Discussion has centered on limiting crop insurance risk subsidies. In a March 2012 report, for example, the General Accounting Office (GAO) used a $40,000 limit on risk subsidies to calculate the number of farms impacted by the limit (see here). In this post, the acres required to reach a $40,000 limit is examined for Illinois farms. Because risk subsidies vary by year, acres required to reach the limit also will vary. Between 2006 and 2012, acres required to reach the limit for average farms in Illinois are between 1,600 and 2,700 acres, not particularly large grain farms. More detail on risk subsidies and acre limits are provided in the following sections.
Premiums and Risk Subsidies on Federal Crop Insurance
click image to zoom The Risk Management Agency (RMA) administers Federal crop insurance products and sets premiums associated with polices. When setting premiums, RMA attempts to set premiums so that those premiums cover expected insurance payments. Over time, total premiums from policies should roughly equal insurance payments. In some years, total premiums will be larger than insurance payments. In other years, total premium will be below insurance payment as adverse events cause payments to exceed premium. Over time, total premium should equal insurance payments.
click image to zoom Farmers do not pay the total premium associated with Federal crop insurance. A portion of the premium, known as the risk subsidy, is paid by the Federal government. Subtracting the risk subsidy from the total premium gives the farmer-paid portion of premium.
Risk subsidies do not go to farmers. Instead, risk subsidies, along with the farmer-paid premiums, flow to crop insurance companies. Crop insurance companies use total premiums to 1) reinsure policies with the Federal government and private insurers, 2) make insurance payments to farmers and 3) build reserves for insurance payments in the future. Any excess (deficit) after performing these three functions contribute to profits (losses) of crop insurance companies.
Risk subsidies are determined by Federal legislation and are stated as a percent of total premium. Percentages vary by unit insured and coverage level, as illustrated in Table 1 which shows risk subsidies for the COMBO product. As can be seen, enterprise units have higher risk subsidy rates than basic and optional units. At an 80% coverage level, for example, the risk subsidy rate is 68% for enterprise units and 48% for basic and optional units. Subsidy levels decrease with higher coverage levels. For enterprise units, for example, the subsidy rate is 80% for 70% and lower coverage levels. Subsidy rates are 77% for the 75% coverage level, 68% for the 80% coverage level, and 53% for the 85% coverage level.