A few weeks ago, we looked into the state of commodity programs from the perspective of farmers. We found that farmers tend to make a great deal of money off these “insurance” programs, as they are designed to function more as subsidies than a safety net. But that pales in comparison to the cronyism involved in the other side of the equation — the providers of that insurance.
The first thing to know about federal crop insurance is that the insurance is provided by private businesses. That’s important to know because it’s just about where crop insurance companies’ relationship to the free market ends.
Crop insurance companies are selling a single, government-approved product, and therefore are unable to change the particulars of their insurance offerings. They are unable to adjust their prices based on their own internal assessments of risk, offer discounts for bundling, change prices to reflect market conditions, or turn away any customer that wishes to buy insurance in a state they operate in. Insurance companies are even prohibited from offering insurance online — a regulation solely designed to protect the jobs of insurance representatives.
Most of the revenue flowing into the coffers of crop insurance companies doesn’t come from the farmers that they are insuring. Approximately 62 percent of farmers’ premiums are covered by the taxpayer funds — only the remaining 38 percent is paid by the farmers themselves. So right off the bat, crop insurance companies’ primary customer is the federal government, not farmers.
But perhaps the most amazing aspect of the federal crop insurance program is that crop insurance companies are promised a guaranteed rate of return of 14.5 percent. No, not a guaranteed premium rate. A guaranteed rate of return — in other words, a profit guaranteed by the federal government to every private company participating in the federal crop insurance program.
Anyone familiar with the term “moral hazard” can feel free to take this moment to push their jaw back up towards their head. Moral hazard occurs when actors in the market are insulated from risk, encouraging them to take greater chances than they would take if they had to face the consequences of bad bets. Providing businesses with a guaranteed profit — particularly one that blows the average business’s profit margin of around 8 percent out of the water — captures moral hazard better than any economics textbook ever could.
Of course, it is the taxpayer that is covering this extravagant federal generosity and bearing the cost of an increase in bad investments made due to artificially decreased risk aversion. The Government Accountability Office estimated that simply lowering that guaranteed profit to 9.6 percent would save taxpayers $364 million.
Compare the state of federal crop insurance to other industries. If these same rules were applied to health care, it would make our current system look market-friendly. Imagine if all health insurance companies were required to offer the exact same plan, paid primarily by the federal government, and promised generous profits no matter what. It would be derided as a bizarre version of corporate-administered single-payer health care.
The recent House Farm Bill would have made this system even more cronyistic. Under its terms, the USDA’s Risk Management Agency (RMA) would have had no choice but to reimburse costs submitted to it by private crop insurance businesses, even if the RMA found the costs to be unreasonable. By the same token, private businesses would have been able to set their own “maintenance” costs for four years after a new crop insurance policy is approved by the RMA — and the RMA would have no choice but to accept. Remember that the House Farm Bill ended up failing to pass because of a fight over immigration, not because it treats your tax dollars like celebrating baseball teams treat champagne.
The Farm Bill provides an ideal opportunity for Congress to inject some market impulses into the federal crop insurance program. Common sense, bipartisan reforms like permitting farmers to purchase crop insurance online, reducing taxpayer-funded premium subsidies, eliminating the taxpayer-subsidy for “Cadillac” Harvest Price Option insurance, or renegotiating the Standard Reinsurance Agreement would all help bring crop insurance companies more in line with industry norms. At the same time, they would reduce taxpayer exposure and help farm businesses better manage their own — more accurately priced — risk.
Congress could more responsibly and intelligently use taxpayer dollars. Reform may be difficult, but your money deserves the effort.