratio
(share of gains/losses in percent)
Share of Company’s Gains/Losses in
Commercial Fund (%)
Share of Company’s
Loss Ratio
Gains/Losses in Assigned Risk
Group1
(%)
Fund (%)
(IL, IN, IA, MN, NE)
All other states
0 to 50
3
5
5
>50 to 65
13.5
40
40
>65 to 100
22.5
75
97.5
>100 to 160
7.5
65
42.5
>160 to 220
6
45
20
>220 to 500
3
10
5
>500 0 0
0
Source: U.S. Department of Agriculture, Risk Management Agency, Standard Reinsurance Agreement dated
June 30, 2010, http://www.rma.usda.gov/news/2010/06/630sra.pdf.
Notes: Loss ratio is indemnities divided by total premiums. See figure on risk sharing for illustration.
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Figure 11. Risk Sharing for the Commercial Fund
(for Group I states of IL, IN, IA, MN, NE)
Share of Gains/Losses
Company
USDA
Percent
Gains
Losses
100
75
50
25
0
0 to 0.5
>0.5 to
>0.65 to
>1.0 to
>1.6 to
>2.2 to
>5.0
0.65
1.0
1.6
2.2
5.0
Loss ratio (Indemnities / Premiums)
Source: CRS, using data from U.S. Department of Agriculture, Risk Management Agency, Standard Reinsurance
Agreement dated June 30, 2010, http://www.rma.usda.gov/news/2010/06/630sra.pdf.
Notes: The USDA share of gains and losses is lowest when the loss ratio (indemnities divided by premiums) is
near 1.0. Insurance companies place “less risky” policies in the Commercial Fund. Separate schedules apply to
the Commercial Fund in all other states and for the Assigned Risk Fund (higher risk policies).
Trends in A&O Reimbursement and Underwriting Gains
Since A&O reimbursements are based on a percentage of premiums, the dollar amount of A&O
reimbursement increased sharply during the late 2000s as premiums rose, reflecting higher crop
prices. The A&O reimbursement increased from an average of $881 million during 2004-2006 to
$2.0 billion in 2008 (Table 2). A&O reimbursements declined to $1.6 billion in FY2009
following a decline in crop prices. Under changes in the 2010 SRA, an inflation-adjusted cap has
limited annual A&O expenditures to about $1.4 billion. Company underwriting gains (the amount
by which a company’s share of retained premiums exceeds its indemnities) increased
substantially during the 2000s as weather was generally favorable for crops (Table 4). In 2012,
though, a major drought across major producing regions led to sharply higher indemnities, which
resulted in large losses for the 2012 crop year. More favorable weather returned in 2013, which
reduced indemnities and generated an underwriting gain for the insurance companies.
During the last decade, increases in insured acreage and higher crop prices have also increased
gross liability. Liability represents total exposure of the program, meaning that if all participating
farmers suffer losses to the full extent of coverage, indemnities would be the total liability.
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Table 4. Federal Crop Insurance Program and Company Data
Private Co.
Net Acres
Gross
Gross
Underwriting
Crop
Insured
Premiuma
Liabilityb
Gross Loss
Gain (Loss)d
Year
(mil. acres)
($ million)
($ million)
Ratioc
($ million)
2004 221
4,186
46,602
0.79 693
2005 246
3,949
44,259
0.60 915
2006 242
4,580
49,919
0.77 821
2007 272
6,562
67,340
0.54
1,577
2008
273
9,851
89,893
0.88
1,096
2009
265
8,951
79,572
0.58
2,301
2010 256
7,594
78,102
0.56
1,912
2011
266
11,970
114,201
0.91
1,687
2012
283
11,071
116,791
1.57
(1,299)
2013
296
11,805
123,775
1.02
657
2014 (est.)
294
10,043
109,664
not avail.
not avail.
Source: For premium, liability, and loss ratio, Summary of Business Report, FCIC, http://www.rma.usda.gov/data/
sob.html. For underwriting gain/loss, Crop Year Premium and Other Income, FCIC, http://www.rma.usda.gov/
aboutrma/budget/2014cyprem.pdf. Estimate for 2014 current as of January 2015.
a. Farmer-paid premium plus government-paid premium subsidy.
b. Liability represents total exposure of the program, meaning that if all participating farmers
suffered losses to the full extent of coverage, program indemnities would be the total liability.
c. Indemnities divided by premiums. Gross loss ratio is for the program in total (government plus
private companies).
d. The underwriting gains represent the amount by which the company’s share of retained premiums
exceeds its indemnities (vice versa for underwriting losses).
Crop Insurance in the 2014 Farm Bill
The federal crop insurance program is permanently authorized. Hence, periodic reauthorization of
the program, including premium subsidies, is not needed, unlike farm commodity programs that
are enacted under traditional “farm bills.” The 2014 farm bill (P.L. 113-79) authorized farm
programs for the years 2014-2018 and made a number of permanent changes to the federal crop
insurance program.25
A prominent crop insurance feature of the 2014 farm bill is the authorization of policies designed
to reimburse “shallow losses”—an insured producer’s out-of-pocket loss associated with the
policy deductible. A new crop insurance policy called Stacked Income Protection Plan (STAX) is
made available for upland cotton producers, while the Supplemental Coverage Option (SCO) is
made available for other crops. The STAX policy indemnifies losses in county revenue of greater
than 10% of expected revenue but not more than the deductible level (e.g., 25%) selected by the
25 For more information, see CRS Report R43494, Crop Insurance Provisions in the 2014 Farm Bill (P.L. 113-79).
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producer for the underlying individual policy. (It can also be purchased as a stand-alone policy.)
Similarly, SCO is based on expected county revenue (or yields) and covers part of the deductible
under the producer’s underlying policy. The government subsidy as a share of the policy premium
is set at 80% for STAX and 65% for SCO.26
A variety of additional farm bill provisions expand existing crop insurance products or require
examination of the potential for new products, including those that would benefit specialty crops
and animal agriculture. Provisions revise the value of crop insurance for organic crops to reflect
generally higher prices of organic (not conventional) crops. USDA is also required to conduct
more research on whole farm revenue insurance with higher coverage levels than currently
available. Studies or policies are also required for insuring (1) producers of specialty crops (e.g.,
fruits, vegetables) for food safety and contamination-related losses, (2) swine producers for a
catastrophic disease event, (3) producers of catfish against reduction in the margin between
market prices and production costs, (4) commercial poultry production against business
disruptions caused by integrator bankruptcy, (5) poultry producers for a catastrophic event,
(6) producers of biomass sorghum or sweet sorghum grown as feedstock for renewable energy,
and (7) alfalfa producers. A peanut revenue insurance product and rice margin insurance also are
mandated. Another provision provides funding for index weather insurance for protecting against
weather conditions that deviate from average levels.
To address conservation concerns, the 2014 farm bill links eligibility for crop insurance premium
subsidies to compliance with wetland and conservation requirements for highly erodible land.
Also, crop insurance subsidies are reduced for plantings on native sod acreage in certain states.
Despite calls by critics of the program to reduce federal funding, the crop insurance title of the
farm bill increased total funding for the program, according to the Congressional Budget Office,
by an additional $5.7 billion over 10 years relative to projected levels that assumed no change in
policy. The largest cost items were STAX ($3.3 billion) and SCO ($1.7 billion). The cost of
expanding the crop insurance program was offset by the elimination of fixed “direct” payments,
marking a policy shift from farm payments made regardless of market conditions to enhanced risk
management programs. A controversial item not included in P.L. 113-79 was the reduction of
premium subsidies for high-income farmers, which had been included in the Senate farm bill but
not the House bill.
Views on Federal Crop Insurance
Federal outlays for crop insurance exceed those for the commodity support programs, making
crop insurance the most costly component of the farm safety net and a potential target for
legislators looking for budget offsets to pay for other legislation or for deficit reduction. For some
policymakers, a main goal when contemplating future modifications to the crop insurance
program would likely be saving federal dollars without adversely affecting farmer participation or
policy coverage in a way that might result in calls for ad hoc disaster assistance. A concern from
the industry is that any cuts could adversely affect company interest in selling and servicing crop
26 Additional information and examples of SCO and STAX are available in USDA, FCIC, Supplemental Coverage
Option (SCO) Endorsement Standards Handbook, July 2014, http://www.rma.usda.gov/handbooks/18000/2015/
15_18180.pdf; and Stacked Income Protection Plan of Insurance (STAX) Standards Handbook, August 2014,
http://www.rma.usda.gov/handbooks/18000/2015/15_18170.pdf.
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insurance to farmers, although some critics say that compensation is more than adequate.
Separately, environmental groups are concerned that the premium subsidies might actually
encourage production on environmentally fragile land.
For many farmers, crop insurance is the most important component of the farm safety net, given
the loss protection it affords and the large number of crops that are covered. Similarly, institutions
that lend to farmers support federal crop insurance because it helps buffer cash shortfalls. Another
major supporter is the set of approved insurance providers and the network of independent agents
who sell and service the federal policies. With significant support from these three groups, the
program generally has widespread support among farm-state legislators and Members of the
agriculture committees where farm policy is developed.
During the debate that shaped the 2014 farm bill, critics of crop insurance vigorously attempted
but were not successful in reducing the scope and benefits of the federal crop insurance program,
including premium subsidy levels and reimbursements to private insurance companies. Critics
question whether premium subsidies are too generous for farmers, particularly high-income
farmers, and expect that farmers would maintain crop insurance coverage at lower subsidy rates.
The issue of program savings might be revisited in the 114th Congress, particularly if future
budget resolutions require deficit reduction.
Author Contact Information
Dennis A. Shields
Specialist in Agricultural Policy
dshields@crs.loc.gov, 7-9051
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