Farm Bill Primer: Federal Crop Insurance

Farm Bill Primer: Federal Crop Insurance

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September 17, 2018
Farm Bill Primer: Federal Crop Insurance
Background
Legislative Authority
Since its inception in 1938, federal crop insurance has
Federal crop insurance is permanently authorized by the
grown from an ancillary program with low participation to
Federal Crop Insurance Act (7 U.S.C. §1501 et seq.) and,
a central pillar of federal support for agriculture. From 2008
thus, would continue to operate if Congress does not enact a
to 2017, the direct costs of the federal crop insurance
new farm bill. However, past farm bills have made changes
program totaled about $74 billion in current dollars. For
to the underlying authority.
FY2018 through FY2027, the Congressional Budget Office
Program Participation
(CBO) projects that crop insurance will cost about $77
In contrast to the program’s limited scope and low
billion, the highest projected cost for an individual U.S.
participation rate in its early years, by 2017 federal crop
Department of Agriculture (USDA) program not related to
insurance was providing approximately $106 billion of
nutrition, assuming extension of current law (Figure 1).
annual insurance protection (liability) for over 100 crops
Figure 1. Projected Cumulative Farm Bill Spending
(excluding hay, livestock, nursery, pasture, rangeland, and
forage) on about 312 million acres (excluding policies
insured in tons, colonies, or trees). Policy offerings and
participation were smaller for the livestock sector—about
$255 million in liability on about 467,000 head and $303
million on about 18 million hundredweight (100 pounds) of
milk.
In 2017, total premium for crops (excluding livestock and
other policies) was about $10 billion, of which FCIC paid
about 63% and producers paid about 37%. In 2017, two
crops accounted for 64% of total liabilities: corn (37%) and
soybeans (27%).
Program Costs
Total direct costs of the program for crop years 2008-2017

was about $74.0 billion in current dollars, of which about
Source: CRS using CBO baseline projections from June 2017.
$44.6 billion (60%) was of direct benefit to producers and
Notes: CBO bases its projections on the extension of current law
$29.4 billion (40%) went to private insurance companies.
through the projection period. Nutrition programs include the
Supplemental Nutritional Assistance Program and others. The
Figure 2. Direct Cost of Federal Crop Insurance
“Other” category in this figure includes farm bill programs supporting
trade, horticulture, research, energy, rural development, and forestry.
Program Operation
Since 1980, federal crop insurance has operated through a
shared public-private arrangement funded by taxpayers and
producers. Three principal actors operate the program:
1. Private insurance companies, known as
Approved Insurance Providers (AIPs),
which sell and service the insurance
policies;
2. The Federal Crop Insurance Corporation
(FCIC), which reinsures the policies and
subsidizes the delivery expenses of AIPs; and

Source: CRS using Risk Management Agency Direct Costs of the
3. The Risk Management Agency within
Federal Crop Insurance Program, as of April 30, 2018.
USDA, which determines policy terms,
Notes: Dollars are current, not constant.
sets premium rates, and regulates AIPs.
The terms of the financial arrangement between FCIC and
Three principal types of federal subsidy are embedded in
AIPs are set out in a mutually negotiated Standard
the federal crop insurance program: producer premium
Reinsurance Agreement (SRA). Each AIP signs an SRA
subsidies, delivery subsidies paid to AIPs, and shared
with FCIC annually.
underwriting risk with the AIPs. The accounting of costs
among these categories and others is complex.
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Farm Bill Primer: Federal Crop Insurance
Premium Subsidies
Figure 4. Federal Crop Insurance Delivery Subsidies
Figure 3 shows total premiums broken into its two
components—the producer-paid portion and FCIC
subsidies—for crop years 2008-2017. Premium subsidy
rates are statutorily set by the Federal Crop Insurance Act.
FCIC subsidy outlays vary with producer coverage choices.
Catastrophic level coverage (CAT), the lowest level of
coverage, has a 100% premium subsidy. Subsidy rates for
coverage levels above CAT (“buy-up”) on yield and
revenue policies range from 38% to 80%. The percentage
depends on the policy type, coverage level, and unit
structure. Producers pay an administrative fee of $300 per
county per crop for CAT coverage and $30 per county per
crop for buy-up coverage. The average premium subsidy
rate was 62% for crop years 2008-2017.

Source: CRS using Risk Management Agency Direct Costs of the
Figure 3. Producer-Paid and FCIC-Paid Premium
Federal Crop Insurance Program, as of April 30, 2018.
Notes: Dollars are current, not constant.
Underwriting Gains and Losses
Figure 5 shows the net underwriting results of FCIC and
the AIPs. The orange bars represent the AIPs’ underwriting
gains (positive bars) or losses (negative bars). The blue bars
represent FCIC’s underwriting gains/losses.
Figure 5. Net Underwriting Results of FCIC and AIPs

Source: CRS using Risk Management Agency Direct Costs of the
Federal Crop Insurance Program, as of April 30, 2018.
Notes: Dollars are current, not constant.
Delivery Subsidies
Program “delivery” generally refers to selling and servicing
policies, including loss adjustment. The amount of these
subsidies is based not on actual expenses incurred by AIPs
but on percentages of premium set in the SRA that vary by
policy type. FCIC subsidizes AIPs’ delivery costs for the

two main levels of insurance coverage—CAT and buy-up:
Source: CRS using Risk Management Agency Direct Costs of the
1. Catastrophic Loss Adjustment Expense
Federal Crop Insurance Program as of April 30, 2018.
subsidy (CAT LAE), for policies with
Notes: Dollars are current, not constant.
CAT coverage, is fixed at 6% of premium.
From crop year 2008 to 2017, the program had a net total
2. Administrative and Operating subsidy
underwriting gain of about $17.55 billion, of which about
(A&O), for policies with buy-up coverage,
$3.05 billion (17%) went to FCIC and $14.50 billion (83%)
varies between 12% and 21.9% of premium.
went to AIPs (Figure 5). During those years AIPs had an
The 2011 SRA established a maximum (cap) for A&O
underwriting loss in 2012, whereas FCIC had underwriting
subsidies of approximately $1.3 billion per year and a
losses in 2011, 2012, 2013, and 2014. FCIC outperformed
minimum (cup) of approximately $1.0 billion. Since the
AIPs in 2016 but not other years.
A&O cup and cap went into effect, the total amount spent
on delivery subsides (A&O and CAT LAE) has exceed the
Conclusion
A&O cap every year (Figure 4), reflecting policies,
The crop insurance program is a central part of federal
coverages, and bonus A&O not subject to the cup and cap.
support for agriculture. Congressional oversight has a
significant role in ensuring that the program meets its
intended policy goals and operates efficiently.
Isabel Rosa, Analyst in Agricultural Policy
IF10980
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Farm Bill Primer: Federal Crop Insurance

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
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