Federal Crop Insurance Program (FCIP): Limits on Administrative and Operating Subsidies

Federal Crop Insurance Program (FCIP): Limits on Administrative and Operating Subsidies

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August 10, 2022
Federal Crop Insurance Program (FCIP): Limits on
Administrative and Operating Subsidies
The federal crop insurance program (FCIP) offers farmers
Figure 1. FCIP Expenditures on Program Delivery
the opportunity to purchase insurance coverage against
Subsidies, FY2000-FY2021
financial losses caused by a wide variety of perils, including
certain adverse growing and market conditions. The federal
government regulates the policies offered and subsidizes
the premiums that farmers pay in order to encourage farmer
participation in the program. The FCIP plays a prominent
role in helping farmers manage financial risk, with more
than 444 million acres and $150 billion in crop and
livestock value insured in crop year 2021. Annual federal
program outlays averaged $9.1 billion for FY2012-FY2021,
adjusting for inflation.
The U.S. Department of Agriculture (USDA) does not sell
FCIP policies to farmers directly. Private sector

companies—referred to as Approved Insurance Providers
Source: CRS using Federal Crop Insurance Corporation/Risk
(AIPs)—sell and service FCIP policies under two annual
Management Agency’s Financial Statements, various fiscal years.
agreements with USDA: the Standard Reinsurance
Notes: Amounts not adjusted for inflation. The cup and cap are
Agreement (SRA) and the Livestock Price Reinsurance
annual minimum and maximum limits on certain program delivery
Agreement (LPRA). USDA provides subsidies to the AIPs
subsidies as specified under the Standard Reinsurance Agreement.
to compensate for the cost of selling and servicing FCIP
policies, as per the terms specified in the SRA and LPRA.
Limits on A&O Subsidies
Program Delivery Subsidies
Prior to 2011, the SRA did not include limits on A&O
Under the SRA and LPRA, USDA provides program
subsidies. In the Food, Conservation, and Energy Act of
2008 (P.L. 110-234; 2008 farm bill, §12016), Congress
delivery subsidies to AIPs calculated as a percentage of the
mandated a reduction in program delivery subsidy rates to
total premium rate for each policy sold. For catastrophic
(CAT) coverage, the associated program delivery subsidy is
generate cost savings. The 2008 farm bill also required
USDA to renegotiate the SRA to take effect for the 2011
6%. Program delivery subsidies for non-catastrophic
reinsurance year (§12017(8)(A)(i)).
coverage are referred to as administrative and operating
(A&O) subsidies and range from 12% to more than 22% of
Beginning in 2011, the renegotiated SRA introduced annual
the total premium depending on the policy type. For
minimum and maximum limits (i.e., cup and cap) on the
example, a Revenue Protection policy with a total premium
rate of $60 per acre would receive an A&O subsidy of
total amount of money spent on A&O subsidies for certain
policies, aggregated across all AIPs. If the total A&O
$11.10 per acre (18.5% of the premium rate). A Yield
subsidy for all AIPs for all applicable policies were to
Protection policy with a total premium of $20 per acre
would receive an A&O subsidy of $4.38 per acre (21.9% of
exceed the cap for any year, each AIP would receive a
portion of the cap prorated based on the company’s share of
the premium rate). USDA provides an additional 1.15% in
total applicable A&O subsidy. If the total applicable A&O
so-called “SnapBack” subsidies for certain policies sold in
certain states with high loss risk. The total amount that each
subsidy amount were less than the cup for any year, each
AIP would receive a portion of the cup prorated based on
AIP earns in program delivery subsidies depends on the
the company’s share of total A&O subsidy.
volume, types, and locations of policies sold.
The cup on A&O subsidies ensures that AIPs collectively
USDA sets premium rates for FCIP policies each year
receive at least a minimum level of A&O subsidies for
based on projections of market prices, crop yields, and yield
and price risks. As market prices increase, premiums and
selling certain FCIP policies. The cap on A&O subsidies
limits increases in program delivery costs as policy sales
A&O subsidies per policy also tend to increase. Higher
and/or market prices increase.
valued crops tend to have higher premium rates than lower
valued crops, and therefore higher A&O subsidies. The
The SRA included annual increases in the cup and cap
total cost of program delivery subsidies has tended to
levels from 2011 to 2015 to adjust for inflation. Since 2015,
increase over time as the number of policies sold has
the cup and cap levels have remained fixed (Table 1).
increased, and FCIP coverage offerings have expanded
(Figure 1).
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Federal Crop Insurance Program (FCIP): Limits on Administrative and Operating Subsidies
Table 1. A&O Subsidy Cup and Cap, in $ millions
Issues for Congress
USDA estimated that the 2011 SRA renegotiation achieved
Reinsurance Year
Cup
Cap
an estimated $6 billion in 10-year cost savings (FY2011-
Prior to 2011
NA
NA
FY2020) for the program relative to 2010 baseline
projections. Since 2011, changes in the program have
2011
$971
$1,221
limited the continuing effectiveness of the A&O subsidy
2012
$985
$1,238
cap as a cost containment mechanism. Changes made to
livestock and grazing land coverage—which have always
2013
$996
$1,253
been exempt from the A&O subsidy cap—have increased
sales of these policies. The FCIP also has introduced new
2014
$1,007
$1,267
policies exempt from the A&O cap, including coverage
2015
$1,020
$1,283
mandated by Congress in the 2014 farm bill and coverage
created using administrative authorities. Some Members of
Since 2015
$1,020
$1,283
Congress have argued that the cap should be increased to
Source: CRS using Risk Management Agency data and the Standard
reflect inflation. Increasing the cap could further limit its
Reinsurance Agreement.
effectiveness as a cost containment mechanism.
Notes: NA = not applicable. Reinsurance years are the 12-month
periods beginning on July 1 of each calendar year.
A&O subsidies may not reflect actual costs incurred for
The cup and cap do not apply to CAT, area-based, weather-
selling and servicing policies. Historically, crop insurers
indexed, or margin coverage or to any policies sold under
have argued that A&O subsidies undercompensate relative
the LPRA. Policies that are generally subject to the cup and
to actual costs incurred. In a 2017 study, the Government
cap may exempt from these thresholds certain crops and
Accountability Office (GAO) concluded that AIPs’ average
counties. The share of total premiums exempt from the
rate of return earned from the program exceeded USDA’s
A&O subsidy cup and cap increased from 7% in 2011 to
target rate and comparable market rates of return. Congress
18% in 2021 (Figure 2).
may consider whether existing A&O subsidy rates are
deficient, sufficient, or excessive relative to costs required
Figure 2. Total Premium for FCIP Policies Sold
for program delivery.
by crop year and type of policy
Additionally, GAO recommended that Congress repeal the
2014 farm bill provision requiring SRA renegotiations to be
budget neutral and that it direct USDA to renegotiate the
SRA to achieve additional cost savings. Congress also
could consider whether existing authorities and SRA and
LPRA terms are sufficient to achieve desired cost control
aims for the program.
The A&O subsidy received per policy sold varies across
crops and years due to changes in market prices. The cap is
more likely to limit subsidies in years of high commodity
prices. Insurers of specialty crops asserted that the A&O
subsidy cap disproportionally impacted their businesses in
2021, as commodity prices increased and reductions
Source: CRS using Risk Management Agency Summary of Business
required to meet the A&O cap exceeded historical norms.
database, downloaded July 25, 2022.
The House-passed bill for USDA FY2023 appropriations
Notes: Amounts include producer-paid premium and federal subsidy
(H.R. 8239, §765) includes $50 million in additional funds
and are not adjusted for inflation. Policies exempt from the A&O cap
for specialty crop A&O subsidies. Congress may consider
include catastrophic coverage, area-based coverage, weather-indexed
whether existing A&O subsidy rates and limits constrain
coverage, margin coverage, and al policies sold under the Livestock
delivery of insurance to specialty crop producers.
Price Reinsurance Agreement. Al other policies are general y subject
to the A&O cap but may be exempt for certain counties and crops.
For more information, see
Limits on SRA Renegotiations
 CRS Report R46686, Federal Crop Insurance: A
USDA used administrative authority to renegotiate the
Primer
terms of the existing SRA and LPRA in 2011, including

creating the A&O subsidy cup and cap. The 2008 farm bill
CRS Report R45291, Federal Crop Insurance: Delivery
restricts USDA to renegotiate the SRA no more often than
Subsidies in Brief
once every five reinsurance years beginning in 2011

(§12017(8)(A)(ii)). The Agricultural Act of 2014 (P.L. 113-
CRS In Focus IF12047, Farm Bill Primer: What Is the
79; 2014 farm bill, §11012) requires future SRA
Farm Bill?
renegotiations to be budget neutral and to maintain or
increase subsidies for program delivery relative to existing
Stephanie Rosch, Analyst in Agricultural Policy
levels.
IF12189
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Federal Crop Insurance Program (FCIP): Limits on Administrative and Operating Subsidies

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