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 totally 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 the main risk management tool of 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.
Not only does agriculture feed and clothe us all, but the food and fiber system accounts for roughly 15 percent 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. 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.
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 longer 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 34 percent increase in global population and 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 and become the next generation of producers that meet the growing global food 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 have cost taxpayers $70 billion since 1989, 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. Unlike the past, farmers must first purchase crop insurance — putting “skin in the game” — before being protected, and must shoulder a portion of the losses through deductibles. 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 eliminated direct payments and has moved farm support from traditional price support programs towards private sector-delivered crop insurance. The net effect has been a downward trend in farm safety net spending.
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 disaster.
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, despite 2011 and 2012 being two of the worst weather years on record. By comparison, 42 emergency disaster bills in agriculture have cost taxpayers $70 billion since 1989, 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. View a video on private sector efficiency here.
For example, in 2011, farmers in Texas received $2.6 billion in indemnities due mostly to drought. Of this, more than $1.3 billion was paid by mid-September of that year. During the 2012 devastating drought, USDA Under Secretary Michael Scuse traveled across rural America and gave farmers his business cards with the instruction to call if there were any problems or concerns about crop insurance or the speed of assistance delivery.
“I have yet to have a single producer call me with a complaint about crop insurance,” he said. “That is a testament to just how well agents, adjusters, the companies, and Risk Management Agency (RMA) worked together in one of the worst droughts in the history of this nation.”
Watch a video that discusses why affordability, availability and viability of crop insurance are so crucial.
What makes Federal crop insurance unique from other insurance products is that companies involved in selling 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.
View a video overview of crop insurance 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, taking advantage of 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.
Get more information on crop 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). 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.
Quoting from RMA’s previous Administrator William Murphy’s 2011 Congressional testimony, “RMA continues to make significant progress in preempting fraud, waste and abuse through the expanded use of data mining. ARPA (Agriculture Risk and Protection Act) directed RMA to employ data mining technologies to program compliance and integrity efforts, and provided the funding necessary to support these activities.
“ARPA also provided a role for FSA to assist RMA in further program compliance and integrity. RMA subsequently entered into a contract with the Center for Agribusiness Excellence (CAE) at Tarleton State University to develop and maintain appropriate data warehousing and data mining capabilities. Annually, CAE produces a spot-check list of producers engaging in questionable behaviors which is provided to FSA for further investigation. With the assistance of FSA offices, RMA and the insurance companies conduct growing season spot checks to ensure that claims for losses are legitimate.
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.”
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…”
The Risk Management Agency (RMA) estimates and reports improper payment rates for the Federal Crop Insurance Corporation Program. RMA reported an improper payment rate of 2.20 percent for FY 2015, decreasing by more than 50 percent from 2014.
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 farm groups, have made crop insurance one of their top priorities in the Farm Bill.
Critics have advocated government takeover of crop insurance delivery, which was soundly rejected by lawmakers, Administration officials and farm leaders.
Absolutely. The years 2011 and 2012 were among the most costly ever for U.S. agriculture due to extreme weather.
Regardless of one’s opinion of the climate change issue, there is no disagreeing that farmers are dealing with unusual weather events. At a minimum, climate change is projected to introduce a whole new level of uncertainty into production agriculture, bringing periods of more intense heat or cold, abnormally high or low moisture and altered weather patterns.
Crop insurance will play a critical role in helping America’s farmers face this uncertainty by enabling them to better deal with climate change and to rebound from its extremes. A financially sound, affordable and universally available crop insurance program helps ensure that as global income, population and urbanization expand, America’s farmers have the resources and capacity to meet the increase in both domestic and foreign demands on food, feed, fuel and fiber.
William Hohenstein, director of USDA’s Climate Change Program Office, noted, “…agriculture has been and will continue to be significantly affected by changes in climate conditions.” Hohenstein pointed out that USDA released a climate change effects and adaptation report in 2013. “There’s a lot of potential for the crop insurance program to help make farmers more resilient to [climate] change by addressing risk,” he said.