Crop Insurance Generally Improves Farm Revenues, But Effects Vary By Policy Type

by Francis Tsiboe and Dylan Turner

A new study co-authored by ARPC economists estimates how well different types of crop insurance policies offered through the Federal Crop Insurance Program (FCIP) fare at creating a steadier bottom line for farmers. Specifically, the study sets out to answer two practical questions: (i) how much each policy type raises average farm revenue and (ii) how much that extra revenue dampens the year-to-year swings in farm income. Using FCIP records covering 11 major crops from 2011-2022, the authors simulated typical net indemnities (defined as indemnities minus the out-of-pocket cost of purchasing the policy) received under 51 different crop insurance policy and coverage combinations and compared them to the case of being uninsured.

The headline result suggests that every additional 1 percent increase in net revenue delivered by a crop insurance policy translates into a 2.25 percent drop in inter-year revenue variability on average. This combination of both higher mean income and lower volatility implies indemnity payments are well correlated with losses, meaning the additional revenues are received at the time when the producer needs them most. However, the study found this correlation to be strongest among policy types that base indemnity payments on verified on-farm outcomes like Yield Protection, Actual Production History, and Revenue Protection plans. These types of plans also account for most participation in the FCIP.

Policies that base indemnity payments on an index like the Area Yield Protection, Area Revenue Protection, and Margin Protection plans tended to increase variability in revenues. This is due to the “basis risk” associated with these policies which occurs when the index used to define indemnity payments doesn’t perfectly track the experience occurring on a given farm. In practice, this means indemnity payments are sometimes made when no loss occurs and alternatively, losses sometimes occur with no accompanying indemnity payment.

Revenue transfer and variability reduction among U.S. federal crop insurance policy alternatives, 2011–2022

Note: Each point in the Figure represents the relative revenue outcomes for the corresponding insurance plan and coverage level combination. The “Income Transfer Score” (ITS) estimates mean revenue changes by first averaging each agent's simulated revenues across all years and then dividing by the average revenue obtained without crop insurance. A higher ITS thus indicates a greater revenue benefit from the FCIP. To measure revenue variability, we use the coefficient of variation, calculated with and without crop insurance, and express the results as a “Variability Reduction Score” (VRS). A lower VRS signifies a greater reduction in revenue risk. Taken together, ITS and VRS provide insights into the FCIP's effectiveness in enhancing and stabilizing revenue under different policy alternatives.

Source: ARPC using data from Tsiboe et. al. (2025).

Related Research and Policy Analysis by ARPC Economists:

Turner, D., Tsiboe, F., & Yu, J. (2025). Crop Insurance Participation and Cover Crop Use: Evidence from Agricultural Resource Management Survey Data. Journal of Agricultural and Applied Economics, 57 (1) 1-18.

Tsiboe, F., Turner, D., & Yu, J. (2025). Utilizing large‐scale insurance data sets to calibrate sub‐county level crop yields. Journal of Risk and Insurance, 92 (1), 139-165.

Turner, D., Tsiboe, F., & Yu, J. (2025). Actuarial implications of prevented planting coverage. Applied Economic Perspectives and Policy, 47 (1), 394-415.

Gaku, S., & Tsiboe, F. (2024). Evaluation of alternative farm safety net program combination strategies. Agricultural Finance Review. Ahead-of-print.