Crop Insurance Overview

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Crop Insurance Overview
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Objectives

• Define risk, management and risk management
• Identify risks in agriculture
• Outline history of crop insurance
• Describe features of crop insurance
• Identify crop insurance products
• Discuss the application of crop insurance products

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Risks in Agriculture
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Risk

• Risk is exposure to a variety of outcomes that
  cannot be predicted or controlled it is also the
  chance or probability of an unfavorable outcome.

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Management

• How we deal with risks and our approach to them
  by making decisions utilizing resources and
  skills available to us.

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Risk Management

• Risk management is making decisions based upon
  your goals, economic expectations and business
  survival skills with your ability and willingness
  to assume risk.

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RISKS IN AGRICULTURE

• Production
• Marketing
• Financial
• Casualty Loss
• Social and legal
• Human
• Government

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Why Do Farmers Need Insurance?

• Protection against losses due to natural
  disasters
• Facilitates business planning
• Loan security
• Forward market crops with assurance

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History of Crop Insurance
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History of Crop Insurance

• Two Major Types of Crop Insurance
• Private Crop Hail
• Federal Crop Insurance

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History of Crop Hail Insurance

• Hail was first crop insurance
• Hail insurance offered by private companies
• First known hail insurance Association
• founded in 1797 in Germany
• many European countries followed

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History of Crop Hail Insurance

• 1880 - hail insurance emerged in the U.S.
• first state was Connecticut
• first crop was tobacco
• 1889 - 4 small writers in North Dakota
• 1893 - Crop Hail spread to the Midwest
• Served as a private risk management tool for over
  100 years and continues today

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History of Crop Hail Insurance

• Evolved from guesstimates and negotiating with
  farmer to the use of scientific data and
  established procedures
• Charts have been developed based on land grant
  university research
• All insurance companies use universal standards
  and procedures which are regulated by the industry

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History of Federal Crop Insurance

• Multi-Peril Crop Insurance (MPCI)
• Government sponsored crop insurance
• first attempt 1899 but failed
• Ag legislation was enacted due to the Great
  Depression of early 30s
• Goal to protect farmers from severe economic
  hardship and to support the national food
  production system

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History of Federal Crop Insurance

• Federal Crop Insurance Act of 1938
• Created the Federal Crop Insurance Corporation
  (FCIC)
• Wheat was first crop insured in 1939
• 1947 the program realized first profit
• 1958 it was expanded to include 24 crops
• Participation was still very low by farmers
  because of poor trust in government

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History of Federal Crop Insurance

• Federal Crop Insurance Act of 1980
• Enlisted private insurance companies
• Insured crop acres increased dramatically
• Federal Crop Insurance Reform Act 1994
• Crop insurance became mandatory for participation
  in other federal farm programs
• 1996 Freedom to Farm Act
• Removed mandatory participation
• Risk Management Agency (RMA) created

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History of Federal Crop Insurance

• Agricultural Risk Protection Act of 2000
• ARPA increased producer subsidies
• Established new insurance procedures
• Created on-line crop insurance information
• 2007 Farm Bill and beyond?????
• New ideas and products to fit changing producer
  needs
• Producer groups lobby congress

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Features of Crop Insurance
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Why U.S. Crops FailRecent Industry Total
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Key Players in Crop Insurance

• Farmer
• Agent
• Company
• Loss Adjuster
• Federal Government

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How Does The Farmer Get Insurance?

• Crop insurance is a contractual agreement between
  the farmer and an insurance company brokered by
  an insurance agent
• Farmer contacts an insurance agent who has a
  contractual relationship with an insurance
  company to sell crop insurance

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What Does the Farmer Do?

• Evaluates need for risk management
• Reviews product options with insurance agent
• Purchases insurance contract based on risk
  coverage needed
• Provide production and acreage reports
• Notifies agent when a loss has occurred
• Work with adjuster to evaluate loss

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What Does The Agent Do?

• Identifies a need for risk management
• Explains product options
• Sells insurance contract
• Collects production and acreage report
• Notifies company of farmers request for loss
  inspection
• Informs farmer about changes to the program
• Local, professional, trusted contact for farmer

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What Does The Company Do?

• Insures farmer
• Provides for the processing of all paperwork
• Contracts agents and loss adjusters
• Ensures all claims are fairly and promptly paid
• Accepts risk on the insurance policies and offers
  reinsurance to other companies to manage overall
  risk to the industry
• Interacts with RMA/Agents/Farmers

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What Does the Loss Adjuster Do?

• Contact the agent and the insured after a notice
  of loss is filed
• Adjust losses through field inspection and
  investigation of production data
• Complete and submit all loss adjustment paperwork
  to the company

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What Does The Federal Government Do?

• Subsidizes insurance
• Pays delivery reimbursement
• Pays premium subsidy
• Offers reinsurance (protection policies designed
  to reduce the risk of major losses to private
  insurance companies due to catastrophic natural
  disasters)
• Sets rates
• Establishes insurance policy provisions
• Regulates insurance companies

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Why A Government Program?

• Weather tends to impact a large area
• Without federal subsidies premiums would be too
  high for most farmers to participate
• Without federal financial support it would be too
  expensive for most insurance companies to
  participate

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Insurance Cycle
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Crop Insurance Products
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• Crop
• Hail
• Insurance

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Crop Hail Insurance

• Private product
• No subsidy
• Sold by licensed insurance agents
• Premiums vary due to past loss experience
• Township or County rated

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Crop Hail Coverage

• Full or Deductible
• Based on percentage payment
• Insured selects coverage level

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Crop Hail Claims

• Agent reports loss to the company as requested by
  the insured farmer
• Company assigns claims to a trained adjuster who
  calculates loss utilizing accepted procedures
• Company verifies information and issues a loss
  payment

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• Federal Crop Insurance

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Federal Crop Insurance Products

• MPCI- Multiple Peril Crop Insurance
• CAT- Catastrophic Risk Protection
• CRC- Crop Revenue Coverage
• RA- Revenue Assurance
• IP- Income Protection
• GRIP Group Risk Income Plan
• AGR- Adjusted Gross Revenue

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Multiple Peril Crop Insurance (MPCI)

• Protects against production loss from wide
  variety of natural causes such as drought, excess
  moisture, cold and frost, wind, flood and
  unavoidable damage from disease and insects
• Can insure at various levels of APH (actual
  production history) at various price percentages
  of the RMA (Risk Management Agency) forecast
  market price
• If production is less than the yield guarantee
  the insured will be paid a loss

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Multiple Peril Crop Insurance (MPCI)

• About MPCI
• This product guarantees production
• Coverage levels are available from 50 to 75 of
  production (80 and 85 levels available in
  limited areas) up to 100 of the price election
  (CAT 50/55)
• Yield Guarantee
• The historical yield (APH), times the level of
  coverage, times the insured acreage
• Production to Count
• The actual production, plus any yield appraisals,
  less any adjustments for poor quality

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Catastrophic (CAT) Insurance

• Meets requirement for producers to qualify for
  USDA program benefits
• Minimum level of MPCI coverage
• 50 of APH at 55 of RMA forecast price
• no premium, 100 subsidized
• Farmer pays small administrative fee of 100.00
  per crop to RMA
• Farmers with limited resources may be eligible
  for a waiver of the above fee

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Crop Revenue Insurance

• Two main products
• 1. Crop Revenue Coverage (CRC)
• Not available for all crops
• revenue guarantee based upon combination of APH
  and average of new crop futures during the month
  before sales closing.
• The price times the APH yield times the level of
  coverage equals the gross income guarantee.
• If prices for the insured crop are higher by
  harvest time, the revenue guarantee increase with
  no additional premium

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Crop Revenue Insurance

• CRC cont.
• If producers actual gross revenue, as calculated
  from the new crop futures price during the month
  before harvest, is below the insured guarantee, a
  indemnity payment is paid.
• Claim can be triggered by various combinations of
  low prices and low yields.

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Crop Revenue Insurance

• 2. Revenue Assurance (RA)
• Many similarities to CRC
• Major differences
• RA protects a producers crop revenue when it
  falls below the guaranteed revenue
• Revenue guarantee does not automatically increase
  if prices rise
• Can be added as an optional feature
• Optional features also include discounts for
  enterprise and whole farm insurance units

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Income Protection (IP) Insurance

• IP is a revenue product that is based on APH and
  protects against loss of income when prices
  and/or yields fall
• It does not have the increasing price function of
  CRC
• The guarantee and premium is calculated using a
  spring-time projected price
• Loss is due when production x harvest prices
  falls below the guaranteed protection level

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Group Risk Income Plan (GRIP)

• Based on experience of the county and not
  individual farms so APH is not required
• Includes coverage against significant reduction
  in county yield or commodity price of a specific
  crop
• County yield estimates and trigger revenues will
  be calculated prior to April 16th each year
• Loss is paid when actual county revenues fall
  below the trigger revenue

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Adjusted Gross Revenue (AGR)

• AGR provides protection against low revenue due
  to unavoidable natural disasters and market
  fluctuations
• Uses a producers historical IRS tax form
  (Schedule F) and an annual farm production report
  to provide a level of guaranteed revenue
• Provides coverage for multiple commodities and
  establishes revenue as the common denominator for
  production levels

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Risk Management Tool

• Crop insurance products are an important
  management tool available to producers to
  minimize production risks
• Insuring revenue helps to assure the long term
  profitability of a farm business
• A profitable farm business allows farmers and
  their families the opportunity to achieve family
  and business goals