Much of the roughly $59 billion taxpayers spent on crop insurance programs over the past decade ends up with financial companies rather than farmers. The 18 insurance companies that participate in the federal crop insurance program banked $10 billion in profit over the past decade and have made money on the program every year save two in the past 20.
Those insurance companies receive taxpayer funds in a variety of ways. The government pays over 60 percent of the total insurance premiums that they charge to farmers. Premiums are tied to crop prices, so rising food prices in recent years have driven the government’s crop insurance subsidy costs higher. On top of the premium subsidies, the government also pays the companies’ operating and administrative costs relating to crop insurance and the bulk of any farmer claims resulting from extreme weather, insects, and crop diseases. Taxpayers spent $14 billion on crop insurance in 2012, a single-year record that reflects the severe drought that plagued American agriculture last year, and absorbed the bulk of the pain when farmer claims exceeded the amount of premium payments for the year. The $10 billion in private insurer profits for the decade includes a $1.3 billion combined loss from 2012.
As a subsidy designed to lure insurers into a market they would not participate in without government aid, the crop insurance program is intended to enhance profit margins for insurers, but the numbers suggest the program has grown more generous than it was ever intended to be. Crop insurance subsidies guarantee companies a 14.5 percent rate of return, substantially above the 12 percent that is typical for financial business. Those figures paint the picture of a program meant to protect farmers that “has evolved into a system that in most years all but guarantees profits for insurers,” as Bloomberg writes. One agricultural policy expert at the University of Tennessee called the modern crop insurance system “a money-laundering operation.”
The insurance companies that have access to that program and bank those tacitly guaranteed profits sport some notable connections. Former AIG head honcho Greenberg runs one of them, the Starr Indemnity & Liability Co., and another, the Great American Insurance Group of Cincinnatti, is part of the business empire of the Lindner family. The Lindners, including the late Carl Lindner Jr., have given many millions of dollars to Republican candidates and campaign organizations over the years.
Crop insurance doesn’t just divert money from farmers to financiers, however. Some of it also gets siphoned off by elaborate fraud schemes involving farmers, insurers, and claims adjusters. One such criminal ring in North Carolina was recently discovered to have defrauded taxpayers of nearly $100 million over the past ten years.
The program’s structure actually encourages such fraud. Because prices and conditions of the insurance policies are set by the government, “the only way for insurers to gain market share is to win the business of the agents who sell the policies directly to farmers,” as Tim Fernholz explains at Quartz. Insurers chase policy salesmen, who in turn chase farmers, who in turn submit fraudulent claims. In one example from the North Carolina case, a farmer claimed losses “on a rock-and-garbage-strewn lot he tried to pass off as a wheat field,” Fernholz writes. The claims adjuster approves the claim in exchange for a kickback, and everyone except the taxpayer profits.
Despite its failings, crop insurance has gotten gentler treatment from this Congress than have other parts of agriculture policy. While the crop insurance system was reauthorized by the Republican-controlled House over the summer, food stamps programs that nearly 50 million Americans rely upon have not yet been renewed. Republican leaders intend to push a $40 billion cut to food stamps sometime next week. Conservative lawmakers have long justified cuts to food stamps by claiming fraud and waste are rampant in the program even though farm programs have higher erroneous payment rates. In 2012, there were zero high-dollar overpayments from federal food assistance programs and over $18 million in high-dollar overpayments from farm programs.