Federal Crop Insurance: The Need for Reform

Abstract

Federal crop insurance is the largest federal property-casualty insurance program. Nominally, it is portrayed as a typical form of private property insurance. However, closer examination reveals that its structure departs significantly from conventional insurance principles and practices that are employed in private insurance markets. In reality, it is a greatly flawed and heavily subsidized wealth transfer program, costing taxpayers $3-$4 billion a year. Also, its flawed structure creates substantial adverse selection and moral hazard problems, encouraging farmers to make economically unsound investment and production choices with rippling effects for farm economies and the environment. Finally, the interaction of state regulation and the federal crop insurance program continues to raise issues that need to be resolved and could be diminished or eliminated if certain program reforms were implemented. In this paper, we critique the structural defects of the crop insurance program, identify the problems they create, and offer recommendations on how the program could be reformed to function more like a true insurance program based on sound economic principles and better coordination between state and federal governments.