ABOUT CROP INSURANCE
JUST THE FACTS
The crop insurance program is now the centerpiece of the U.S. agriculture safety net.
Below are some of the most common questions about crop insurance, which farmers have called their most important risk management tool. The answers to each, including useful links to additional information, are just a click away. If you still cannot find what you are looking for, feel free to contact Laurie Langstraat at (913) 685-2767 or contact here.
There are two types of crop insurance. First, U.S. multi-peril crop insurance is a risk management tool that producers purchase to protect against the loss of their crops due to natural disasters such as hail, drought, freezes, floods, fire, insects, disease and wildlife, or the loss of revenue due to a decline in price. Crop insurance is federally supported and regulated and is sold and serviced by private-sector crop insurance companies and agents. In 2015, 1.2 million polices were sold protecting more than 120 different crops covering 285 million acres, an area larger than Texas and California combined, with an insured value of $102 billion.
Second, Crop-Hail policies, which are not part of the Federal Crop Insurance Program, are sold by private insurers to farmers and regulated by individual state insurance departments. Many farmers purchase Crop-Hail coverage because hail has the unique ability to completely destroy a significant part of a planted field while leaving the rest undamaged. In areas of the country where hail is a frequent event, farmers often purchase a Crop-Hail policy to protect high-yielding crops. In 2015, Crop-Hail liability was $37 billion, and premium was $977 million.
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 a critical risk management tool for farmers and ranchers.
To read more about the history of crop insurance, click here.
See a video overview of crop insurance here.
Read more about crop insurance in general here.
Every American consumer relies upon agriculture for food and clothes. Moreover, agriculture and its related industries are important sectors of the U.S. economy accounting for nearly five percent of Gross Domestic Product (GDP) and nearly 10 percent of U.S. employment. and agriculture is an important sector of the U.S. economy Therefore, it is in the public interest to have a financially stable agricultural sector that produces the nation’s safe and affordable food and fiber supply and supports the rural economy. That necessitates the presence of a publicly-supported safety net for farmers, who increasingly face variable weather patterns that challenge the food production system as well as face unfair competition from foreign countries that subsidize heavily and violate international trade rules. In the United States, a critical part of this safety net is crop insurance. Its importance has been on full display recently, from the widespread drought of 2012 and ongoing dry conditions in the West to the recent decline of crop prices and farm income. In the United States, this safety net is crop insurance, whose need was most recently demonstrated by floods and drought in 2011 and the widespread drought of 2012. In addition to the weather extremities in 2011 and 2012, benefits of crop insurance are being demonstrated with summer 2015 drought in the West and floods across much of the Midwest and East.
Crop insurance is the primary risk management tool farmers use 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. Without effective and affordable crop insurance, catastrophic production losses would sap the rural economy by setting in motion a series of harmful events: farm failures and consolidation, job losses, farm-related small business failures, financial stress on rural banks and reduced investment in U.S. agriculture. A financially healthy rural economy requires a financially healthy farm production sector.
Furthermore, by 2050, the United Nations projects a 33 percent increase in the global population with at least a 70 percent increase in demand for food. As the number of consumers expands globally and the climate continues to exhibit more intense weather events, there will be increasing pressure on the global food production system.
In the United States, the ability for farmers to purchase crop insurance is this nation’s “insurance policy” against disruption and financial instability in the food production sector. Crop insurance is also critical in helping new and beginning farmers obtain credit and enter farming to become the next generation of producers that meet the growing global food, fiber and energy needs. The 2014 Farm Bill strengthened provisions for new and beginning farmers by providing them with an additional 10 percent premium discount and allowing them to use higher average yields until their own actual yields are available.
Watch a video that explains why Congress turned to crop insurance as the foundation of the farm safety net.
Crop insurance is an effective taxpayer investment that helps ensure the stability of America’s food, feed, fiber and fuel producers and promotes rural economic growth.
Absent crop insurance, the cost of natural disasters that cripple 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. Under this policy, farmers shoulder a portion of the risk along with private-sector crop insurance companies. 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. This ensures that farmers are active participants in risk management and that taxpayers are not being asked to bear all the burden of natural disasters in farming.
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 delivery costs that would otherwise be built into the premium. However, this Administrative and Operating (A&O) delivery cost reimbursement to the companies does not fully cover their actual delivery expenses. The Federal government also reinsures the crop insurance companies (known as approved insurance providers, or AIPs) through the Standard Reinsurance Agreement (SRA). The reinsurance involves the government and the companies sharing in the underwriting gains and losses of the program.
Thanks to the success and effectiveness of crop insurance, there have not been any 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.
The private-sector crop insurance companies employ agents and loss adjusters who sell policies to farmers and determine the extent of losses, collect premiums and pay claims. The crop insurance companies also share in the underwriting gains and losses of the program. In good years, the government collects a portion of the underwriting gains and in bad years the private sector absorbs a share of the losses, thus reducing taxpayer exposure.
The companies employ more than 20,000 licensed agents, certified loss adjusters and company staff. (For more information on the role agents play, click here.) Furthermore, companies invest heavily in technology, infrastructure efficiency, training programs and service improvements for farmers and ranchers.
Beyond fulfilling their delivery and service obligations, insurers have contributed to improving the program by providing input and feedback on the implementation of ever-changing rules and policies.
Farmers benefit from private-sector efficiency, which speeds payments when needed most, and taxpayers benefit from reduced overhead costs and strict procedures to combat waste, fraud and abuse.
All insurance, from auto to life, health, and crop insurance works best when it expands the number of people it covers. That’s because the broader 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. In that sense, crop insurance works like other forms of insurance.
What makes Federal crop insurance unique from other insurance products is that companies that sell Federal crop insurance must sell a policy to any farmer at the premium rate set in advance by the Federal government. Crop insurance companies cannot refuse to provide protection, raise the premium rate or impose special underwriting standards on any individual producer, regardless of risk.
To better understand why this is an important characteristic of the crop insurance industry, click here.
This is not the only example where the Federal government has stepped into the insurance markets to ensure wider availability of insurance for those who live, or work, in harm’s way. One of the largest programs is the National Flood Insurance Program, which provides coverage for flooding that historically was often unaffordable or not available through private companies without government support.
Similar to the flood insurance program, crop insurance is sold, administered and delivered by the private sector, which capitalizes on the efficiencies and speed of the competitive market to get claims processed and paid after disaster strikes.
Although the Federal government has been involved in crop insurance since 1938, it was not until Congress decided to use private-sector delivery with incentivized sales and reduced the cost of farmer premiums that crop insurance became as widespread as it is today. Insured acreage rose from 206 million in 2000 to 285 million in 2015, equaling approximately 90 percent of the U.S. cropland planted in 2015.
Read more about how crop insurance companies are similar to other forms of insurance here.
The structure of crop insurance is such that companies have dollars at risk on every policy and are thus financially incentivized to reduce fraudulent claims. The industry has extensive training and education efforts including a certified loss adjuster proficiency program in which all adjusters must participate.
Because program integrity is vital for continued public support, fighting fraud, waste and abuse is a key priority for the industry and the USDA through the Risk Management Agency (RMA) and the Farm Service Agency (FSA). There are numerous monitoring, review, audit and other oversight requirements in the Standard Reinsurance Agreement (SRA), which is the contract between the Federal government and insurers. The private-sector crop insurance industry and RMA have fought to minimize fraud and have implemented effective and unprecedented measures to deter and identify false claims. The program has been a pioneer in the use of data mining, conducting thousands of reviews of claims data to ensure a high level of program integrity.
Brandon Willis, current Administrator of USDA’s Risk Management Agency, which manages the Federal Crop Insurance Program, has said “The Federal Crop Insurance Program is a central component of our nation’s farm safety net, and when one farmer takes advantage of that system, all farmers are hurt. To preserve the safety net for honest, hard-working farmers, the Risk Management Agency actively works to decrease fraud, waste and abuse in the Federal Crop Insurance Program.”
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 (NRCS 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. Producers interested in exploring how cover crops can fit into their farming 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 outside of their control occur. 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 is following current USDA cover crop guidelines. We support 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.
For more information on cover crops, please click here.
For cover crop and crop insurance information specific to Illinois, Indiana, Ohio, and Michigan, please click here.
The Risk Management Agency (RMA) estimates and reports improper payment rates for the Federal Crop Insurance Corporation Program. RMA reported that error payment rate improved by more than 50 percent dropping from 5.5 percent in 2014 to 2.20 percent in 2015. By way of comparison, the average error rate government-wide is 4 percent.
Former RMA director, Ken Ackerman, put this low error rate into perspective in a recent article. He noted: “RMA’s eye-catching new 2.2 percent ‘improper payment’ rate for 2015 was no fluke. Rather, it was the product of a long-term commitment and years of work by a wide range of people who deserve credit for sticking to it.”
An improper payment occurs when funds go to the wrong recipient, the right recipient receives the incorrect amount of funds (including overpayments and underpayments), documentation is not available to support a payment, or the recipient uses funds in an improper manner. When improper payments are identified, they must be corrected. For example, if a producer receives an indemnity payment that is too high, the excess must be returned.
The government reporting website states the following:
- “Not all improper payments are fraud (an intentional misuse of funds). The vast majority of improper payments are due to unintentional errors. For example, an error may occur because a program does not have documentation to support a beneficiary’s eligibility for a benefit, or an eligible beneficiary receives a payment that is too high—or too low—due to a data entry mistake. Also, many of the overpayments are payments that may have been proper, but were labeled improper due to a lack of documentation confirming payment accuracy. We believe that if agencies had this documentation, it would show that many of these overpayments were actually proper…”
Read more on the background and issues pertaining to improper payments here, beginning on page 198.
Private-sector delivery is a chief 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 producer’s operation and can only be successfully managed and delivered by the private sector. The private sector has also proven that it can deliver assistance into the hands of farmers usually within weeks of the claim being finalized. That is why farmers and agricultural groups, have made defending crop insurance one of their top priorities.
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.
Watch a video that discusses why affordability, availability and viability of crop insurance as so crucial.