Crop Insurance Basics: Incentives

When policymakers prioritize specific behaviors or actions, they usually turn to incentives to jumpstart the process.

For example, the U.S. government has long promoted the benefits of homeownership to individual families and the economy as a whole. Hence, lawmakers introduced mortgage interest deductions on income tax filings to make homeownership more affordable and attractive.

In the world of agriculture, the public-private crop insurance system is often used as an incentive vehicle.

It’s helpful to think of crop insurance incentives in two buckets. The first bucket is using reductions in a policy’s premium rate to incentivize desired behavior. But with insurance, the key is not to incentivize in a way that upsets the delicate actuarial balance of the system, which could inadvertently do more harm than good.

For example, it would be inappropriate or unsound to arbitrarily discount premiums to promote an action without actuarial and financial justification – doing so could negatively affect coverage levels and/or drive up premiums for other farmers to offset resulting losses.

So, policymakers designed crop insurance with a self-correcting feature that naturally discounts premium for any producer who improves their performance. This catch-all incentive rewards any behavior that increases yields and reduces risk for farmers and taxpayers.

Take conservation for example. Farmers are turning to conservation practices like no-till more and more because those practices lower production costs and improve soil health which over time can lead to increased yields.

Through crop insurance’s incentive known as Actual Production History or APH, those farmers with above average yields are naturally rewarded with lower premiums.

The second incentive bucket works differently. In it, policymakers don’t adjust or discount premium rates. Instead, they offset a higher percentage of the farmer’s overall share of the premium costs.

This protects the actuarial soundness of the crop insurance system while providing additional financial incentives to help farmers who are willing to adopt preferred behaviors.

In recent Farm Bills, Congress wanted to encourage people to get into farming. To do this, the government agreed to offset a higher percentage of insurance premiums for new and beginning farmers as well as military veterans looking to break into farming.

Some states offer this second kind of incentive, too. In Iowa and Illinois, growers can get additional help paying their insurance premiums if they agree to plant cover crops – a conservation practice that helps sequester carbon, reduce soil runoff, and improve soil health.

These state pilot programs – although small – have proven to be very popular with farmers and have achieved the states’ goal of adding cover crop acreage.

Best of all, once this cover-cropping technique starts improving overall farm yields, it is rewarded with a higher APH and lower premium rate, falling within the first-bucket incentive, which will only encourage even higher levels of participation.