Crop insurance was designed by Congress to largely replace the need for ad hoc disaster legislation, thereby helping to shelter taxpayers from the full costs of agricultural disasters and avoiding the need to enact new disaster assistance following every major farm disaster, such as was recently experienced with Hurricane Sandy.
Farmers rely on crop insurance, and they show their support by voting with their pocketbooks. In fact, since 2000, farmers have spent nearly $30 billion out of their own pockets to purchase crop insurance protection. Yes, crop insurance premiums are partially discounted by the federal government, but first and foremost, farmers must put skin in the game to gain coverage.
Farmers must suffer a verifiable loss to collect an indemnity. Contrary to allegations, most farmers purchase crop insurance and do not collect an indemnity. In fact, of the nearly 1.1 million policies purchased in 2012 – the worst drought we have faced in decades — less than half of the policies were indemnified. And that is in a really bad year.
When farmers who purchase crop insurance suffer a loss, they usually receive their indemnity checks within 30 days of finalizing the claim. By contrast, it took the federal government three months to pass the Hurricane Sandy relief bill, and it could take months more before those funds reach the victims.
Of course, it is easy to criticize insurance after a costly disaster, which is why opponents of crop insurance, like the Environmental Working Group (EWG), are jumping on the bandwagon right now. EWG is not only critical of farm policy, but farmers as well. In fact, this summer, EWG claimed that farmers were “praying for drought, not praying for rain,” a statement that makes no sense whatsoever and points to EWG’s lack of understanding of the farm community and rural economy.
In an unusual and catastrophic year like 2012, there will be heavy losses and all participants will feel the pinch. That is how all insurance works. In crop insurance, losses are shared by farmers, who pay premiums — $4.1 billion last year — and who have deductibles, thus shouldering a percentage of loss; private insurers when premiums do not offset losses, as was the case in 2012; and, the government, which acts as a reinsurer and provides premium support.
But losses by the federal government are buffered by underwriting gains that they make during the good years. That was the case from 2001-2010 when the government saw $3.99 billion in underwriting gains.
So while opponents of crop insurance criticize a policy that has been embraced by farmers, farm groups, bankers and politicians of all political stripes, it is noteworthy that critics have conveniently glossed over the fact that this policy ensures that taxpayers are never stuck with the whole tab, as they were in the era of ad hoc disaster assistance, and they can rest assured that the food production system is financially stable.
But two bad years in a row might actually turn into three. Unless the spring rains break this pattern, 2013 is starting off as an incredibly dry year for many farmers, with roughly 57 percent of the continental U.S. in some level of drought. Thankfully, most of those farmers will purchase crop insurance, a
smart, fiscally sound and reliable approach to risk management.
Zacharias is president of National Crop Insurance Services in Overland Park, Kansas.