Update on 2012 Crop Insurance Losses
May 30, 2013
Farm Doc Daily from the University of Illinois just release an extremely good article updating the total net crop losses incurred during 2012. As most of us are aware, 2012 resulted in the highest amount of indemnity payments ever paid under the crop insurance system at slightly more than $17 billion. 2010 was in second place at $10.7 billion. Due to these large payments, the system ended up with a net loss of about $6.4 billion for the year. Total premiums for the year were $17.2 billion, however, the government subsidized these payments by about $6.7 billion. Without this subsidy, there would have been a small gain for the year.
Although last year was a very large loss to the program, insurance is not based on what happens in one year, but rather, what happens over several years. The article does a good job of explaining this, but in summary, what I noticed is that the gain from the crop insurance program for 2009 ($3.5 billion) and 2010 ($3.1 billion) was about $6.6 billion in total. This amount would be in excess of the loss realized for 2012 and over the last five years, the total net gain to the program is about $2.1 billion.
Since 1995, the crop insurance program shows a net loss ratio of about 93%, therefore, it appears that the program is accomplishing what it is intended to do and I would suggest that Congress really does not need to tweak the subsidies involved since this may end up with unintended consequences.
For example, if the subsidy is reduced for higher income farmers, we could see many of these farmers electing to self-insure and the reduction of those premium payments may result in greater overall losses to the program.
All in all, the crop insurance program appears to be one of the more successful government/private programs and lets try not to mess it up too much.