Crop Insurance Subsidizes Insurance Companies as Much as Farmers
Tuesday, April 24, 2012
Washington’s effort to help protect the American farmer has proven to be a billion-dollar bonanza for insurance companies and agents.
According to a report from the Environmental Working Group, the federal government’s crop insurance program has cost about $50 billion. But only half of this money has actually gone to farmers. The rest, about $25 billion, has been paid to insurance companies to cover premiums and to insurance agents in the form of commissions. The annual cost has more than tripled in the past ten years.
The crop insurance program has become so costly because its subsidies give farmers “irresistible incentives to buy more insurance, and more expensive types of insurance, than they would buy if they had to spend their own money,” states the report.
“Another reason the program costs so much is that insurance companies have to be paid large subsidies to induce them to take on a small portion of the risk of having to make large payouts,” the report continues. “And finally, the agents who sell these policies earn commissions far in excess of what a competitive market would pay.”
The Environmental Working Group suggests reforming the program by simply giving away the insurance to farmers for free, which, the group contends, would actually save the government more money than to continue the current arrangement.
The author of the study, Bruce Babcock of Iowa State University, proposes a “single, simple and free yield protection policy covering 70 percent of average crop yield. The policy would compensate producers for a financial loss caused by bad weather–at 100 percent of the crop’s market price. Farmers would be asked to pay a small fee to cover the much lower costs of delivering this program.”
To Learn More:
Giving It Away Free (by Bruce Babcock, Environmental Working Group) (pdf)
'Free' Crop Insurance Might Save Taxpayers $18.5 Billion (American Agriculturist)
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