Minding Ag's Business

Truth Serum for Crop Insurance Costs

With up to date expenses for 2012, Kansas State University economist Art Barnaby pegs the average taxpayer cost of the crop insurance program at about $5.1 billion to $5.3 billion/yeear since 2001. That counts about $4.043 billion in underwriting losses and premium subsidies, plus subsidies for administrative overhead.

Journalists are supposed to make the complex simple. What I am about to say involves crop insurance, so I apologize in advance.

Much has been debated recently about how much crop insurance costs in taxpayer subsidies. For the last year I've read more actuarial data, Risk Management Agency reports, Environmental Working Group exposes and insurance industry retorts than I care to remember. As Congress begins debate, it's worth a little fact checking. Don't err by saying a record $17.2 billion in claims paid to date on the 2012 crop are the true cost of the program. The real cost includes government'snet insurance subsidies on premiums, administrative costs and any underwriting gains or losses.

1. First, let's all remember that 2012 was the equivalent of Hurricane Sandy for drought losses, probably the most expensive crop loss ever. In the last 21 years, Kansas State University Economist Art Barnaby says we've only experienced two (1993 and 2012) where there were big yield losses in the Corn Belt and higher prices at harvest, the worst case scenario for government exposure. So 2012 is not the new trendline, it's an anomaly. A five-year or 10-year average is more indicative of real costs.

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2. Second, farmers paid $4.1 billion of the total $11.08 billion in premiums (37% of the total cost) to insure their crops in 2012, so that inflow needs to be deducted from the outflow.

3. Third, insurance companies and the government split the underwriting losses based on the state and the year in question. Recently USDA negotiated a larger share of the profits but it also agreed to a larger share of the losses. (A quirk in government accounting only assesses crop insurance for outlays; profits are never credited back to RMA's account.) From 2006-2010, the government made $18 million to $1.51 billion/year on crop insurance. In 2012, the government will shoulder about $4.9 billion and the industry about $1.3 billion in underwriting losses. (See the red on the accompanying chart if you're getting lost).

4. Administrative subsidies now add about $1.3 billion/year to the government's cost, pared back in the last Standard Reinsurance Agreement. They are capped, one of the few certainties in insurance.

5. Bottom line is that the government will spend about $11.8 billion subsidizing crop insurance for the 2012 crop. It's a big deal but nothing like the $19 billion or $20 billion USDA spent on farmers in the height of the 1980s credit crisis, not taking even inflation into account.

Since 2001, the average taxpayer cost of crop insurance has been about $5.3 billion to $5.5 billion/year, according to Barnaby. While the Congressional Budget Office pegs future 10-year costs at $8.8 billion/year, they must make guesstimates of future crop sizes and prices so have a high margin of error.

Follow Marcia Zarley Taylor on Twitter@MarciaZTaylor


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