But how does the cost compare to a crop insurance premium?
The University of Georgia economists tested their level of contributions with crop insurance premiums paid in Illinois. They found “the effective contribution rates corresponding to the above contribution and revenue guarantee combinations are 2.32 percent, 3.62 percent, and 5.92 percent of average annual revenue ($13.81, $21.60, and $35.25 per acre). As a point of reference, the 2007-2011 average crop insurance premiums paid by grain corn farmers (crop code 0041) purchasing revenue insurance products in the State of Illinois for the same revenue coverage levels, were $10.82, $15.43 and $29.27 per acre. Note that, although the effective crop insurance premiums are heavily subsidized by the government, they are not that much lower than the CISA contributions.” And they add, “As long as coverage levels are reasonably defined in terms of the frequency of loss they are designed to protect (e.g., 5, 10 or 15 out of 100 years) the proposed CISA system could provide effective coverage at affordable annual contributions regardless of how volatile a crop’s revenues are.”
And why would someone opt for CISA over crop insurance?
The economists report, “Because of insurer and producer uncertainty about what the actuarially fair premium is, without subsidies, many farmers would feel that they are being overcharged and thus not participate. Under the simplifying assumption that a producer would only purchase coverage if he or she thinks that the premium quoted by the insurer is fair or better, and moderate levels of uncertainty, substantial subsidies are needed to achieve high participation rates.”
2012 was one of those years when farmers in many areas actually collected indemnity checks, unlike many prior years when premiums were paid, just for the benefit of having insurance. The economists say, “Under the proposed CISA, since the producers would own and be paid interest on the contributions they make to their accounts and those contributions are tax-deductible, they are more likely to participate even if the required contribution rate is substantially higher than what they think it should be for the account to end with a positive balance.”
A self-funded crop insurance system may be one of those proposals considered in the future as the nation wrestles with high levels of budget debt, while providing crop insurance to farmers. Such a program would parallel a health-savings account in which tax deductible funds are used for major medical issues. A crop insurance program would indemnify a producer with losses in yield or revenue below an established level. The producer would draw on the account in the event of a loss, and funds remaining when the farming operation concludes would be provided to him.
Source: FarmGate blog