Farmers are exposed to financial losses because of production risks— droughts, floods, and other natural disasters—as well as variations in the market price of their crops. The federal government has played an active role in helping to mitigate the effects of these risks on farm income by promoting the use of crop insurance. RMA has overall responsibility for administering the federal crop insurance program, including controlling costs and protecting against fraud, waste, and abuse. As of May 2014, RMA partnered with 19 private insurance companies that sell and service the program’s insurance policies and share a percentage of the risk of loss and opportunity for gain associated with the policies (known as “underwriting”). RMA administers the crop insurance program through a Standard Reinsurance Agreement that establishes the terms and conditions under which participating insurance companies sell and service federal crop insurance policies. Through the federal crop insurance program, farmers insure against losses on more than 100 crops. These crops include major crops—such as corn, cotton, soybeans, and wheat, which accounted for more than three-quarters of the acres enrolled in the program in 2012—as well as nursery crops and certain fruits and vegetables. More specifically, according to RMA, federal crop insurance penetration based on planted acres is high for the principal crops of corn, soybeans, wheat, and cotton. For example, in 2012, about 84 percent of the planted principal crops were insured under the federal crop insurance program. More specifically, corn acreage was 84 percent insured, soybean acreage was 84 percent insured, wheat acreage was 83 percent insured, and cotton acreage was 94 percent insured. Most crop insurance policies are either production-based or revenue policies. For production-based policies, a farmer can receive a payment if there is a production loss relative to the farmer’s historical production per acre. Revenue policies protect against crop revenue loss resulting from declines in production, price, or both. The federal government encourages farmers’ participation in the federal crop insurance program by subsidizing the insurance premiums and acting as the primary reinsurer for the private insurance companies that take on the risk of covering, or underwriting, losses of participating farmers. The federal government’s premium subsidies for crop insurance policies are not payments to farmers, but they can be considered a financial benefit to farmers. Without a premium subsidy, a participating farmer would have to pay the full amount of the policy premium. Congress sets premium subsidy rates, meaning the percentage of the premium paid by the government. Premium subsidy rates vary by the level of insurance coverage that the farmer chooses and the geographic diversity of crops insured. For most policies, the statutory premium subsidy rates range from 38 percent to 80 percent. Premium subsidy rates increased, as a percentage of total premiums, from an average of 37 percent in 2000 to an average of 63 percent in 2012. In addition, premium subsidies rose as crop prices increased because higher prices meant the insured value of the crop increased, and premiums are based on the value of what is insured. In addition, the federal government pays administrative and operating expense subsidies to insurance companies as an allowance that is intended to cover their expenses for selling and servicing crop insurance policies. In turn, insurance companies use these subsidies to cover their overhead expenses, such as payroll and rent, and to pay commissions to insurance agencies and their agents. Insurance companies also incur expenses associated with verifying—also called adjusting—the amount of loss claimed. These expenses include, for example, loss adjusters’ compensation and travel expenses of adjusters to farmers’ fields. The administrative expense subsidies also can be considered a subsidy to farmers; with these subsidies, crop insurance premiums are lower than they would otherwise be if the program followed commercial insurance practices. In private insurance, such as automobile insurance, these administrative expenses typically are captured through the premiums paid by all policyholders. The federal government provides crop insurance premium subsidies in part to achieve high crop insurance participation and coverage levels. Higher participation and coverage levels may reduce or eliminate the need for disaster assistance payments from congressionally authorized ad hoc disaster programs to help farmers recover from natural disasters, which can be costly. For example, under three separate congressionally authorized ad hoc disaster programs, USDA provided $7 billion in payments to farmers whose crops were damaged or destroyed by natural disasters from 2001 to 2007. Farmers’ participation in the federal crop insurance program and spending on ad hoc disaster assistance have been policy issues for more than 30 years. A 2005 USDA publicationasserts that Congress passed the Federal Crop Insurance Act of 1980 and subsequent related legislation to strengthen participation in the crop insurance program with the goal of replacing costly disaster assistance programs. According to this publication, the government has historically attempted to increase participation in the federal crop insurance program by subsidizing premiums, including increasing the level of these subsidies over time. The 2014 farm bill introduced several changes to the crop insurance program. Regarding revenue policies specifically, the legislation added peanuts to the list of crops eligible for this policy type. The legislation also made “enterprise units” a permanent option for revenue and other policy types. An enterprise unit consists of all insurable acreage of the same insured crop in the county in which the farmer has a share on the date coverage begins for the crop year. In addition, separate insurable enterprise units for both irrigated and nonirrigated crops will be available. Separating the acreage can increase risk protection for farmers because losses on dryland crops would no longer be offset by higher yields on irrigated acreage when the two are combined. The 2014 farm bill also added two new policy options to the crop insurance program—the Supplemental Coverage Option and the Stacked Income Protection Plan for upland cotton. The Supplemental Coverage Option is based on expected county yields or revenue, to cover part of the deductible under the farmer’s underlying policy (referred to as a farmer’s out-of-pocket loss or “shallow loss”). The federal subsidy as a share of the policy premium is set at 65 percent. The Stacked Income Protection Plan insures against losses in county revenue of 10 to 30 percent of expected county revenue based on the deductible level selected by the farmer for the underlying individual policy. The federal subsidy as a share of the policy premium is set at 80 percent. As of June 2014, USDA was developing implementing guidance for these new policies that it expects to issue before the start of the 2015 crop year. For now, it is uncertain how farmers will utilize these new policies and how their use will impact federal crop insurance premium costs, including for revenue policy premium subsides. Federal crop insurance program costs and farm sector income and wealth grew significantly during the period 2003 through 2012. Costs of federal crop insurance are growing due to an increase in premium subsidies, particularly for revenue policies. Farmers are increasingly purchasing revenue policies and are choosing higher coverage levels for these policies. Meanwhile, indicators of farm business economic well-being— such as farm income and real estate and asset values—all increased from 2003 through 2012. The cost of the federal crop insurance program grew significantly from 2003 through 2012, according to our analysis of RMA data. For fiscal years 2003 through 2007, federal crop insurance costs averaged $3.4 billion a year, but for fiscal years 2008 through 2012, the crop insurance program cost an average of $8.4 billion a year. There were significant drought and crop losses in crop year 2012 that contributed to the spike in government costs to $14.1 billion. These trends are shown in figure 1. According to an April 2014 CBO estimate, for fiscal years 2014 through 2023, program costs are expected to average $8.9 billion annually. In fiscal years 2003 through 2012, according to our analysis of RMA data, premium subsidies comprised approximately $42.1 billion of $58.7 billion in total government costs for federal crop insurance, or almost 72 percent of total program costs. Revenue policy premium subsidies specifically accounted for $30.9 billion of the premium subsidy costs over that period. RMA offered 17 different crop insurance policies in crop year 2012, but revenue policies were the most frequently purchased and accounted for the majority of all premium subsidies. For example, for crop year 2012, revenue policy premium subsidies cost $5.5 billion that year, which accounted for 82 percent of the $6.7 billion in total premium subsidy costs to the government. Figure 2 shows the breakdown of costs for the overall crop insurance program into premium subsidies; administrative and operating expense subsidies; and other costs, such as the salaries of RMA staff, research and development initiatives for new crop insurance products, and the net underwriting loss for the period, for fiscal years 2003 through 2012. As shown in figure 3, overall crop insurance premium subsidies more than tripled from $1.8 billion to $6.7 billion from crop years 2003 through 2012. The revenue policy premium subsidies increased from $1.1 billion in crop year 2003 to $5.5 billion in crop year 2012, a nearly 5-fold increase. The total acreage covered by federal crop insurance also continued to increase from crop year 2003 through crop year 2012, from around 183.7 million acres in 2003 to 265.2 million acres in 2012. As shown in figure 4, the amount of that acreage covered by revenue policies also increased, from about 112.2 million acres in 2003 to 180.9 million acres in 2012. In 2012, revenue policies were purchased for about 68 percent of the acres covered by federal crop insurance. Farmers have also increased their purchases of higher coverage levels of crop insurance—that is, the percentage of their normal annual revenue that they want to insure—for their revenue policies. These higher coverage levels equate to greater potential liability for the government and insurers in the case of loss and higher premium levels for the policies, both of which contribute to higher program costs. According to our analysis of RMA data, the percentage of acres insured at higher coverage levels has increased in recent years, as shown in figure 5.