This article was first published April 8, 2026, as part of the "Cornhusker Economics" series by the Department of Agricultural Economics.
At a Glance:
- Crop insurance participation tends to rise as producer risk exposure increases and premium costs decrease.
- Producers with greater aversion to risk are more likely to choose higher coverage policies.
- More targeted premium subsidy strategies could improve participation and use funding more efficiently.
Crop insurance is a key component of U.S. farm policy, designed to mitigate risk exposure for agricultural producers. To address the diverse insurance needs of producers with varying risk attitudes, crop insurance policies offer a variety of contract options that differ in the level of coverage provided to agricultural producers. To encourage participation, the U.S. government subsidizes producer premiums, with premium subsidies exceeding $12 billion in 2023.
Despite the prevalence of heterogeneity in producer attitudes towards risk, most economic analyses of crop insurance focus on the decisions of the “representative producer.” Disregarding producer heterogeneity precludes the analysis from addressing: (a) partial participation in crop insurance, (b) selection of different insurance contracts by policy participants facing similar risk exposure, and (c) asymmetric impacts of crop insurance on different producers.
Understanding the factors affecting the producer insurance decisions and the disaggregated welfare impacts of crop insurance is essential for designing effective and efficient policy mechanisms aimed at increasing producer participation in certain crop insurance coverage levels/ programs or/and the welfare of certain producer groups. The effectiveness of crop insurance depends on aligning federal policy with producer behavior, ensuring that crop insurance options match actual risk exposure while maintaining economic efficiency. Our approach to modeling crop insurance decisions by accounting for producer heterogeneity can be especially useful for interest groups, policy makers, and researchers seeking to refine risk-based policies and/or strengthen crop insurance as the cornerstone of the U.S. farm policy.
Our recent paper, “Producer Heterogeneity, Insurance Decisions and Economic Impacts of Crop Insurance” in the Journal of Policy Modeling, develops a theoretically consistent framework for analyzing agricultural producers’ insurance choices and the economic impacts of crop insurance, while explicitly considering diverse risk attitudes. By incorporating producer heterogeneity, the framework facilitates the identification of factors influencing insurance decisions and enables a more nuanced assessment of welfare effects across different segments of agricultural producers. Analytical results of the study follow.
Result 1. The producer participation in crop insurance depends on the individual attitudes towards risk, with the share of policy participants increasing with the risk exposure of agricultural producers and the reduction in risk exposure offered by the low-coverage policy and falling with the producer premium of the low-coverage crop insurance. In this context, government provided premium subsidies reduce the policy premium/cost of the policy to producers and increase the producer participation in crop insurance.
Result 2. Policy participants with higher aversion to risk prefer higher coverage crop insurance. The share of producers participating in high-coverage crop insurance increases with the reduction in risk exposure offered by this coverage option, the producer premium of its low-coverage counterpart, and falls with the reduction in risk exposure offered by the low-coverage policy and the producer premium of the high-coverage crop insurance.
Result 3. The expected producer welfare gains from crop insurance increase with the producer aversion to risk, their risk exposure, and the reduction in risk exposure offered by the policy, and fall with the policy premiums/producer costs of the policy.
Policy relevance and implications
The results of our study have important implications for policy design and the political economy of crop insurance. By assessing the market and welfare effects of crop insurance and the factors affecting the producer insurance decisions, our study informs policy makers in the development of policy mechanisms that induce the desired producer behavior across various crops and/or regions.
Our analysis shows that, in addition to producer risk attitudes, the producer premiums of each contract option are the most important factor affecting producers’ insurance decisions/choice of insurance coverage level. The relative significance of producer premiums rationalizes the extensive use of premium subsidies and provides guidance to policy makers favoring certain coverage levels for different crops and/or regions.
Allowing premium subsidy rates to vary between crops and/or regions would allow policy makers the necessary flexibility to achieve desired crop insurance participation and/or choice of coverage level goals. While helpful in inducing participation, premium subsidies have been a contentious part of the policy, often leading to unintended consequences, with many groups advocating their reduction, capping, or elimination.
For interest groups wanting to overhaul crop insurance premium subsidy mechanism and policy makers considering changes to policy design, our results identify three important points: (1) producers’ contract choices will respond to changes in policy premiums (due to changes in premium subsidies); (2) these responses will vary by crop and across space; and (3) changes in premium subsidies to high-coverage policies will cause some participants to switch to lower coverage, implying participation is maintained.
If lowering premium subsidies while maintaining coverage levels is the goal, changes in high-coverage subsidies in crops and areas with the smallest impact would be the cheapest path. If the goal is to maintain participation, lowering premium subsidies to high-coverage policies would be the most efficient option.
If the RMA were to implement a strategic approach to the premium subsidy policy design mechanism that encompasses our three key elements, the stated objective of the policy—enhancing participation—could be achieved more efficiently and effectively. For example, participation could be increased by reallocating premium subsidy savings from reducing premium subsidy in regions and/or crops where a high percentage of producers are enrolled in high coverage policies, to regions and/or crops with low participation rates by increasing low coverage premium subsidy. Producers in regions and/or crops with high coverage policies will either remain in high coverage or switch to a low coverage policy, and producers not participating in crop insurance in regions or for crops with low participation rates may decide to participate.
