We have written previously about the partnerships between the federal government and the private sector in complex insurance settings. One is the National Flood Insurance Program which is a public – private partnership between the federal government represented by FEMA and almost 90 private insurance companies. The partnership works to offer flood insurance to property owners and renters in communities that are part of the National Flood Insurance Program. The Terrorism Risk Insurance Act enacted after 9-11 also cast the government in the role of partner with private insurers. Both of these programs deal with managing a phenomenon called collateral risk –the occurrence of simultaneous losses from a single common event. Natural disasters like wildfires, floods, tornadoes and earthquakes can produce collateral risk.
The Federal Crop Insurance Program is another example of a public-private insurance partnership and an experiment in managing collateral risk. The Crop Insurance Program is managed through the USDA’s Risk Management Agency working with private insurers who do the underwriting and independent agents who sell the insurance. Crop insurance is the oldest of these programs having its origins in the Dust Bowl and the Great Depression. It began as a limited experimental program in the USDA that covered major crops in their main areas of production and it was operated strictly as a federal program. The reason for creating a crop insurance program was to provide relief in an environment where localized disasters – like droughts – created pressure for declarations of emergencies and applications for federal assistance. In short, it was an effort to manage risk at a national level.
The program as it is known today took shape in 1980 with the passage of the Federal Crop Insurance Act and evolved through the creation of the Risk Management Agency in 1994 as a means of administering the program. Much of the impetus for the evolution of the law and the agency appears to have been the regular calls for disaster assistance to farmers following crop related events like drought and hailstorms. Today, the Risk Management Agency administers the program and 17 insurers participate as underwriters. The federal government provides a reinsurance capacity which puts the American taxpayer on the hook for catastrophic losses but they also participate in the profits; in most years there is an underwriting surplus.
Like other programs designed to respond to these collateral risk events there are supporters and detractors. Detractors cite the huge, and potentially ballooning, costs of the program which is projected to reach about$16 billion this year following severe drought in many areas of the south and Midwest. Supporters of the program note that without it, may farmers would be put out of business by seasonal losses leaving our national food security in peril.
Historically, it appears true the program has best served large corporate farms. It is only recently that programs have been developed to support small farmers and organic growers like those we find here on Washington’s Olympic Peninsula. The problem for organic growers has been that reimbursement rates did not take into account the increase in value of an organic crop which significantly affected the value of the coverage. New programs are being developed to address that which allows high reimbursement rates. Fruit growers, another Washington interest, are also not wholeheartedly in support of the program. Not all crops are covered and there are bureaucratic hurdles to jump in order to create a successful application.
Although there are a number of groups that would like to see reform or elimination of the program it has proven resistant to change by congress and remains a favorite among many farmers, particularly those involved in large farms and commodities.