3/E - Crop Insurance Flashcards
Crop Insurance Definitions
Agricultural Producer
- A business that grows and sells crops for a profit
Crop Insurance
- Insurance that covers losses to a crop’s profitability
Two types:
- Crop-yield insures against losses to actual crops
- Crop-revenue insures against losses to crop value when prices change or the crop is damaged
Crop-Yield Insurance
- Covers physical losses to the crop
- 2 common forms:
a. Crop-Hall Insurance
b. Multi-Peril Crop Insurance (MPCI)
Crop-Hail Insurance
- Type of Crop-Yield Insurance
- Covers more perils than just hail
- Typically available through private insurers
- Not reinsured or government subsidized
Coverage Details
More Important Details
- Rated on an acreage basis
- Coverage can be a percentage of expected crop value
- Policies sometimes have a minimum amount of losses required before they will pay anything
Covered Perils
Perils Covered (in addition to hail)
- Fire
- Lightning
- Wind (by endorsement)
- Transit to storage after harvest
- Wildfire
Crop-Hail Exclusions
Typical Exclusions
- Failure to harvest a mature crop
- “Unit normal visible stand” (i.e. crop must be up to be covered)
- “Before effective hour” (i.e. damage prior to start of policy)
- Crops that can be recovered by harvesting
- Crop not owned by the insured (e.g. share crops)
- Damage to trees, bushes, fruit, or nut crops
- Damage to leaves or plants, unless affecting the actual crop
Covered Perils for Multi-Peril Crop Insurance (MPCI)
Weather-related:
- wind
- drought
- excessive moisture
- frost
- flood
- lightning
- tornado
- hurricane
- hail (by endorsement)
Other perils:
- volcano
- earthquake
- disease
- insects & wildlife
- insect infestations (if unavoidable)
- irrigation failure (if unavoidable)
- low/poor quality yields
- prevented planting
- late planting/replanting
Government Support and Regulation
- MPCI creates massive exposure for insurers
- In the aftermath of the Dust Bowl, FDR’s New Deal created several federal programs to help protect against future losses
- Government solution:
a. subsidizes it with the Federal Crop Insurance Corporation (FCIC)
b. regulates it through the U.S. Department of Agriculture (USDA)
Policy Changes
Rules for Policy Changes
- Policy changes and increases only allowed before sales closing date
- Requires planting to be done by set planting dates
- No changes during growing season: must remain in effect for an entire crop year
- After the first crop year, a farmer may change or cancel policy, but only before the cancellation date
Exclusions
MPCI excludes losses caused by:
- Neglect or malfeasance
- Failure to reseed
- Failure to follow good farming practices
Crop-Hail vs. MPCI
Differences Between Crop-Hail and MPCI:
Crop-Hail Insurance:
- Private
- Uses agreed-upon purchase times
- Insurers can choose whom to insure
Multi-Peril Crop Insurance:
- Government subsidized
- Has restricted purchase times
- Government forces insurers to cover any farmer
More Differences Between Crop-Hail and MPCI:
- With Crop-Hail insurance, coverage levels based on acreage
a. this helps when hail destroys part of a field without touching the rest of the crop - Under Multi-Peril (MPCI), coverage is based on “units” (one unit = all of a farmer’s acreage in one county)
The NCIS
Federal Jurisdiction of Crop Insurance
Multi-Peril Crop Insurance (MPCI) is supervised by the National Crop Insurance Services (NCIS)
NCIS:
- International not-for-profit organization
- Provides risk management tools to producers
- Writes over a million policies each year
- Issues both crop-hail insurance and MPCI
Federal Crop Insurance Act
- Federal Crop Insurance was authorized in 1930 and expanded greatly by the Federal Crop Insurance Act in 1980
- The Act applies more coverages, crop types, and regions to NCIS jurisdiction
- It is still voluntary, but most of America’s producers choose to purchase crop insurance
Risk Management Agency (RMA)
- Promotes sound risk management practices
- Subsidizes the premiums of crop growers for federal crop insurance policies
- Reimburses private insurers for administrative costs
- Sets critical production dates
- Assigns commodity market prices to protect the producer’s revenue
Crop Policy Changes and Pilots
- Pilot program lets the RMA test policies in small areas before releasing to the rest of the country
- During this time, the RMA collects data on how the new policy performs
- New policies are typically pilots for several years
Government Support Overview with Dates
- US Dept of Agriculture (USDA) - created in 1862
- Risk Management Agency (RMA) - created in 1996
- Federal Crop Insurance Corporation (FCIC) - created in 1938, expanded in 1980
- National Crop Insurance Services (NCIS) - 1915, expanded in 1989
Multi-Peril Crop Insurance (MPCI)
- Many types, covering yield losses, revenue losses, or both
- Often bundled together under Common Crop Insurance Policy Basic Provisions
Actual Production History
Actual Production History (APH): history of a farm’s crop yield over several years (requires at least 4 years of records)
APH Policy:
- Protects against low yield
- Guarantees the crop will produce a set percentage of its APH
- Crops typically insured at 50% to 85% of the APH
Yield Guarantee:
- The minimum amount of yield that the policy guarantees for the insured crop
- Coverage kicks in if the crop produces less than this amount
Yield Guarantee
Yield Guarantee (APH yield per acre) x (percentage of coverage)
Example: With 50% coverage, you multiply the “per acre APH” by 0.5 to get the yield guarantee.
Percentage of Projected Price:
- Insured chooses a percentage of the expected price of insured crop
- Expected price is determined by the RMA
That is what the insurer pays, regardless of how much the crop is actually worth at harvest time.
Indemnity Equation
(Yield guarantee-Actual production) x Percentage of crop price x Crop price (set by RMA) x Insured's share in the crop \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Total Indemnity
T-Yields
Transitional Yield (T-Yield)
- Actual Production History (APH) requires at least 4 years of records
- If a farmer does not have 4 years of records, the data is taken from other farms in the county
Calculating APH using Transitional Yields
- No records: use 65% of the Transitional Yield as farmer’s APH
- 1 year of records: use 80% of the Transitional Yield for the missing 3 years
- 2 years of records: use 90% of the Transitional Yield for the missing 2 years
- 3 years of records: use 100% of the Transitional Yield for the missing year
Crop-Revenue Insurance
How does Crop Revenue coverage work?
Crop-Revenue Insurance
Insurance that protects against loss of crop value
Includes losses from:
- Decline in prices during the growing season
- Low crop yields
- A combination of both
MPCI Policies
- Actual Production History (APH)
- Actual Revenue History (ARH)
- Yield Protection (YP)
- Revenue Protection (RP)
- Revenue Protection with Harvest Price Exclusion (RP-HPE)
- Whole Farm Revenue Protection (WFRP)
- Adjusted Gross Revenue (AGR) and AGR-Lite
- Area Risk Protection Insurance (ARPI)
- Dollar Plan
- Margin Protection (MP)
- Livestock
- Rainfall Index (RI)
- Vegetation Index (VI)
- Pasture, Rangeland, Forage (RI-PRF)
- Small/Coarse Grains
- Catastrophic Risk Protection Endorsement (CAT Coverage)
- High-Risk Alternate Endorsement (HR-ACE)
- Supplemental Coverage Option (SCO)
APH Policy
Yield guarantee:
- (APH yield per acre) x (percentage of coverage)
- Insured chooses a percentage of the expected price (set by RMA) of insured crop
Actual Revenue History (ARH)
- Pilot policy
- Similar to APH, but guarantees a percentage of average revenue, not yield
- Covers lost revenue due to low yield, falling prices, bad quality, or any combination of these
- Works as endorsement to the Common Crop Policy
- Adds a unique set of provisions for each covered crop
Yield Protection (YP)
- Protects against losses due to low yield
- Farmer chooses a percentage of the projected price
- “Projected price”: the crop’s expected sell price, according to the board of trade/exchange (as outlined in the Commodity Exchange Price Provisions)
- Any losses are paid using the agreed-upon percentage of the projected price
Revenue Protection (RP)
Covers revenue losses due to low yield, low prices, or a combination of both
Uses two prices:
- Projected price to set coverage
- Harvest market price to determine if indemnity is due
Revenue protection guarantee: average yield, multiply it by the percentage of coverage x projected price
Calculated revenue = (actual production) x (harvest market price)
Revenue Protection with Harvest Price Exclusion (RP-HPE)
Same as RP, but revenue guarantee does not go up if the harvest price goes up.
Whole Farm Revenue Protection (WFRP)
- Insures entire farm revenue, not individual crops
- Uses info from Schedule F tax forms and yearly reports to establish approved farm revenue
- Farmer sets coverage at a percentage of this number (50% - 85%)
- Policy pays indemnity if farm’s actual revenue falls below the insured revenue
Area Risk Protection Insurance (ARPI)
- New policy replacing GRP and GRIP
- Area-based coverage
- Triggered if entire county experience a loss
Three options:
- Area Revenue Protection
- Area Revenue Protection with Harvest Price Exclusion
- Area Yield Protection
Dollar Plan
- Covers loss in value caused by damaged crops
- RMA sets maximum dollar amount of insurance per acre
- Insured chooses a percentage (50% or higher) of that number in order to set the dollar amount of coverage
- Policy pays an indemnity if actual value per acre is lower than dollar amount of insurance
Margin Protection (MP)
- Pilot policy that insures farmer’s operating margin
- Expected Margin = Expected Revenue - Expected Costs
- Area based plan
- Coverage is set according to how much margin the county as a whole expects
- Insured can choose coverage between 70% and 90% of this expected margin
- Policy pays indemnity if the county’s margin is lower than expected
Livestock Policies
- Available for swine, cattle, lambs, and milk
- Protect against declining market prices
- Uses prices from the Chicago Mercantile Exchange Group
Two types:
- Livestock Risk Protection:
a. insures against falling market prices
b. pays indemnity if the margin on insured livestock ends up being smaller than expected
RI & VI
Rainfall Index (RI) policies pay an indemnity if the area gets less rainfall than usual
Vegetation Index (VI) policies pay an indemnity if there is less vegetation growth in the area than usual.
These are area-based plans, so coverage does not depend on the individual farm’s experience, but rather on general weather trends.
Pasture, Rangeland, Forage (PRF)
- Currently a pilot policy
- Covers acres used as pasture, rangeland, or forage
- Based on the area’s average precipitation
- Triggered when there is less rainfall than usual
- Helps offset costs of buying feed and other risk management measures
Small and Coarse Grains Provisions
- Cover both crop yield and reduction in crop value
- Grains must be grown on “insurable acreage”
a. small grains: wheat, barley, oats, flax, rye, buckwheat
b. coarse grains: corn, grain sorghum, soybeans
Small/Coarse Grains - Covered Perils
- Hail
- Drought
- Excessive moisture
- Fire
- Wildlife
- Failure of irrigation (if unavoidable)
- Insect damage and plant diseases (assuming good farming practices)
Small/Coarse Grains - Insurance Period
Insurance period:
The period between when the crop is planted to when it’s harvested
Other events that can set end of insurance period:
- End of the crop’s season
- Complete destruction of the crop
- Final adjustment of a claim
- Abandonment of the crop
Catastrophic Risk Protection Endorsement (CAT Coverage)
- Covers losses exceeding 50%
- Pays 55% of the price of the crop (according to the Risk Management Agency)
- Premiums paid by government
- Has administrative fee paid by farmer for insured crops
High-Risk Alternate Endorsement (HR-ACE)
- For farmers with some crops on high-risk land and some crops on non-high risk land
- Adds coverage for the high-risk land that is lower than the coverage for the rest of his crops
Supplemental Coverage Option (SCO)
- Area-based coverage that can help pay deductibles on underlying policy
- Follows coverage of underlying policy, except in what triggers coverage:
a. triggered by county-wide losses - Premiums are 65% subsidized
Duties of Insured
In the event of crop damage, the insured must:
- File a claim within 72 hours
- Protect crops from further damage
- Leave samples of the damaged crop intact in each field, so the adjuster can inspect them
Acreage Reporting:
Every crop year, the farmer must submit an acreage report, due by the acreage reporting date
More Duties of Insured
The insured must:
- Plant correctly
- Maintain the crop correctly
- Use required fertilizers, pesticides, soil additives, etc. (does not apply to organic farming)
Site Assessment
During a claims site assessment, the adjuster records:
- Location: latitude and longitude
- Plant samples
- Soil samples
- Normal yields for the region
- Comparison with similar crops in the same area
Helpful tip: taking photos or videos
Loss Payments
Loss payments:
- Usually made at actual cash value
- Can be made in multiple payments
Always refer to the policy at hand!
Cancellation/Nonrenewal
- Insurance applications must be signed before the closing date specified by the NCIS
- Policies may not be canceled during the first crop year
Insurance coverage:
- Continuous
- Cancellation only allowed in writing and before the cancellation date specified in the policy
Crop Insurance Thresholds
Deductibles vs. Thresholds
Crop insurance uses thresholds instead of deductibles
- “Threshold” is a percentage of insured crops
- Losses BELOW threshold are NOT paid
- Losses ABOVE threshold have full policy coverage
Final Notes about Crop Insurance
- Forms are “non-standard”
- Coverage period usually limited to the growing season
- Annual Policy Form is the most common
- Also available are Three-Season, Five-Season and Continuous-Until-Cancelled Forms
