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Crop insurance outcomes vary significantly by policy type and coverage level, study finds

A newly published paper by Francis Tsiboe and Dylan Turner of NDSU's Agricultural Risk Policy Center finds that while federal crop insurance generally boosts farm revenues and reduces income volatility, its effectiveness depends greatly on the type of policy selected. The work is in the journal Applied Economic Perspectives and Policy.

Using data from the Federal Crop Insurance Program covering 11 major crops between 2011 and 2022, the study evaluates 51 combinations of insurance plans and coverage levels. The researchers simulate net indemnities—payouts minus out-of-pocket premium costs—and compare them to the baseline of being uninsured.

The results show that for every 1% increase in average revenue provided by an insurance policy, there is a corresponding 2.25% decrease in year-to-year income volatility. This suggests that indemnities generally arrive when farmers experience the greatest need.

"Plans based on verified farm-level outcomes, such as Yield Protection, Actual Production History, and Revenue Protection, perform best," said Tsiboe. "They not only improve income but also stabilize it, and they account for most of the participation in FCIP."

By contrast, index-based products like Area Yield Protection, Area Revenue Protection and Margin Protection were shown to increase revenue variability due to basis risk, the mismatch between index triggers and actual on-farm losses. These types of plans are generally cheaper for farmers to purchase and are simpler to administer but can sometimes lead to indemnity payments that don't align with when losses occur.

The paper includes a graphical breakdown of each insurance plan's effect on average revenue (Income Transfer Score) and income stability (Variability Reduction Score), offering practical insights for producers and policymakers.

While the overall impact of FCIP remains positive, the authors note the trade-offs associated with index-based policy designs.