Reduce the Premium Subsidy in the Crop Insurance Program

The Federal Crop Insurance Program protects farmers from losses caused by drought, floods, pest infestation, other natural disasters, and low market prices. Farmers can choose various amounts and types of insurance protection--for example, they can insure against losses caused by poor crop yields, low crop prices, or both. Premium rates for federal crop insurance are set by the Department of Agriculture (USDA) so that the premium equals the expected payment to farmers for crop losses. The federal government pays about 60 percent and farmers pay about 40 percent of the total premium. Insurance policies purchased through the program are sold and serviced by private insurance companies, which receive a federal reimbursement for their administrative costs. Those businesses also share in insurance gains and losses through reinsurance agreements with the federal government.

This option would reduce the federal government's subsidy to 50 percent of the crop insurance premium. The Congressional Budget Office estimates that under current law, federal spending for crop insurance will total $35 billion over the 2012-2016 period; reducing the crop insurance premium subsidy would save more than $5 billion over the same period and almost $12 billion over the 2012-2021 period, CBO estimates.

An argument in favor of this option is that lawmakers could probably cut the premium subsidy without substantially affecting the level of participation in the program, partly because of linkages between crop insurance and other assistance programs offered by USDA and partly because private lenders increasingly view insurance as a way for farmers to ensure that they can repay their loans. Those producers who did reduce their crop insurance coverage or dropped out of the program would continue to receive substantial crop and income support from other federal farm programs.

An argument against this option is that federal funding for the program has already been reduced by about 5 percent through changes in the 2008 farm bill and by an additional estimated 5 percent through changes in the reinsurance agreements with private companies in 2010. Further cuts, some argue, would threaten farmers' access to insurance. If participation in the crop insurance program declines significantly, opponents say, lawmakers would be more likely to resort to special-purpose relief programs when disaster strikes, reducing the savings from cutting the premium subsidy. (Such ad hoc disaster assistance programs for farmers have cost an average of about $700 million annually over the past five years.)