Those who like to sow discord during farm bill discussions will often argue that crop insurance is regionally inequitable – that one region (typically the Midwest) subsidizes crop insurance in other regions of the country. The argument often takes this form: loss ratios – the ratio of indemnities received to premiums paid – are highest in areas like the Great Plains and the South. Regional battles in farm bill deliberations are seldom constructive. In the case of crop insurance, those battles endanger the entire crop insurance system and threaten to reduce the risk pool which is essential in spreading risk across multiple crops and states.
For serious participants in the policy process, it’s important to make informed/balanced decisions based on the facts. While loss ratios are certainly one metric, focusing on loss ratios alone can leave the impression that growers in certain parts of the country are not pulling their weight (i.e., not paying enough for coverage). In this article, we delve into this topic using corn production to illustrate. In particular, we explore average premiums paid by county for the highest coverage level (85%) for the most popular crop insurance product (Revenue Protection) in 2022 to examine regional equity throughout the country. In carrying out the analysis, we utilize average yields in the county (specifically, the county reference yield utilized by RMA in rating crop insurance policies). We further assume the crop is being produced for grain, and we focus exclusively on non-irrigated crop production. Finally, we illustrate the case of enterprise units, but the relative results are largely the same for optional units as well.
As noted in Figure 1, the lowest average premiums paid for 85% coverage are in the heart of the Midwest. For example, the lowest premium rate in the country is in Marshall Co., IA, where producers are paying just 2.13% (or 2.13 cents for every dollar of liability insured) for 85% coverage. In contrast, corn producers in Wilbarger Co., TX, would have to pay 32.5% (or 32.5 cents for every dollar of liability insured) for the same percentage coverage level. No producer can afford to spend that kind of money on crop insurance, so their only option is to reduce their coverage level – and increase their risk exposure – as a result. While we illustrate the two extremes, this highlights one reason why coverage levels outside of the Midwest tend to be considerably lower than 85% – producers simply cannot afford the coverage.
It is also important to note that rates are significantly variable within states as well. For example, while the median county rate in Minnesota is just 3.9%, as noted in Figure 2, the average ranges from just 2.14% in Watonwan Co., MN, to 17.8% in St. Louis Co., MN. No surprise…producers reduce their coverage as a result. For example, in Marshall Co., MN, where the average premium for 85% coverage in 2022 was 13%, the average coverage level actually purchased by producers has averaged just 73% over the past 5 years, far below the maximum 85% coverage available.
Bottom line: outside of the Midwest, much of the country is (1) paying considerably higher rates for crop insurance which is (2) resulting in producers having to significantly reduce coverage while shouldering considerably more risk. Any effort in the farm bill to further raise premiums on these producers would simply drive coverage levels even lower and risk exposure even higher.
Figure 1. 2022 Average Premium Rates for 85% Revenue Protection for Corn, by County
Figure 2. Range of County Average Premium Rates for 85% Revenue Protection for Corn, by State (median county premium rate denoted by black dots).