UC Davis Agricultural and Resource Economics

Vincent Smith, Montana State University

The US Federal Crop Insurance Program: A Case Study in Rent Seeking

Date and Location

Thursday, February 23, 2017, 4:10 PM - 5:30 PM
ARE Library, 4101 Social Sciences and Humanities

Abstract

Rent seeking is endemic to the process through which any policy or regulatory initiative is developed in the United States and farm lobbies have become some of the finest artists in seeking benefits from the public purse. In doing so they have become especially effective in developing alliances with other interest groups to protect and expand their rents. This study illustrates the process by which coalitions have been formed by farm groups with other lobbies by focusing on the legislative history of a major farm subsidy program over the past four decades, the federal crop insurance program. The study examines how, in the context of three major crop insurance legislative initiatives, regulatory and program innovations for the most part have been designed to jointly benefit farm interest groups and the agricultural insurance industry, at considerable and generally increasing expense to taxpayers. The three major initiatives are the 1980 Crop Insurance Act, through which private agricultural insurance companies gained a foothold in the federal crop insurance program, the 1994 Crop Insurance Reform Act, and the 2000 Agricultural Risk Protection Act.

The major findings of the analysis are as follows. The federal crop insurance legislation and the way in which the USDA Risk Management Agency manages federal crop insurance program are replete with complex and subtle policy initiatives. Nevertheless several major features of the program have been especially important. They include the requirement that RMA compute actuarially fair premium rates and the methods by which RMA requires that those rates be established and a mandate incorporated in the 1994 Crop Insurance Act that a catastrophic loading factor be added to that rate to establish the total premium rate for insurance coverage. In addition, since 1980, in successive legislative initiatives, congress has required that tax payers provide an increasingly large share of the total premium rate through a premium rate subsidy, which now averages 62 percent of the total premiums paid into the federal crop insurance pools. A further administration and operations subsidy is also paid directly to crop insurance companies by tax payers. The companies obtain revenues from the A&O subsiding and underwriting gains, which through a complex reinsurance agreement with the federal government are biased towards companies through a complex set of stop loss provisions.

The central conclusion is that the simultaneous changes in the provisions of the 1980 Crop Insurance, the 1994 Crop Insurance Reform Act, and the 2000 Agricultural Risk Protection Act with respect to how premium rates are set, premium subsidy rates, and the A&O subsidy rate have been designed to benefit both farmers and the crop insurance industry, and almost always at the expense of taxpayers. Even though some policy adjustments, when considered in isolation, may have benefitted farmers and adversely affected the insurance industry, or vice versa, the joint effects of the multiple adjustments included in each legislative initiative have generated net benefits for both sets of interest groups. Thus the evidence indicates that, at least implicitly, coalitions have been formed between the farm lobby and the insurance lobby to obtain policy changes that in the aggregate benefit both groups, as well as banks with substantial agricultural lending portfolios. The upshot has been a thirty five year evolution of the crop insurance program into a large, costly (over $8 billion a year) subsidy program that mainly redistributes tax revenues to relatively wealthy farm operators and landowners and to a crop insurance industry that in all likelihood would not exist absent the federal subsidy program.

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