The United States' federal crop insurance program is a powerful and effective system which affords farmers the ability to keep producing food even after a natural disaster occurs. This program is vital to keeping our people fed and our country strong. Thanks to federal crop insurance, we enjoy one of the cheapest, most abundant food supply chains in the world.
But crop insurance is also complicated, and learning the details of the system can be intimidating. Who pays for it all? How are farmers able to afford insurance every year? Why do we need private insurers like AgriSompo?
Below, we'll walk you through the basics of how money flows through the American crop insurance system.
The three-legged stool: understanding the public-private partnership
The most important component of the federal crop insurance program is the public-private partnership frequently termed the "three-legged stool". This is a system in which the burden of paying for the program is divided three ways between taxpayers, farmers and the private sector (i.e. Approved Insurance Providers like AgriSompo).
In short, the program can be seen as a cycle: farmers and taxpayers fund the system, private insurers administer coverage, and indemnity payments flow back to farmers when losses occur.
The farmer
First, the farmer purchases a crop insurance policy through an agent. The farmer has "skin in the game" via a deductible which encourages them to utilize good farm management practices to maximize their profits.
The taxpayer
While the farmer pays a portion of their crop insurance premium, the taxpayer provides dollars that subsidize a significant share of the cost; this keeps insurance affordable for all types of producers. Tax dollars also help AIPs pay for the administration and operating of the program.
In return, taxpayers are assured that America's farmers will continue to provide the food and goods that our society needs to function.
Unlike other farm programs or ad-hoc (temporary, one-off) disaster assistance which derive 100% of their funding from taxpayers, crop insurance losses are only partially covered by the taxpayer.
The private sector
The premiums paid by farmers and taxpayers are collected by private Approved Insurance Providers (AIPs). In exchange, the AIP is responsible for much of the farmer's risk, thereby lessening the impact on the taxpayer and farmer when losses occur.
Competition between AIPs ensures that farmers benefit from the highest levels of service, innovation and efficiency in the administration of their insurance, far beyond what would be possible if the program was run by a public entity.
The private sector is encouraged to participate in the crop insurance program by the possibility of making a profit in years with relatively few losses. When losses are especially high and indemnity payments exceed the premium collected by private insurers, the government assumes a share of the risk in order to keep the system financially stable.
The agent
Typically, farmers do not interact directly with the AIP servicing their policy. Instead, they purchase their insurance from an agent who represents one or more AIPs.
Agents play an extremely important role in the crop insurance cycle. They act as trusted advisors for the farmers they work with: they evaluate an operation's needs, explain the available products and help the farmer make a risk management decision. They then work closely with both the AIP and the farmer to assist the latter with their application, paperwork, acreage reporting, claims, and more. In exchange, the AIP pays a commission to the agent.
How AIPs and agents support one another
Under the federal crop insurance program, the incentives of AIPs and agents are aligned. The success of one benefits the other.
At AgriSompo, we are endlessly grateful for the work done by our partner agents. We rely on their local expertise, customer relationships and ongoing dedication to ensure that our mutual customer – the American farmer – receives the best experience possible.
In return, we strive to be a stable, predictable partner that agents can lean on without worry. Through data-driven analytics, careful portfolio management and a diverse spread of risk, we provide a foundation of financial strength on which agents can build their legacies.
Want to learn more about the federal crop insurance program and help ensure it remains viable? Check out our education and advocacy organization, the American Coalition for Rural Engagement (ACRE).