Crop Insurance and Disaster Assistance in the 2008 Farm Bill
Released: 2009-01-28T00:00:00

Agriculture is generally viewed as an inherently risky enterprise. Farm production levels can vary significantly from year to year and by location, primarily because farmers operate at the mercy of nature, and frequently are subjected to weather-related and other natural disasters. Since the Great Depression, policymakers have decided that the federal government should absorb some portion of the weather-related production losses that otherwise would depress farm income and could alter farmers' decisions about what to produce in some high-risk locations.

Federal crop insurance is the primary ongoing crop loss assistance program. It is permanently authorized by the Federal Crop Insurance Act, as amended (7 U.S.C. 1501 et seq .), and is administered by the U.S. Department of Agriculture's Risk Management Agency (RMA). This is complemented with the Non-Insured Assistance Program, administered by the Farm Service Agency (FSA), which is available to producers not offered insurance coverage. Lack of insurance availability occurs in locations where there is insufficient production history to determine actuarial risks of a crop or in regions where production of a specific commodity is relatively small. Following a widespread and severe drought in 1988, Congress approved a large ad hoc disaster assistance program to supplement the ongoing disaster programs. Such ad hoc assistance subsequently has became routine. For more information on currently available agricultural disaster assistance, see CRS Report RS21212, Agricultural Disaster Assistance .

Since the federal crop insurance program is permanently authorized, it does not require periodic reauthorization in an omnibus farm bill. However, during the 2007-2008 farm bill debate, some policymakers expressed interest in revising the crop insurance program in the context of the farm bill with two goals: to score cost savings and/or to supplement it with a permanent disaster payment program. Ultimately, the 2008 farm bill ( P.L. 110-246 ), enacted on June 18, 2008, contained provisions that accomplished both of those goals. This report provides background on the crop insurance program and describes in detail changes made to it as part of the 2008 farm bill.

Crop Insurance Background

Federal crop insurance policies are marketed and serviced by private insurance companies. In purchasing a policy, a producer growing an insurable crop may select a level of crop yield and price coverage and pay a portion of the premium, which increases as the levels of yield and price coverage rise. The remainder of the premium is covered by the federal government. Coverage is made available through various insurance products, including crop-specific revenue insurance, which allows a participating producer to insure a target level of crop revenue rather than just production levels. According to the USDA, the federal crop insurance program provided coverage in 2007 to over 100 crops covering more than three-fourths of planted acreage in the country. Although the list of covered commodities has grown in recent years, 80% of total policy premiums (and federal subsidies) are accounted for by just four commodities—corn, soybeans, wheat, and cotton.

Because the program is not subject to periodic reauthorization, major changes to the crop insurance program usually are not addressed in the context of an omnibus farm bill. Over the past 25 years, the program has been subject to three major legislative enhancements (in 1980, 1994, and 2000), each of which has pumped additional federal dollars into the program in order to enhance farmer participation levels in anticipation of precluding the demand for ad hoc disaster payments.

Since the last major modification in 2000, the federal subsidy to the crop insurance program has averaged about $3.25 billion per year, up from an annual average of $1.1 billion in the 1990s and about $500 million in the 1980s. Nearly two-thirds of the current federal spending is used to subsidize insurance policy premiums, and the balance primarily covers the government share of program losses and reimburses participating private insurance companies for their administrative and operating expenses (see Table 1 ).

Although the scope of the program has widened significantly over the past 25 years, the anticipated goal of crop insurance replacing disaster payments has not been achieved. In virtually every crop year since 1988, Congress has provided ad hoc disaster payments to farmers with significant weather-related crop losses. These have been made available primarily through emergency supplemental appropriations, and, until recently, regardless of whether a producer had an active crop insurance policy. The exception to the historical pattern is the FY2007 supplemental appropriations act ( P.L. 110-28 , as amended by the FY2008 Consolidated Appropriations Act), which is expected to provide an estimated $2.4 billion in crop disaster payments for 2005, 2006, or 2007 crop losses, but only to those producers who held an active crop insurance policy or enrolled in the noninsured assistance program in the year of the crop loss.

Since FY1989, total disaster payments have amounted to more than $20 billion, or just over $1 billion per year. Over the past six years (FY2001-FY2006), the federal cost of the crop insurance program combined with ad hoc supplemental disaster payments has averaged $4.5 billion per year (see Figure 1 ).

For a summary of all agricultural disaster assistance provided by Congress since 1988, see CRS Report RL31095, Emergency Funding for Agriculture: A Brief History of Supplemental Appropriations, FY1989-FY2009 .

Crop Insurance And Disaster Provisions in the 2008 Farm Bill

The following sections review the major crop insurance and disaster assistance provisions of the enacted 2008 farm bill ( P.L. 110-246 ) and the major issues that shaped the debate. See the Appendix , below, for a comparison of the crop insurance and disaster assistance provisions in the enacted 2008 farm bill, with the House- and Senate-passed versions of the farm bill and previous law.

Reducing Crop Insurance Program Costs

Because of the rising cost of the crop insurance program, many policymakers viewed the program as a potential target for spending reductions, whereby savings could be used to fund new initiatives in various other titles of the farm bill. Consequently, Title XII of the Food, Conservation, and Energy Act of 2008 ( P.L. 110-246 , the 2008 farm bill) contains several revisions to the crop insurance program, most of which are designed to reduce program costs. For all crop insurance provisions in Title XII, the Congressional Budget Office (CBO) estimates net budget outlay savings of $3.9 billion over 5 years (FY2008-FY2012), or $5.6 billion over 10 years (FY2008-FY2017), relative to the March 2007 baseline which was the official budget scoring benchmark for the bill.

Timing of Crop Insurance Payments

Approximately $2.8 billion of this estimated five-year savings is attributable to changes in the timing of premium receipts from farmers, and payments to the participating insurance companies. None of these revisions would directly affect the final monetary amounts for participating farmers or insurers, but would still be scored as savings within the five-year horizon of the bill. Essentially, these 2008 farm bill provisions (Sec. 12007 and Sec. 12015) will allow USDA to collect two crop years of premiums in 2012, and delay the 2012 payment of reimbursements and underwriting gains into the next fiscal year.

Insurance Company Reimbursements and Loss Sharing

Although crop insurance is sold and serviced by private insurance companies, the federal government absorbs a large portion of program losses and reimburses the companies for their administrative and operating (A&O) expenses. Loss sharing and A&O reimbursements currently are spelled out in a Standard Reinsurance Agreement (SRA) between USDA and the private companies.

Under the SRA, the reimbursement rate for A&O expenses currently averages 22% to 24% of total premiums. The 2008 farm bill (Sec. 12016(E)) reduces the A&O reimbursement rate by 2.3 percentage points beginning with the 2009 reinsurance year (July 1, 2008). This reduction can be restored in any state that experiences a loss ratio of 1.2 or greater (i.e., when total indemnity payments to farmers are more than 20% greater than total premiums). The farm bill (Sec. 12016(F)) also reduces the A&O reimbursement rate to 12% for any plan of insurance that is based on area-wide losses. CBO estimates that these provisions will save $618 million over five years.

A House provision to require the insurance companies to share more of their underwriting gains with the federal government was not included in the final version of the bill. The conferees did adopt a provision (Sec. 12017) that allows USDA to renegotiate the SRA once every five years beginning with the 2010-2011 reinsurance year.

During the farm bill debate, the Administration and others contended that the private insurance companies should be required to absorb more of the program losses, and that the reimbursement rate for company A&O expenses needed to be reduced as a means of reducing federal costs. Proponents for change point out that A&O reimbursements to the companies have doubled over the last seven years (see Table 1 ), mainly because farmers have been buying up to higher levels of insurance coverage, causing total premiums to rise. Since A&O reimbursements are based on a percentage of total premiums (and premiums have been rising significantly in tandem with crop prices), the Administration contends that the companies are being overcompensated for their expenses. The private crop insurance companies contend that any reductions in the A&O reimbursement will negatively impact the financial health of the crop insurance industry and possibly jeopardize the delivery of crop insurance, particularly in high-risk areas.

Farmer Subsidy and Costs

Under the crop insurance program, farmers pay no premium for CAT coverage (which is 100% subsidized by the government), and are encouraged to purchase higher levels of coverage. On average, about 50% of the premium is subsidized by the government for this buy-up coverage. For farmers whose crops are not covered by crop insurance, they are offered the equivalent of CAT coverage under a separate Noninsured Assistance Program (NAP), and pay an administrative fee for this coverage.

A number of provisions are included in the 2008 farm bill that require participating farmers to share more in program costs, including (1) an increase in the fee paid by farmers for both catastrophic (CAT) coverage and NAP to $300 per crop per county, from the previous $100 fee (Sec. 12006); and (2) a 4 percentage point reduction in the rate of premium subsidy received by farmers for policies based on area-wide losses (Sec. 12012). The 2008 farm bill (Sec. 12003) also requires USDA to operate the crop insurance program so that the anticipated loss ratio is 1.0 (i.e., total indemnity payments equal to total premiums), compared with the then-current statutory loss ratio requirement of 1.075. To achieve the new lower ratio could mean somewhat higher premiums for farmers.

Crop Production on Native Sod

In an attempt to protect and preserve virgin prairie, the 2008 farm bill added a provision (Sec. 12020) that declares that any parcel of native sod greater than 5 acres that is cultivated for production of an annual crop after May 22, 2008, is ineligible for federal crop insurance and noninsured crop disaster assistance during the first five crop years of planting. However, the governors for states within the Prairie Pothole National Priority Area are given the discretion of electing whether this provision is effective for their state.

Waste, Fraud, and Abuse

For many years, policymakers have been concerned about waste, fraud, and abuse within the federal crop insurance program. The Agricultural Risk Protection Act (ARPA) of 2000 ( P.L. 106-224 ) contained several provisions designed to enhance USDA's recognition of and response to challenges to program compliance and integrity. In response to the ARPA requirements, USDA used "data mining" techniques to compile an annual list of producers who either exhibit high loss ratios (i.e., high indemnity payments relative to total premiums), exhibit high frequency and severity of losses, or are suspected of poor farming practices that might contribute to production losses. USDA estimates that the use of the spot-check list has prevented between $70 million and $110 million each year in improper payments. Mandatory funding authorized by ARPA for data mining and other ARPA-related program integrity activities expired at the end of FY2005. A general provision in the FY2008 Consolidated Appropriations Act ( P.L. 110-161 ) allows USDA to use up to $11.166 million in mandatory funds in FY2008 to strengthen its ability to reduce waste, fraud, and abuse within the crop insurance program. However, future funding for this activity was uncertain.

The 2008 farm bill (Sec. 12021) authorizes up to $4 million annually for data mining activities beginning in FY2009, and authorizes $15 million annually for four years (FY2009-FY2013) to upgrade USDA's computer technology for crop insurance.

Agricultural Disaster Assistance

During the 2007-2008 farm bill debate, some policymakers wanted to make permanent in the farm bill some level of disaster payments to supplement the crop insurance program. Supporters say that ongoing farm disaster programs do not adequately address emergency needs when a major disaster strikes and that USDA should have at its disposal a permanent source of disaster funds in the same manner as the Federal Emergency Management Administration (FEMA). Questions in the debate included how such a program would be funded given current budget constraints, and whether the permanent availability of disaster payments would adversely affect participation in the crop insurance program, and possibly encourage production on high-risk lands.

Title XV (Sec. 15101) of the 2008 farm bill authorizes a series of new disaster programs through September 30, 2011, the largest of which is a supplemental revenue assistance payment program for crop producers.

Supplemental Crop Revenue Assistance Program (SURE)

The SURE program is designed to compensate eligible producers for a portion of crop losses that are not eligible for an indemnity payment under the crop insurance program (i.e., the portion of losses that is part of the deductible on the policy.) An eligible producer can receive a payment equal to 60% of the difference between a target level of revenue and the actual total farm revenue for the entire farm. The target level of revenue would be based on the level of crop insurance coverage selected by the farmer, thus increasing if a farmer opts for higher levels of coverage. (See the box in this report for a description of how the guarantee level and total farm revenue are defined by the statute.) To be eligible for a payment, a producer must be either in or contiguous to a county that has been declared a disaster area by either the President or the Secretary of Agriculture. Payments are limited so that the disaster program guarantee level cannot exceed 90% of what income likely would have been in the absence of a natural disaster.

The producer also must have at least the minimum level of crop insurance (CAT) coverage for insurable crops and participate in the NAP program for non-insurable crops. The statute made an exception for the 2008 crop year by allowing producers who did not purchase crop insurance or NAP coverage in advance to be eligible for the program, as long as they pay the equivalent administrative fee for coverage within 90 days of enactment.

Some farm groups have raised concerns about the delayed timing of payments under SURE. Final payments for crop losses cannot be determined until after the marketing year since a portion of the disaster payment formula is based on the national average market price of the commodity for the year in which the loss was incurred. For example, since the 2008 marketing year for corn and soybeans ends September 30, 2009, any eligible SURE payments for 2008 losses cannot be made until late October 2009 at the earliest. Consequently, some farm groups have asked USDA to make more timely payments under the new program by providing advance payments until the final payment levels can be determined. To date, program regulations have not been released.

Other Authorized Disaster Programs

In addition to the supplemental crop revenue assistance payment program described above, the 2008 farm bill also authorizes and funds four smaller disaster programs: (1) Livestock Indemnity Payments, which compensate ranchers at a rate of 75% of market value for livestock mortality caused by a disaster; (2) Livestock Forage Disaster Program, to assist ranchers who graze livestock on drought-affected pastureland or grazing land; (3) Emergency Assistance for Livestock, Honey Bees and Farm Raised Fish, which will provide up to $50 million to compensate these producers for disaster losses not covered under other disaster programs; and (4) Tree Assistance Program, for orchardists and nursery growers who can receive a payment to cover 70% of the cost of replanting trees or nursery stock following a disaster (up to $100,000 per year per producer).

Disaster Program Funding

All five of these farm bill disaster programs will receive funding through a newly authorized Agricultural Disaster Relief Trust Fund within the U.S. Treasury. The Trust Fund will receive the equivalent of 3.08% of the amount received each year (FY2008-2011) in U.S. Customs receipts collected on certain goods. The Congressional Budget Office (CBO) estimates the combined total costs to be $3.8 billion over the four-year life of the programs, relative to the March 2007 budget baseline. Of this total, CBO estimates that supplemental crop revenue assistance will cost $1.7 billion over the four years, or an average of $425 million per year. Another $1.6 billion would cover increased crop insurance and NAP costs associated with the crop insurance and NAP purchase requirement. The balance of $500 million would cover the combined estimated cost of the other four disaster programs. If the cost of the programs exceeds the level of funding provided through Customs receipts, the 2008 farm bill gives the Trust Fund the authority to borrow from the Treasury such sums as necessary to meet its obligations.

Appendix. Major Crop Insurance and Disaster Assistance Provisions in the Enacted 2008 Farm Bill