Become an Expert: FAQ
What is Crop Insurance?
Crop insurance in America can trace it roots all the way back to 1880, when private insurance companies first sold policies to protect farmers against the effects of hail storms. These Crop-Hail policies are still sold today by crop insurance companies and are regulated by individual state insurance departments. In 2016, farmers spent $981 million on Crop-Hail insurance to protect $36 billion worth of crops.
In addition, farmers may also purchase Federal Crop Insurance, also known as multi-peril crop insurance, a risk management tool that protects against the loss of their crops due to natural disasters such as drought, freezes, floods, fire, insects, disease and wildlife, or the loss of revenue due to a decline in price. This form of crop insurance is federally supported and regulated and is sold and serviced by private-sector crop insurance companies and agents.
Participation in multi-peril crop insurance has grown rapidly since the private sector began delivering it in 1981. Back then, only 45 million acres and $6 billion worth of crops were insured. By 2016, 1.2 million polices were sold protecting more than 130 different crops covering 290 million acres, with an insured value of $100 billion.
The Federal program came to prominence following years of costly, inefficient ad hoc disaster bills as a way to speed assistance to farmers when they need it most, while reducing taxpayer risk exposure. Today, crop insurance is the cornerstone of U.S. farm policy.
Is Crop Insurance like other forms of insurance?
All insurance, from auto to life, health, and crop insurance works best when it expands the number of people it covers – a concept known as the “ risk pool.” That is because the greater the participation, the more widely risk can be spread. And by spreading the chance of loss among a diverse group of insureds, premiums become more affordable for everyone involved.
Additionally, participants in all forms of insurance must pay premiums and shoulder deductibles. This gives the insured some ownership of their own protection and prevents participants from engaging in risky behavior – sometimes referred to as “ moral hazard.”
In this sense, crop insurance works like other forms of insurance. However, the parallels are not perfect because agriculture is a unique kind of business that suffers unique kinds of losses. Unlike other insurance lines, agricultural losses tend to be geographically targeted and severe.
For example, there is little chance that every car in a city will be simultaneously totaled, or that every person in a state will need medical help at the same time. But a single flood, storm, or drought can cause a catastrophic loss for every farming operation in a county or region, which makes it more difficult to insure.
Because of this higher risk, the concentration of losses, and the likelihood for wide-scale disaster, crop insurance policies would be cost prohibitive and very limited without some form of government support. Thus, America has a crop insurance system based on a public-private partnership between private insurance providers and the U.S. Department of Agriculture.
Under this arrangement – spelled out in a contract known as the Standard Reinsurance Agreement – companies that sell crop insurance must sell a policy to any eligible farmer at the premium rate set in advance by the Federal government. In addition, insurers cannot refuse to provide protection, raise the premium rate or impose special underwriting standards on any individual eligible farmer, regardless of risk.
Who benefits from crop insurance?
Farmers use crop insurance to financially recover from natural disasters and volatile market fluctuations; pay their bankers, fertilizer suppliers, equipment providers and landlords; purchase their production inputs for the next season; and give them the confidence to make long-term investments that will increase their production efficiency.
This may explain why most farm leaders across the country have called crop insurance their top risk management tool and a policy priority heading into the Farm Bill debate. Of course, others also benefit when farmers have proper protection against uncontrollable risks. For example:
• The rural economy is largely dependent on farmers’ ability to rebound after disaster strikes. A study explained this relationship following the historic 2012 drought, noting that crop insurance saved 20,900 jobs – with an annual labor income of $721 million – in Iowa, Nebraska, South Dakota, and Wyoming alone.
• Absent crop insurance, the cost of natural disasters that harm farmers would fall directly on U.S. taxpayers, which happened repeatedly before the widespread use and availability of crop insurance. In fact, 42 emergency disaster bills in agriculture cost taxpayers $70 billion from 1989 to 2012, according to the Congressional Research Service. Since crop insurance emerged as the cornerstone of farm policy, farmers shoulder a portion of the risk along with private-sector crop insurance companies, and the federal government.
• Every American consumer relies upon agriculture for food and clothes, and agriculture accounts for nearly five percent of America’s economy and around 10 percent of U.S. employment. Therefore, it is in the public interest to have a financially stable agricultural sector and a publicly-supported safety net for farmers, who increasingly face variable weather patterns and unfair competition from foreign countries that subsidize heavily and violate international trade rules. Crop insurance is a critical part of this safety net.
What is National Crop Insurance Services?
National Crop Insurance Services (NCIS) provides a unique suite of services to the crop insurance industry ranging from actuarial and analytical support to the development of crop loss adjustment standards and industry-wide training for both company staff and industry loss adjusters. This is accomplished through the financial support and active participation of NCIS member companies. NCIS member companies participate through a network of regional committees typically comprised of senior company field and loss adjuster staff. In essence, the NCIS regional committee system provides a grass-roots, ground-truthing infrastructure for the industry. In addition, NCIS members serve on industry-level operational committees that support each NCIS service area. Membership of these working committees is comprised of senior management company staff or relevant subject matter experts for a given operational area. The membership is supported by the professional and technical staff housed at NCIS. NCIS staff represent a diverse mix of individuals with training in agronomy, actuarial methods, economics, business, law, and information technology.
NCIS is the only entity that fully supports both the state-regulated and federally-regulated lines of the crop insurance business. In relation to federally-regulated crop insurance, NCIS is distinctly positioned to represent the industry on an array of functional business areas including policy and procedural development; actuarial and economic analysis; legal analysis; training and education; and industry data processing issues. Each of these service support areas provide economic value to the companies by eliminating duplicative efforts or by providing industry infrastructure support that would be prohibitively expensive on an individual company basis. For the state-regulated segment of the crop insurance industry, NCIS serves as the industry actuarial statistical agent and advisory organization. This service allows companies to pool their actuarial data in order to access and utilize an industry-level statistical database. No individual company possesses sufficient credible data to promulgate its own premium rates. In its role as liaison between the companies and the individual state insurance departments, NCIS relieves companies from the separate burden of filing statistics and policy forms with each department.
NCIS's industry-funded agronomic research program serves to improve and validate crop loss adjustment procedures for both state and federally regulated lines of crop insurance. This research is conducted at major agricultural universities throughout the U.S. Application of science-based crop loss adjustment procedures ensures that farmers are paid fairly and accurately thus contributing to the integrity of the crop insurance program. The research program allows companies to share in the cost of developing crop loss adjustment procedures and standards, rather than this cost being borne individually by each company. The cost to develop the crop loss procedures is miniscule in comparison to the $136 billion underwriting risk.
As the only organization representing all companies writing crop insurance in the U.S., NCIS through its education and public relations efforts serves as the industry voice providing clear and singular messaging to both the media and the public.
What other national trade associations represent the crop insurance industry?
In addition to National Crop Insurance Services, crop insurers are represented by several organizations that work closely together to promote a strong farm safety net. Among them are:
• American Association of Crop Insurers (AACI) – A national trade association that represents numerous insurance providers and agents. Its purpose is to promote public policies that foster the effective and efficient construction, regulation and delivery of crop insurance. AACI was founded by industry leaders in 1980 after Congress passed legislation to establish private-sector delivery of Federal crop insurance.
• Crop Insurance Professionals Association (CIPA) – A membership of independent crop insurance agents that advocates for beneficial legislation and promotes the exchange of information among agents and with farm groups, insurance providers, and lawmakers.
• Crop Insurance and Reinsurance Bureau (CIRB) – Founded in 1964 and headquartered on Capitol Hill, CIRB represents numerous insurance providers and international reinsurers on crop insurance-related legislative and regulatory matters before the United States government.
• Independent Insurance Agents & Brokers of America – Sometimes called the Big “I,” the Independent Insurance Agents & Brokers of America is a national alliance of more than 250,000 businesses that offer all types of insurance and financial services products, including crop insurance.
Who shoulders risk in crop insurance?
Absent crop insurance, the cost of natural disasters that harm America’s farmers would fall directly on the laps of taxpayers, which happened repeatedly before the widespread use and availability of crop insurance. In fact, 42 emergency disaster bills in agriculture cost taxpayers $70 billion from 1989 to 2012, according to the Congressional Research Service.
The 2014 Farm Bill cemented crop insurance as the cornerstone of farm policy. Today, farmers are asked to pay for part of their own safety net and risk is more evenly distributed among three parties through a cost-sharing structure.
• Farmers must first purchase crop insurance before being protected, and must shoulder a portion of the losses through deductibles before receiving an indemnity for the verifiable loss. On average, a farmer in the United States must lose at least 25 percent of the value of their crop before a crop insurance policy kicks in – losses that taxpayers may have been asked to cover in ad hoc disaster bills.
• Crop insurance providers pay indemnities from their own coffers on most claims, thus minimizing cost to taxpayers. And when indemnities paid are greater than premiums received, companies experience an underwriting loss and lose money. Since the inception of the public-private partnership, insurers have experienced net underwriting losses in 1983, 1984, 1988, 1993, 2002 and 2012.
• The Federal government acts as a reinsurer by providing insurance for the insurance companies. As such, the government bears an agreed-upon portion of the companies’ underwriting losses, and in return, the government takes a share of the companies’ underwriting gains. In short, as a reinsurer the government will help shoulder excessive losses in bad years like 2012, but will receive underwriting gains from farmer premiums in good years.
Why is private-sector delivery of crop insurance important?
Private-sector delivery is a key strength of crop insurance because time is of the essence when a major loss occurs. Even during the government shutdown in 2013, the private sector continued to pay indemnities to farmers, ensuring that they recovered from their losses.
Government-run programs of the past were notoriously slow in their ability to deliver payments to farmers, often taking as long as 18 months to two years after a disaster for help to finally arrive. Crop insurance, on the other hand, is a highly dynamic program, which is closely tailored to each farmer’s operation and can deliver assistance within weeks of a claim being finalized.
Critics have advocated government takeover of crop insurance delivery, but this approach has been soundly rejected by lawmakers, administration officials and farm leaders time and time again. In fact, the government delivered crop insurance decades ago but tapped the private sector to help in 1981 amid low program participation and high taxpayer cost for farm policy.
Today, the private-sector crop insurance companies employ more than 20,000 licensed agents, certified loss adjusters and company staff, who sell policies to farmers and determine the extent of losses, collect premiums and pay claims. Furthermore, companies invest heavily in technology, infrastructure efficiency, training programs, and service improvements for farmers and ranchers.
How and why does the government encourage crop insurance participation?
Congress created and provides funding for the modern-day crop insurance system through the Federal Crop Insurance Corporation (FCIC) as a way to help farmers manage the risks of natural disasters and market fluctuations. The activities of FCIC are carried out by the Risk Management Agency (RMA) of USDA. Lawmakers intended for the system to largely replace the need for ad hoc disaster legislation, thereby helping to shelter taxpayers from the full costs of agricultural disasters and avoiding the need to enact new disaster assistance following every major catastrophic event.
To this end, FCIC/RMA sets program standards, approves new products, sets premium rates and discounts farmer premiums. The Federal government further makes crop insurance affordable for farmers by offsetting a portion of the delivery costs that would otherwise be built into the premium. Finally, the government reinsures crop insurance providers and shares in the underwriting gains and losses of the program.
Thanks to the success and effectiveness of crop insurance, there have been no widespread calls for ad hoc crop disaster bills over the past several years, including 2011 and 2012, two of the worst weather years on record. By comparison, 42 emergency disaster bills in agriculture cost taxpayers $70 billion from1989 to 2012, according to the Congressional Research Service.
What steps do crop insurers take to ensure taxpayer dollars are efficiently used?
The structure of crop insurance is such that companies have dollars at risk on every policy and are thus financially incentivized to reduce errors and cases of waste. Thus, the industry has extensive training and education efforts including a certified loss adjuster proficiency program in which all adjusters must participate.
The industry and the U.S. Department of Agriculture also work closely together to fight fraud, waste and abuse. There are numerous monitoring, review, audit and other oversight requirements in the Standard Reinsurance Agreement and collaborative efforts to deter and identify false claims have resulted in the pioneering use of data mining, where thousands of claim reviews are conducted to ensure a high level of program integrity.
Reducing improper payments – a closely-watched standardized measure of waste and efficiency for all major federal spending programs – has also been a long-term goal for insurers and the USDA. An improper payment occurs when funds go to the wrong recipient; when the correct recipient receives too little or too much; or when the recipient uses funds in an improper manner. Many errors are simply rooted in data entry and reporting mistakes.
Crop insurance’s 2016 improper payment rate of 2.02 percent is down from 2.2 percent in 2015 and 5.58 percent in 2014. By comparison, the government-wide improper payment rate was 4.67 percent in 2016 and 4.39 percent in 2015.
What is the Standard Reinsurance Agreement (SRA)?
The Standard Reinsurance Agreement (SRA) is the formal contract between the Federal government (USDA/RMA) and private-sector insurance providers (AIPs). It spells out the details of the partnership that makes crop insurance unique.
The latest agreement took effect in 2011, and it defines the contractual arrangement between the USDA and Approved Insurance Providers (AIPs). The SRA spells out expense payments and risk-sharing by the government, including the terms under which the government provides reinsurance (i.e., insurance for insurance companies) on eligible crop insurance contracts sold or reinsured by insurance companies. Thus, the SRA plays a central role in determining program costs. The SRA, however, does not affect policy premiums paid by farmers, which are based on the Risk Management Agency’s (RMA’s) estimates of risk and on premium discounts set by statute.
The financial performance of the crop insurance industry under the current SRA has been poor. Returns are far below the levels expected at the time of the negotiation and well short of a reasonable return on capital.
Financial returns for crop insurers have dropped markedly under the new SRA, as was found in a 2017 study by economists from the University of Illinois and Cornell University. Crop insurance providers had an average net return on retained premium of 14.1 percent between 1998 and 2010. In sharp contrast, the report noted that from 2011 to 2015 returns averaged only 1.5 percent — a decline of 12.6 percent.
What are Administrative & Operating (A&O) reimbursements?
Whenever a customer writes a premium check for an auto, health, or home insurance product, part of that payment is allocated to the cost of servicing the policy. That is, insurance companies include an expense load in the premium for each policy beyond anticipated losses to offset overhead costs, such as staff salaries, agent commissions, adjusting losses, employee training, computer systems, customer support, office space, marketing, etc. This also includes a profit component for the insurer.
Unlike other types of insurance, crop insurance policies are not loaded for expenses. Why? Because Congress wanted to make policies more affordable so farmers would purchase protection with their own money and leave taxpayers less vulnerable to agricultural risk and ad hoc disaster payments.
Of course, private-sector insurance companies cannot afford to deliver and service 1.2 million policies for free. Insurers still have overhead costs that they need to recoup, even if these costs are not included in the premium. So, the government pays a portion of the delivery costs to insurance companies on farmers’ behalf. This is known as an Administrative and Operating (A&O) reimbursement. Unfortunately for crop insurers, A&O payments do not cover all the costs they incur, which continue to increase over time as more and more Federal requirements and paperwork are piled on insurance providers. In fact, A&O payments have fallen short of actual company delivery expenses, with an average shortfall of 7.7 percent from 1998 to 2015. The shortfall in 2015 alone totaled $777 million. Because expenses tend to increase over time but A&O payments are essentially locked-in under the terms of the SRA, the shortfall is expected to increase in future years.
Who are Approved Insurance Providers (AIPs)?
AIP is an acronym for an Approved Insurance Provider. An AIP is a state chartered property and casualty insurance company that has executed a Standard Reinsurance Agreement (SRA) and/or Livestock Price Reinsurance Agreement (LPRA) with the Federal Crop Insurance Corporation (FCIC). As a party to the SRA, the AIP is authorized to sell and service Federally regulated multi-peril crop insurance companies. There are currently 16 AIPs, which collectively offer coverage in all 50 states on more than 130 different crops. A complete list of what AIPs provide coverage in each state is available here.
To become an AIP, a company must demonstrate that it has the requisite financial and operational resources, organization, experience, internal controls, and technical skills to meet crop insurance program requirements, including addressing reasonable risks. After initial approval, the AIP must continue to demonstrate a satisfactory performance record to hold an SRA for subsequent years. AIPs were first tapped to deliver Federal crop insurance in 1981 after government-delivered insurance failed to gain popularity. Since that time, coverage has expanded greatly thanks in part to private-sector efficiency and ingenuity.
Today, AIPs work closely with a network of agents to tailor coverage for farmers’ individual needs, and they employ thousands of employees who process claims and quickly provide indemnity checks after disaster strikes. They also maintain the vast infrastructure required to service the 1.2 million policies covering 290 million acres nationwide.
What is Revenue Protection and why is it an important policy to offer farmers?
Revenue Protection (RP) provides coverage to protect against loss of revenue caused by low prices or low yields or a combination of both. This crop insurance policy has become a valuable risk management tool for farmers across the United States. More than 75 percent of the Federal crop insurance policies sold today are Revenue Protection.
One of the key components of a revenue policy is the utilization of a fall harvest price. RP policies allows the farmer to use the greater of the fall harvest price or the projected harvest price to determine the revenue guarantee. The farmer automatically has the harvest price protection when buying a Revenue Protection policy, but can choose to exclude it by selecting the Harvest Price Exclusion (HPE). If the farmer opts to do so, he will pay a lower premium rate.
The RP policy is designed to provide additional assurance to those farmers who market their crop before harvest. Many farmers enter a forward contract to sell a portion of their production before harvest. Usually these contracts pay the farmer for the production they deliver after harvest based on contracted prices. If the farmer loses the crop, he is still obligated to deliver under the forward contract. But since the crop is lost, the farmer would have to buy the commodity at the harvest price and deliver that or financially settle the buyer’s contract at the contract price. The purpose of RP is to provide the farmer with sufficient funds to settle the forward contract.
Another example of the importance of RP is for farmers who raise dairy cows, cattle, hogs, poultry or other animals and grow their own feed. If a disaster wipes out feed production, the farmer must enter the market and purchase feed at the going price, which would reflect the effects of the disaster. RP provides farmers with the funds to afford the higher costs should feed prices rise.
How has farm policy evolved over the decades?
Nearly every civilization in human history has had some form of farm policy because of agriculture’s importance. The United States is no different, and its farm policy history can be traced back to colonial times. Through the years, public support for agriculture has taken many forms, from investments in research and education to disaster aid and individual commodity programs. That journey has led us to today’s safety net, with crop insurance as its centerpiece.
Although Federal crop insurance has been around since 1938, for more than half a century it was largely unknown and underused. Because of this, natural disaster management was mostly accomplished in the form of costly ad hoc disasters bills. These bills were not only slow in delivering assistance, but also fell fully on the laps of taxpayers to fund.
Following repeated weather disasters in the 1980s, accompanied by an equally painful farm debt crisis, Congress turned to the General Accounting Office (GAO) for guidance on how to better structure farm policy. The resulting GAO report would help pave the way for today’s safety net.
GAO noted “crop insurance treats disaster victims more equitably” and “provides farmers disaster assistance more efficiently because farmers generally have more incentive to reduce risk under the program than they do under loan and direct payment programs.” And so, crop insurance began its evolution from a small part of the 1980 Farm Bill to a program that insures 90 percent of farmland today. Legislation in 1994, 2000 and 2014 helped spur more private-sector involvement, made the program more actuarially sound, encouraged participation, and improved coverage availability.
Now, farmers design risk management plans that work best for them, and when disaster strikes, private insurers process claims and speed payments to growers—usually within weeks rather than months or years. Best of all, taxpayer risk is lessened because farmers and private-sector insurers share in the program’s cost.
How did crop insurance perform during the historic 2012 drought?
Crop insurance helped shield taxpayers from additional risk and cost in the wake of the historic 2012 drought. In fact, the drop in corn production per acre in 2012 was the largest caused by drought since 1988, a once-in-25-year event. But farmers were not pressing Congress for help because most them were already protected by their crop insurance policies. This was good news for taxpayers, who were on the hook for 100 percent of disaster payments before crop insurance’s emergence as the cornerstone of U.S. farm policy.
Following the 2012 drought, farmers received $17.4 billion in indemnity payments, which was well below the $20 billion to $40 billion initially predicted by some analysts and critics. Importantly, before farmers received a single dime in crop insurance indemnity payments, they shouldered $12.7 billion in losses as part of their crop insurance policy deductibles, and an additional $4.1 billion was paid by farmers to purchase their policies. Thus, farmers absorbed nearly $17 billion in uninsured losses and premium expenditures out of their own pockets before insurance paid anything.
In addition, private insurers had a $1.3 billion net underwriting loss in 2012 because claim payments were well in excess of premiums collected. For its part, the government fulfilled its contractual obligations in its role as a reinsurer under the terms of the Standard Reinsurance Agreement (SRA) and provided premium support to farmers – just as Congress intended.
This public-private partnership performed very well under the pressure of finalizing claims following one of the worst disasters to hit agriculture in decades. Former USDA Under Secretary Michael Scuse summed up the performance in 2013, when he told crop insurers: “To this day, I have yet to have a single producer call me with a complaint about crop insurance. That is a testament to just how well your agents, your adjusters, the companies, and Risk Management Agency (RMA) worked together in one of the worst droughts in the history of this nation.”
How did the 2014 Farm Bill change crop insurance?
The Agricultural Act of 2014, commonly referred to as the 2014 Farm Bill, strengthened crop insurance by adding new products and expanding coverage to previously underserved crops, which increased crop insurance’s role as a key component of the farm safety net.
Among the new programs is the Stacked Income Protection Plan, or STAX. This protection is for upland cotton acreage only, as cotton is not a covered commodity for assistance under other parts of the farm bill. STAX is an area revenue plan that a cotton farmer may use alone or in combination with an underlying policy or plan of insurance, which is similar in design to the existing area plan called Area Revenue Protection.
Another new program, the Supplemental Coverage Option, or SCO, provides certain crop farmers with the option to purchase area coverage in combination with an underlying individual policy or plan of insurance that would allow indemnities to be equal to a part of the deductible on the underlying individual plan of insurance. SCO indemnities are triggered if area losses exceed 14 percent of expected levels, with SCO coverage not to exceed the difference between 86 percent and the coverage level selected by the farmer for the underlying policy. SCO coverage is not available for crops enrolled in the Agriculture Risk Coverage (ARC) protection or acreage that is enrolled in STAX.
The 2014 Farm Bill also required the Risk Management Agency (RMA) to develop a product that addressed the needs of diversified farms. RMA was already developing a new product called Whole Farm Revenue Protection (WFRP) prior to the enactment of the farm bill and policies were available for sale beginning with the 2015 crop year. WFRP may be particularly attractive to growers of specialty and organic crops because it enables them to cover all farm revenue under one policy. It also allows for other Federal crop insurance policies to be purchased covering individual commodities of significant importance to the operation.
Additionally, a new Peanut Revenue policy now provides farmers the ability to manage risk for both yield and revenue losses. The 2014 Farm Bill may also result in several new crop insurance products coming to market. One new type of product authorized for commodities, Margin Protection, (MP) became available in the 2016 crop year, for corn, rice, soybeans, and wheat in select states and counties. MP provides coverage against an unexpected decrease in a farmer’s operating margin (revenue less input costs). It is area-based, using county-level estimates of average revenue and input costs to establish the amount of coverage and indemnity payments. New product priorities were also placed on policies that increase participation by farmers of other underserved agricultural commodities, including sweet sorghum, biomass sorghum, sugarcane, alfalfa, pennycress, dedicated energy crops, and specialty crops. Insurance products specifically identified for approval for sale, or research and development, include alfalfa, biomass sorghum and sweet sorghum for use in renewable energy and bio products. Finally, the 2014 sought to increase participation among new and beginning farmers by providing additional premium discounts. It also linked crop conservation practices to insurance participation by requiring farmers to adhere to an approved conservation plan intended to protect highly erodible land and wetlands in order to be eligible for a premium discount.
How would efforts to weaken crop insurance - such as means testing, reducing premium discounts, removing revenue-based tools, and releasing personal information about participants - affect farmers?
The idea of means testing measures (adjusted gross income [AGI] limits or premium support caps) or removing tools that insure against losses in revenue would have unintended consequences for all farmers and be detrimental to the long–term viability of crop insurance.
While it might only be a small number of farmers, initially, who are targeted by legislative efforts to make crop insurance less affordable and available, every single farmer in the program will be affected because all policies are interconnected to spread risk. Capping crop insurance benefits for some translates to fewer policies sold and a higher concentration of risk. Likewise, the elimination of revenue-based tools, the product most utilized by producers, would undoubtedly lead to a decline in program participation – especially among lower risk farmers, crops and regions.
That would change the composition of the “risk pool,” which in turn would increase the premiums for every farmer with insurance coverage. When premiums start to increase for that reason, the exit from the program may accelerate, thus further exacerbating the problem.
Economic literature indicates that lower risk farmers, which are more likely to be affected by means testing, are more responsive to premium changes than higher risk farmers. The USDA has called a cap on premium support “ill advised,” noting regions with high-value crops, large-acreage farms, and/or a higher risk of crop loss would be especially hard hit. North Dakota, South Dakota, Texas, Minnesota, California, Arizona, Mississippi, Utah and Hawaii have all been singled out by USDA as shouldering disproportionate effects under a cap on premium support.
Reduced participation can only lead to an increase in calls for off-budget, ad hoc disaster programs that have been largely averted since the Federal crop insurance program was modernized in 2000. For example, there were no calls for disaster assistance in 2012, a major drought year.
Critics’ demands to release personal information of crop insurance participants is similarly flawed and serves no purpose other than an attempt to publicly shame and intimidate the agricultural community. The Federal government has numerous programs that make subsidy payments directly or indirectly to the public, such as tax expenditures. These programs do not require disclosure of an individual’s private information. There is no reason to single out crop insurance and require release of information not required of most other Federal programs.
While private information, such as recipient names, has been released for some traditional farm programs where the farmer received a check intended to support farm income, crop insurance is different. Crop insurance is designed to help farmers manage risk and to achieve high program participation to help protect the financial stability of the food production sector.
The farmer enters into a contract with a private-sector insurance provider and pays a premium for the policy. The farmer writes a check for crop insurance. The farmer only receives an indemnity after suffering a verifiable loss and shouldering a portion of the loss as a deductible. The farmer gets a discount on the actuarial-based risk premium rate established by the government and pays a discounted premium, depending on the level of coverage purchased.
In addition, the USDA’s Risk Management Agency provides wide-ranging data on the payments made and costs of crop insurance (see here, particularly the section titled Summary of Business Reports and Application). Additional analysis and data on the distribution of program benefits has been reported by the Government Accountability Office (GAO). The existing information provides all the data needed to evaluate the cost, efficiency and effectiveness of the crop insurance program.
Are companies guaranteed excessive profits as some critics claim?
Since the inception of the public-private partnership, crop insurance companies experienced net underwriting losses, even after Federal reinsurance, in 2012, as well as in 1983, 1984, 1988, 1993 and 2002.
In fact, crop insurers lost 1.4 percent from 2011 to 2014 once all expenses were accounted. While companies achieved an underwriting gain in 2015 and 2016, the industry’s cumulative returns have still fallen well below the target assumed in the 2011 Standard Reinsurance Agreement (SRA).
A 2017 study by economists from the University of Illinois and Cornell University noted that returns for crop insurance providers have dropped a staggering 12.6 percentage points since the current SRA went into effect.
This stands in sharp contrast to providers of property and casualty (P&C) insurance, which lost money only once in the most recent 20 years, in 2001—the year of the 9/11 attacks. According to a recent report by Grant Thornton LLC, a national accounting firm: “The crop insurance program historically has been less profitable and its financial performance more variable than the P&C industry as a whole.”
When examining company returns, it is important to realize that, even in a year with underwriting gains, crop insurers may not be profitable because underwriting gains alone are not profits; they are one component of a company’s revenue. Second, the Administrative and Operating (A&O) reimbursements received from the government, the other major component of revenue, have consistently fallen short of actual delivery costs for loss adjustment, commissions, information technology, salaries and benefits, rent and other expenses.
While A&O payments were intended to pay for program delivery costs, they have been consistently less than actual expenses since 1997. The average shortfall from 1998 to 2015 has been 7.7 percent, with the shortfall in 2015 alone totaling $777 million.
Do farmers profit from crop insurance?
As Sen. Debbie Stabenow (D-MN), the Ranking Member of the Senate Agriculture Committee, noted during the last farm bill debate: “The farmer gets a bill, not a check, with crop insurance…and they don’t get help unless they really need it.”
In other words, farmers do not use crop insurance to make a profit. Anyone who understands agriculture knows farmers benefit from good weather and bountiful harvests not disasters.
And when they do receive an indemnity to help offset part of a loss, their insurance guarantees in the future may go down and their premium rates may go up. Furthermore, crop insurance, just like other forms of insurance, has deductibles so farmers must shoulder a considerable loss – typically around 25 percent – before indemnities begin. In 2012, for example, those deductible losses were $12.7 billion. In 2015, those deductible losses were more than $8 billion. While most farmers purchase crop insurance annually, only a small portion of them collect indemnities in an average year. For example, while more than 1.2 million policies were purchased by farmers in 2016, only 218,000 were indemnified. Even in 2012, the year of the worst drought in 25 years, 1.17 million policies were purchased by farmers and only 494,000 (42 percent) were indemnified. In addition, according to Dr. Gary Schnitkey from the University of Illinois, in most years the indemnities from crop insurance do not cover a farmer’s cost of production, and they do not return a profit.
Is crop insurance targeted to specific crops, regions, or farmers?
In its formative years, crop insurance was available for only a handful of commodities. For example, in 1948, insurance was only available for wheat, cotton, flax, corn and tobacco for a total of 391 county-crop programs. This is compared to more than 130 commodities and 62,000 county-crop programs today. Because crop insurance premium support is size neutral, every eligible farmer, large or small, may purchase crop insurance.
All told, 1.2 million policies were sold in 2016, covering all 50 states and 90 percent of America’s farmland.
While major field crops, such as corn, soybeans, and wheat account for the most acreage protected by crop insurance, they also account for most acreage farmed today. As the crop insurance industry has matured, extensive efforts have been made to increase the crops and areas covered by expanding to new areas and developing endorsements, special provisions, and new plans of insurance to meet the needs of a diverse U.S. agriculture.
Expansion to additional crops and new provisions and plans of insurance have been the result of Congressional actions, notably in farm bills; RMA contracting with private entities often at the request of farmers; and new pilot programs introduced through the 508(h) process, also spurred by farmer interest. Through these means, crop insurance has been successfully expanded to many new specialty crops as well as to pasture, range, forage and livestock products. New insurance plans, such as Actual Revenue History and Whole Farm Revenue Protection, have been designed to improve coverage for specialty crop and diversified farmers.
The result of these ongoing efforts has been an increase in affordable financial protection for many farm types across the country. For example, an article on specialty crop insurance notes that “Considering the different perils faced and the available alternative risk management approaches, the average participation rate for insurable specialty crops is a respectable 75 percent.” Such program growth will continue to be a high priority, given the reduced role of traditional farm programs and the increased reliance on crop insurance to uphold the financial security of U.S. farms.
Does crop insurance have distortionary effects over the market?
There is no evidence to support that crop insurance has had any substantive distortionary effect on agricultural markets.
In the case of the market for cropland, there is a large body of research that has examined the effect of farm programs on agricultural land values. Much of that research indicates that the value of land depends on the net income expected to be earned from owning the land. Many factors affect land values, such as commodity prices and non-agricultural use values, including recreational and natural amenities; resource endowments of the land, such as water; population; distance to urban centers; general economic conditions; interest rates; and so on.
While a portion of government support does benefit land owners, it should be noted that farmers and consumers are major beneficiaries. One study that examined the potential effects of eliminating the farm safety net found about 40-60 percent of benefits went to landowners, with the remainder going to consumers and farmers.
Recent research results also indicate the crop insurance program has limited effects on the quantity of farmland in production and related environmental impacts. In an analysis of the corn belt region, where crop insurance is used extensively, results suggest that crop insurance will have small impacts on conversions of non-cropland to cropland, and a somewhat higher impact on crop choice. Likewise, changes in crop mix were also found to have small impacts environmental effects.
Research into the impact of crop insurance on commodity prices also suggest small effects in response to the program. A study by the National Bureau of Economic Research concludes that crop insurance has a small negative effect on prices for specialty crops. The results of research on the effect of crop insurance on the level of production and prices for other commodities is mixed, though predominately suggesting small positive increases in production which would lead to downward pressure on prices (Study ;Goodwin, Vandeveer and Deal, 2004; Goodwin and Smith, 2012; Lau, Schropp and Sumner, 2015).
Is crop insurance impairing farmers' ability to use new conservation tools like cover crops?
The crop insurance industry helps farmers manage risk and maintain the long-term health of American agriculture. Crop insurance functions well because it is designed to be actuarially sound and because participants must follow good farming practices that are based on research and sound science. Absent those traits, taxpayers could be harmed as associated program costs rise. In 2013, an inter-agency USDA task force released the “NRCS Cover Crops Terminations Guidelines” which serve as the cover crop management guide for all USDA agencies.
Farmers who choose to incorporate cover crops into their operations and participate in the Federal crop insurance program must follow these guidelines and provisions of the insurance policy for the crop they are insuring. Insurance companies are following these guidelines and associated insurance policy procedures as they insure their customers. Farmers interested in exploring how cover crops can fit into their operations are encouraged to discuss all available options with their agronomic advisors and their crop insurance agent to verify their plan follows good farming practices and meets crop insurance requirements.
Crop insurance exists to protect growers’ cash crops and to prevent financial ruin when events happen outside of their control. It has evolved to become the cornerstone of farm policy because it uses hard data and science to control taxpayer cost. For crop insurance to continue functioning well for both farmers and taxpayers, its guidelines and procedures must be based on the best information available while critical research is being performed for the future.
The crop insurance industry supports continued agronomic research to determine how farmers can best incorporate cover crops and other Best Management Practices in their operations and to determine what impact those practices may have on the insured crop.
FAQ questions and answers taken from www.CropInsuranceInAmerica.org