Crop Insurance Overview

1
Crop Insurance Overview
2
Presentation Data Sources

• Crop Insurance Research Bureau
• National Crop Insurance Services
• Risk Management Agency, USDA
• University of Minnesota Extension
• Crop Insurance Services
• Minnesota Farm Business Management Education
  Association

3
Disclaimer

• The information provided in this power point
  presentation was accurate on the date that it was
  created, but may no longer be current due to the
  frequent occurrence of Multi-Peril program
  changes or updates, the passage of time, or other
  reasons.  Therefore, Crop Insurance Research
  Bureau (CIRB) is unable to control or guarantee
  the current accuracy, relevance, timeliness, or
  completeness of this presentation as it relates
  to the government regulations and guidelines. The
  material contained in this presentation is
  offered for the purpose of education and
  information only. 

4
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
• Demonstrate the application of crop insurance
  products

5
Risks in Agriculture
6
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.

7
Management

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

8
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.

9
RISKS IN AGRICULTURE

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

10
PRODUCTION

• Risks
• Drought
• Flood
• Excess Moisture
• Insects
• Disease
• Hail
• Wind
• Cold, frost, freeze

• Management Options
• Production Diversity
• Varied Maturity Dates
• Irrigation
• Crop Share/Land Rents
• Participate in Government Farm Program
• Crop Insurance/Hail Insurance

11
MARKETING

• Risks
• Price Risks
• Weather
• World supply and demand
• Delivery Dates
• Quality

• Management Options
• Storage
• Forward Price Contracts
• Futures
• options
• Marketing Cooperatives
• Direct Sales
• Government Programs
• Crop Insurance
• Hail Insurance
• Multi peril

12
FINANCIAL

• Risks
• Cost and availability of debt capital
• Ability to meet cash flow needs
• Ability to maintain and grow equity

• Management Options
• Crop Insurance
• Hail Insurance
• Multi peril
• Government Programs
• Maintain financial records
• Cash flow statements
• Balance Sheets
• Income Statements

13
CASUALTY AND LOSS

• Risks
• Accident
• Fire
• Wind
• Hail
• Flood
• Theft
• Drought

• Management Options
• Crop Insurance
• Hail Insurance
• Multi peril
• Government Programs
• Property and liability insurance

14
SOCIAL AND LEGAL

• Risks
• Environmental
• Pesticide
• Herbicide usage
• Pollutants
• Structural
• Type of ownership
• Estate planning
• Contracts
• Urban Expansions

• Management Options
• Proper Usage
• Management
• Liability Insurance
• Records
• Community Involvement
• Legal Advise
• Education

15
HUMAN

• Risks
• Disease
• Accident
• Disabling Event
• Hired Labor
• Hiring and training
• Compensation
• Family

• Management Options
• Health Insurance
• Job Descriptions
• Liability Insurance
• Disability Insurance
• Business Plan
• Estate Plan
• Life Insurance

16
GOVERNMENT

• Risks
• Complexity
• Current and Future Legislation
• Funding/payments
• Regulations

• Management Options
• Compliance
• Education
• Involvement and participation

17
Why Do Farmers Need Insurance?

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

18
History of Crop Insurance
19
History of Crop Insurance

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

20
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

21
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

22
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

23
History of Federal Crop Insurance

• Multi-Peril Crop Insurance (MPCI)
• first attempt - 1899
• Ag legislation due to Depression of early 30s
• Agricultural Adjustment Act of 1933
• Commodity Credit Corporation
• 1936 presidential campaign issue
• Federal vs. private program

24
History of Federal Crop Insurance

• Federal Crop Insurance Act of 1938
• Federal Crop Insurance Corporation (FCIC)
• agency of USDA
• 1939 first insurance program
• wheat for wide variety of natural causes
• losses exceeded premiums first year due to dry
  conditions
• 1943-44 suspended for Congressional study

25
History of Federal Crop Insurance

• Reauthorized in 1945
• added risks and crops and other features
• 1947
• loss ratio less than 1.00 for the first time
• loss ratio loss paid/premium collected
• more premium collected than losses paid
• 1956
• offered for 24 crops in 948 counties
• However participation still low

26
History of Federal Crop Insurance

• 1970
• task force appointed to establish premiums on an
  individual farm basis rather than County yields
• Disaster program is a barrier for Crop Insurance
• 3.4 billion in disaster payments from 1974 - 1980

27
History of Federal Crop Insurance

• Federal Crop Insurance Act of 1980
• changes to FCIC programs
• exclude Crop Hail from FCIC Policy
• private insurance industry enlisted as the
  primary delivery system
• reinsured explicitly by FCIC
• number of crop acres increased by 81
• coverage in nearly 3,000 counties

28
History of Federal Crop Insurance

• 1994 Disaster Legislation rescinded in favor of
  crop insurance
• 1994 Federal Crop Insurance Reform Act
• crop insurance protection mandatory for
  eligibility
• deficiency payments
• FHA loans, etc

29
History of Federal Crop Insurance

• Result?
• 70 of all eligible crop acres insured
• Catastrophic (CAT) coverage introduced to take
  place of disaster payments
• 50 of yield and 60 of FCIC forecast price
• completely subsidized by federal government
• Requirement repealed the next year, but
  enrollment has remained high

30
History of Federal Crop Insurance

• 1996 Freedom to Farm Act
• Amended Act of 1980
• Repealed the requirement for mandatory
  participation
• Risk Management Agency (RMA) created
• administer FCIC programs
• administer risk management and other education
  programs
• Crop Revenue Coverage (CRC) was introduced

31
History of Federal Crop Insurance

• Agricultural Risk Protection Act of 2000 (ARPA)
• Increased producer subsidies
• Revised subsidies of other plans to put on equal
  field with traditional MPCI
• FSA and RMA will work together to correct
  information databases
• Established new procedures for insuring multiple
  crops on the same land.

32
History of Federal Crop Insurance

• ARPA, cont.
• Improve program compliance and integrity
• provided for pilot programs for Livestock
• provided for Electronic Availability of Crop
  Insurance Information
• 2007 Farm Bill and beyond?????

33
Features of Crop Insurance
34
Why U.S. Crops FailRecent Industry Total
35
Key Players in Crop Insurance

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

36
Basic Components of the Industry
Farmers
Insurance Sales Agents (Most agents work for more
than one company) Responsible for Sales and
Premium Collection of the Farmer-paid Portion
Private Insurance Companies Responsible for Loss
Adjustment, Reinsurance and Delivery of the
Program and Contribute to Policy Development
Federal Crop Insurance Corporation
(FCIC) (Managed by USDA/RMA) Responsible for
Policy Development, Rating, Reinsurance,and
Administrative Expense Support (as negotiated
and contracted by the Standard Reinsurance
Agreement)
37
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

38
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

39
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

40
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

41
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

42
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

43
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

44
Insurance Cycle
45
Crop Insurance Products and Applications
46

• Crop
• Hail
• Insurance

47
Crop Hail Insurance

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

48
Crop Hail Coverage

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

49
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

50
Crop Hail Application

• Insured selects amount of coverage
• Insured selects policy type
• Example 1
• 300 acres of corn that will make 150 bushels per
  acre. The farmer has 100 interest and the value
  of the corn is 2.25 per bushel. The farmer
  wants to insure the crop to value. How much
  insurance would the farmer purchase?

51
Crop Hail Application

• 150 bushels x 2.25 per bushel 337.50 per acre
  coverage
• 337.50 x 300 acres 101,250 total coverage
• Farmer selects full coverage policy
• suffers a 10 loss on all 300 acres
• 101,250 x 10 10,125 payment

52
Crop Hail Application

• Example 2
• 40 acres of soybeans averages 55 bushels per acre
• The value of the beans is 6.00 per acre and the
  farmer has 100 interest

53
Crop Hail Application

• 55 bushels x 6.00 per bushel 330 per acre
• 330 x 40 acres at 100 interest 13,200
• Farmer purchases 5 disappearing deductible
  policy
• Hail causes a 10 loss on all 40 acres
• 10 - 5 5
• 5 x 1.25 multiplier 6.25 payable loss
• 13,200 x 6.25 858 payment

54

• Federal Crop Insurance

55
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

56
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

57
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

58
MPCI Actual Production History

• The development of the APH is the MOST IMPORTANT
  component of Multiple Peril Crop Insurance.
• The Actual Production History for a yield record
  includes from 4 to 10 continuous years of ACTUAL
  PLANTED yield history.
• If APH can not be determined a county T (base)
  yield will be used.

59
MPCI Actual Production History

• Creating APH for new policies (lt4 years of
  records)
• No years of production provided
• 4 years at 65 of the T-Yield
• 1 year of production provided
• 3 years at 80 of the T-Yield
• 2 years of production provided
• 2 years at 90 of the T-Yield
• 3 years of production provided
• 1 year at 100 of the T-Yield

60
MPCI Application

• Loss Payment and Loss Ratio
• The loss payment is calculated by subtracting
  production from the yield guarantee and
  multiplying the result by the MPCI price
• The loss ratio is calculated by comparing the
  loss payment to the premium collected for
  coverage
• Loss Ratio Loss Payment/Premium

61
MPCI Application

• How it works
• Bushel Guarantee
• 100 Bu./A. x 75 x 100 A. 7,500 Bu.
• Production to Count
• 60 Bu./A. x 100 A. 6,000 Bu.
• Production Loss 1,500 Bu.
• Loss Payment
• 1,500 Bu. x 2.20 price election 3,300

62
MPCI Insurance Application
Examples APH Coverage for Corn
Coverage Level 75 (Select 50-85 in
Increments of Five
APH 140 bu per acre
Yield Guarantee 105 bu per acre

X
Elected Price 2.45 Established by FCIC
Amount of Protection 257.25 per acre

63
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

64
CAT Insurance Application

• How it works Corn Soybeans
• Planted Acres 300 200
• APH Yield 120 bu. 40 bu.
• RMA Projected Price 2.25 5.60
• CAT Fee 100.00 100.00
• Indemnity Price (55) 1.24 3.08
• Guaranteed Yield (50) 60 bu. 20 bu.
• Actual Yield 40 bu. 16 bu.
• Insured Loss 20 bu. _at_ 1.24 4 bu. _at_ 3.08
• Indemnity Per Acre 24.75 12.32
• Total Payment 7,425.00 2,464.00

65
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

66
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.

67
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

68
Crop Revenue Coverage (CRC) / Revenue Assurance
(RA) Application

• About CRC/RA
• These programs provide comprehensive protection
  through a dollar guarantee
• Additional protection is provided if the harvest
  futures price (harvest price) exceeds the base
  price (RA harvest price option must be selected
  to apply)
• Dollar Guarantee
• The guarantee is the historical yield multiplied
  by the selected level of coverage (50-85 in
  increments of 5) the insured acreage, and the
  higher of the base or harvest price
• A maximum increase or decrease between the base
  and harvest price applies to CRC only (not RA)

69
Crop Revenue Coverage (CRC) / Revenue Assurance
(RA) Application

• Base price (planting price)
• Example February average for December CBOT corn
  contract
• Harvest price (near harvest time)
• Example October average for December CBOT corn
  contract

70
Crop Revenue Coverage (CRC) / Revenue Assurance
(RA) Application

• Value of Production
• The actual yield, plus any appraisals, multiplied
  by the harvest price
• Loss Payment
• To calculate a payable loss, subtract the value
  of production from the dollar guarantee

71
Crop Revenue Coverage (CRC) / Revenue Assurance
(RA) Application
How it Works
Harvest Price Harvest Price is lower
than is higher than Base Price Base
Price
Dollar Guarantee 120 Bu./A. x 75 x 100A. _at_
2.83/Bu. 25,470 _at_ 2.50/Bu. 22,500 Value
of Production 60 Bu./A x 100A. _at_ 2.05/Bu.
12,300 _at_ 2.60/Bu. 17,400 Loss Payment
(Indemnity) 13,170 5,100
72
CRC Insurance Application
Examples CRC Coverage for Corn
Coverage Level 75 (Select 50-85 in
Increments of Five)
APH 140 bu per acre
X
X
Min. Revenue Guarantee 257.25 per acre
Base Price 2.45

73
RA Insurance Application
Examples RA Coverage for Corn
Coverage Level 75 (Select 50-85 in
Increments of Five)
APH 140 bu per acre
X
X
Min. Revenue Guarantee 257.25 per acre
Projected Harvest Price 2.45

74
Crop Revenue Coverage (CRC) / Revenue Assurance
(RA) Application

• Benefits
• Fosters greater grower confidence to do
  pre-harvest crop sale to improve profits
• Loss payments more closely track economic results
• May be viewed more favorably as loan collateral

75
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

76
IP Application

• How it works
• Example 100 Share APH65 bu/ac Coverage75
• Dollar Guarantee
• 65 bu/ac x 0.75 coverage x 3.15/bu projected
  price
• 154.00 per acre guarantee
• Value of Production (harvest)
• 30 bu/ac x 2.00/bu harvest price 60.00 per
  acre
• Loss Payment (indemnity)
• 100 percent share 154.00 - 60.00 94.00
  per acre

77
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

78
GRIP Application

• How it works
• Example Farmer buys 85 coverage and selects
  244 protection per acre on 200 acres 48,800
  total
• Expected County Revenue is 271/acre
• Trigger Revenue is 0.85 x 271 230/acre
• Dollar Guarantee
• FCIC issues County Revenue of 225/acre
• Payment Calculation Factor is 230-225/2300.022
• Loss Payment (indemnity)
• Payment Calculation Factor x Policy Protection
  Level 0.022 x 48,800 1,074.00 indemnity

79
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

80
AGR Application

• How it works
• 80 coverage level and 90 payment rate chosen
• Approved Adjusted Gross Revenue 94,900.00
• Actual Revenue from the farm 21,000.00
• Liability 94,900 x 0.80 x 0.90 68,328.00
  then
• Loss Inception Point 94,900.00 x .080
  75,920.00
• Loss Scenario
• 75,920 - 21,000 revenue to count 54,920
  loss
• of revenue then
• 54,920 x .090 payment rate 49,428 indemnity

81
More Examples

• MPCI with 85 Coverage Level
• MPCI with 75 Coverage Level and Basic Crop Hail
  Coverage
• RA with 75 Coverage Level and Without Harvest
  Price Option

82
(No Transcript)
83
(No Transcript)
84
(No Transcript)
85
(No Transcript)
86
(No Transcript)
87
(No Transcript)