amount of A&O subsidy the companies obtain, although increased sales would involve increased operating cots A change in the catastrophic loading factor, β, has the following effects: The first term in the derivative, is strictly negative as long as the loss ratio, k, remains less than one, reflecting the adverse effect of an increase in premium rates on the amount of liability purchased. An increase in β, by raising the total premium rate p, will unambiguously increase revenues if L is constant because there is no impact on the loss ratio or the A&O subsidy. The second term, is strictly positive, reflecting the direct impact of an increase in the loading factor on premium earned by the companies on each policy. However, if the marginal effect on quantity of coverage purchased of a change in the paid by farmers is small then almost surely the direct impact on the total premium rate will exceed any revenue losses associated with a decline in liability and the associated potential increase in the loss ratio. If an increase in, or introduction of a positive catastrophic loading factor is accompanied by an increase in premium subsidy rates then the net effect of the joint changes in β and s on the price paid by farmers for coverage can be negative. Such was the case under the terms of the 1994 Crop Insurance Reform Act when the 13.64% catastrophic loading factor was introduced but, at the same time, the average premium subsidy rate was increased from 30% to 50%. Prior to the 1994 CIRA, as s = 0.3 and β = 0, pf = (1 – s)(1 + β)r = (1 -0.3)r = 0.7r. After the reform, s = 0.5 and β = 0.1364, pf = (1 – 0.5)(1 + 0.1364)r = 0.5682 r. Thus the joint changes in s and β substantially reduced pf, thereby increasing program participation, L, and lowering loss ratios. The combined effects of these policy changes increased the revenues of the crop insurance companies while also increasing farmers’ economic well-being. Thus the 1994 Crop Insurance Reform Act is perhaps a classic
The analytical results, including effects on tax payer costs not formally examined, can be heuristically summarized as follows: An increase in the A&O subsidy rate increases insurance company revenues but has no effect on farmers. However, taxpayers lose because subsidies paid directly to the insurance companies increase while subsidies paid to farmers remain constant (as total coverage purchased remains constant. An increase in premium subsidy rates increases the economic benefits farmers obtain from the program and increase the total revenues obtained by crop insurance companies from the program. Taxpayers, of course, lose because each dollar of coverage receives a larger premium subsidy and coverage increases (L increases). An increase in the catastrophic loading factor almost certainly increases the total revenues obtained by the crop insurance companies but lowers the economic benefits to farmers by increasing the out of pocket price they pay for coverage. Taxpayers almost certainly lose because an increase in the catastrophic loading factor increases the total premium rate and, given a constant subsidy rate, the amount of subsidy per dollar of coverage increases. An increase in the actuarially fair premium rate almost certainly increases company total revenues, and by reducing coverage through higher farmer paid prices, lowers their costs. Farmers receive fewer benefits as they now face higher out of pocket costs for coverage. Tax payers almost surely lose because the increase in the actuarially fair premium rate increases the total premium rate for each dollar of coverage and, therefore, the amount of subsidy for each dollar of coverage. The Effects of the Joint Provisions of the 1980, 1994 and 2000 Crop Insurance Legislative Initiatives on Farmers and Crop Insurance Companies The 1980 Federal Crop Insurance Act (FCIA), the 1994 Crop Insurance Reform Act (CIRA) and the 2000 Agricultural Risk Protection Act (ARPA) all included important provisions that affected both farmers and crop insurance companies. provisions also provided benefits to agricultural lenders, many of which are small rural banks. By effectively guaranteeing farmers a revenue floor for many of their crops through substantial tax payer subsidies, as well as
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