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.
Is crop insurance targeted to promote the production of a few favored commodity crops and biased against diversity in production, which lowers risks and may enhance sustainability?
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, a fraction of what is available today. Today, crop insurance is available for more than 100 commodities and has over 62,000 county-crop programs and premium support rates are the same across commodities for each plan of insurance. Policies are available for most commodities; however, some policies are currently being tested as pilots or have not been expanded nationwide, principally due to lack of producer interest or insufficient data.
While major field crops, such as corn, soybeans and wheat have accounted 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 producer interest. The FCIC Board of Directors must approve new pilot programs before they are made available to producers and then field tested for three or more years, which is a time consuming process. Through these means, crop insurance has been successfully expanded to many new specialty crops in recent years as well as to pasture, range and 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, a recent 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 undergird the financial security of U.S. farms.
How have the crop insurance companies fared financially under the new SRA that was implemented beginning in 2011?
The financial performance of the crop insurance industry since the negotiation of the financial terms of the 2011 Standard Reinsurance Agreement (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. Several factors account for this outcome. Despite higher acreage covered since 2011, premium dollars have declined from $12 billion in 2011 to $10 billion in 2014, reflecting lower market prices and reduced premium rates. During this period, indemnities reached record high levels caused by widespread drought in the Corn Belt and Southern Plains and a sharp drop in commodity prices during 2013. Total claims exceeded total premiums in 2012 and 2013, the first time for such an occurrence since 1999 and 2000.
Industry underwriting results have been highly volatile since the inception of the current SRA. Even though 2014 final results are not yet known, we currently project the industry’s net underwriting gain as a percent of net retained premium will finish in the low teens. The comparable results for 2011, 2012, and 2013 were 17.4 percent, a negative 15.3 percent and 6.9 percent respectively. As a result, over the four-year period of the current SRA, the industry’s average net underwriting return as a ratio to retained premium will be approximately six percent, a mediocre result but an improvement from last year’s three-year result of four percent. When considering the industry’s expense deficit over the same four-year period, the industry will have achieved a total return of less than one percent on net retained premium.
The low returns since 2011 are insufficient to build needed surplus and retain and attract capital in the industry.
Is it true, as some critics claim, that crop insurance has been a major factor in raising land values?
Government support for crop insurance has played an insignificant role in the appreciation of U.S. farmland values. There is a large body of research that has examined the effect of farm program subsidies on agricultural land values. Much of that research indicates that the value of land depends of the net income expected to be earned from owning the land. Subsidies, as part of the income accruing to the land, do get at least partly capitalized into the value of the land and primarily benefit the landowners. However, the availability of insurance, even if not supported by the government, also strengthens land values because it reduces a producer’s financial risks. The research also notes that many other factors affect land values, such as commodity prices and nonagricultural 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. Furthermore, while part of government support benefits land owners, part also benefits consumers though production and part benefits farmers operating the land. One study that examined the potential effects of eliminating farm subsidies found about 40-60 percent of the subsidies benefitted landowners, the remainder going to consumers and farmers.
Accordingly, crop insurance premium support may have some limited impact on land values, but the impact is quite small and pales in comparison to market returns and a host of other factors. It is also important to consider that premium support is not a guaranteed payment; a farmer pays a premium for crop insurance and only receives premium support after incurring a loss that exceeds a deductible. Some farmers may receive the benefit if their indemnities exceed their premiums over time, while others may never receive the benefit, if their premiums exceed their indemnities over time. Thus, while premium affects land values, it varies by producer and region and is small relative to other factors. Support is particularly small compared with the market value of corn and soybeans, which are estimated at over $90 billion in 2014. Total premium support for corn and soybeans is expected to account for only 3.8 percent of the sum of crop production value and crop insurance support in 2014.
What steps are taken to ensure that the public funds spent on crop insurance are subject to sufficient oversight and accountability?
Crop insurance is one of the most scrutinized areas of public policy. Accountability starts with the private companies that deliver crop insurance. These companies have strong financial incentives to ensure payments to producers accurately reflect bona-fide losses, and they have implemented extensive financial controls and operating procedures to ensure that accuracy. In addition, the Risk Management Agency (RMA) conducts broad oversight activities that include company operations, individual policy reviews and data mining.
Each year companies must have a detailed operating plan approved by RMA to be able to sell insurance. RMA also conducts an in-depth Operations Review of each company every three years. The Operations Review is an assessment of each company’s operational systems designed to administer crop insurance and an evaluation of the company’s delivery of the program through a review of selected policies. In all, the companies conduct various oversight reviews on about 50,000 policies each year to ensure compliance with all of RMA’s oversight and operational requirements. Recently, RMA has begun implementing a new, more extensive effort to identify and recover improper payments, as required under the Improper Payments Elimination and Recovery Act. RMA and crop insurance are also subject to review by the Federal Crop Insurance Corporation Board of Directors, whose majority of members are appointed from the private sector. The Board has general management responsibility for crop insurance and continually reviews program operations.
Data mining is major effort to ensure program accountability. RMA has partnered with the Center for Agribusiness Excellence (CAE) at Tarleton State University, Stephenville, Texas, which has stored all of RMA’s crop insurance data since 1996. CAE manages a centralized data warehouse, which is used to search, or mine, all data records to compare policies and detect individual producers whose policies demonstrate atypical patterns and to uncover broader patterns that may indicate potential waste, fraud or abuse. Through data mining, RMA annually develops a list of agricultural producers whose operations warrant an onsite inspection. This “spot check” list has proven to be an effective technique for deterring dishonest activity.
USDA’s Office of Inspector General (OIG) provides another line of oversight by conducting audits designed to reduce vulnerabilities, strengthen integrity and provide RMA with oversight to help achieve efficient and effective program delivery. In its most recent semi-annual report to Congress, released in November 2014, OIG reports that it has eight crop insurance audits ongoing that have corrective actions to be implemented by RMA. These audits are targeted on a range of issues, from specific program features, to financial statements, to reducing overpayments. In addition to OIG, the Office of Management and Budget (OMB) provides added oversight through the development and execution of crop insurance’s annual budget. OMB examiners review program performance and recommends discretionary and legislative changes for improvement.
Ultimately, Congress determines the role of government in crop insurance and relies not only on the above sources of information but also calls upon the Government Accountability Office and the Congressional Research Service to conduct reviews of crop insurance. Both entities issue periodic reports on their findings. Congress also conducts public oversight hearings to monitor the expenditure of public funds on crop insurance. These multiple layers of oversight provide a high level of confidence that the public funds used to support crop insurance are being properly spent.
The 2014 Farm Bill accelerates the evolution from traditional farm price and income support to risk management, solidifying crop insurance as the primary tool for farmers in dealing with production and price risk.
The 2008 Farm Bill’s direct and countercyclical payment programs and the state-based revenue program known as ACRE (Average Crop Revenue Enhancement Program) were eliminated. In their place, a farmer may choose one of two new farm programs that commence with the 2014 crop year: 1) Price Loss Coverage (PLC), a program that makes a payment to a producer when the market price for a covered crop is below a fixed reference price; or 2) Agriculture Risk Protection (ARC), a program that makes a payment when either the farm’s revenue from all crops or the county’s revenue for a crop (the farmer may choose which alternative) is below 86 percent of a predetermined or benchmark level of revenue. The maximum coverage band is 10 percentage points (76 percent to 86 percent of benchmark revenue). These two programs are designed to supplement crop insurance by providing support in periods of multi-year price declines and helping producers cover the crop insurance policy’s deductible. Together these two farm programs are projected over time to spend substantially less than the programs they replaced.
In addition to these two new farm programs, the 2014 Farm Bill substantially strengthens crop insurance by adding several new products and requiring a number of program revisions to strengthen crop insurance’s role as the primary component of the farm safety net. The major enhancement to crop insurance is the addition of two supplemental policies that will help producers expand their protection against losses due to natural disasters or price declines.
The first program, the Stacked Income Protection Plan, or STAX, is for upland cotton acreage only, as cotton producers are not eligible for ARC or PLC. STAX is an area revenue plan that a cotton producer may use alone or in combination with an underlying policy or plan of insurance. STAX is similar in design to the existing area plan called Area Revenue Protection (ARP) and is available for sale beginning with the 2015 crop year. STAX will be available in all counties where Federal crop insurance coverage is available for upland cotton. It is also available by practice, irrigated or non-irrigated. STAX covers revenue losses of not less than 10 percent and not more than 30 percent of expected county revenue. An indemnity is paid based on the amount that expected county revenue exceeds actual county revenue as applied to the individual coverage of the producer, except that indemnities may not include or overlap the producer’s selected deductible. Producers receive a premium discount equal to 80 percent of the STAX premium, and on behalf of the producer, an administrative and operating expense payment is made to the crop insurance companies to compensate for a portion of delivery expenses. Because STAX replaces major farm programs for upland cotton producers, but will not be in place for the 2014 crop year, producers will receive a transition payment for 2014.
The second program, the Supplemental Coverage Option, or SCO, provides all crop producers 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 the policy or plan of insurance. SCO is available for sale beginning with the 2015 crop year for spring barley, corn, soybeans, wheat, sorghum, cotton, and rice. SCO will be available in specific counties, depending on the availability of data. Additional crops and counties are being reviewed for inclusion in SCO beginning with the 2016 crop year. 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 producer for the underlying policy. SCO coverage is not available for crops enrolled in ARC or acreage that is enrolled in STAX. Producers receive a premium discount equal to 65 percent of the SCO premium, and on behalf of the producer, an administrative and operating expense payment is made to the crop insurance companies to compensate for a portion of delivery expenses.
What explains why government payments to the private-sector crop insurance companies for delivery expenses have grown much faster than the number of policies the companies sell?
In simple terms, the amount and cost of the work involved per policy has gone up. Delivery expenses include all expenses associated with sales and servicing the policies, including agent commissions, loss adjustment, information technology and other data processing, company staff salaries and benefits, office rent, utilities and other overhead costs. Companies must also comply with many required procedures and regulations that do not typically apply to other lines of insurance. These additional activities include extensive, large-scale data reporting requirements as well as additional Federal oversight and audit requirements in order to promote and ensure program integrity.
Selling, servicing and providing the infrastructure to support a policy today is much different than a decade ago as the program has grown and changed. Coverage has been introduced for many additional crops; the number of plans of insurance has increased and the plans are constantly being revised; the size and complexity of an average policy has increased; training and education of agents, adjusters, company staff and producers have continually risen reflecting the size and complexity of the program; reporting requirements of RMA and associated IT needs have steadily increased as information demands have risen along with program complexity. Wage and price inflation have also contributed to expense growth.
Policies today cover more plans of insurance, more planted acres and more crops than in the past. For example, 10 years ago in 2005, the number of crop insurance plans offered by crop by county was 47,511. By 2013, the number of county crop plans had grown to 62,466. A decade ago, the average policy covered 206 acres, while today an average policy covers 244 acres. These trends in expenses are likely to persist as the 2014 Farm Bill introduced many new programs and options for producers that will be rolled out over the next several years and add to the costs per policy.
It is also important to recognize that crop insurance companies have a strong incentive to minimize their delivery expenses to increase their financial rates of return. But, despite that incentive, meeting the many requirements of program delivery has resulted in actual delivery expenses exceeding government A&O payments to the companies for the past 15 years in a row. This shortfall has required the companies to meet expenses using other sources of income. Even so, actual expenses as a percent of total premium have been steadily falling and are far below those of the overall property and casualty industry.
Crop insurance premium support is size neutral. Every eligible farmer, large or small, who wants crop insurance, may purchase crop insurance. The premium support rates provided for a given plan of insurance are the same for every producer, large or small, and every crop. The primary benefit of crop insurance is reduction of farm financial risk, which is achieved by shifting a farmer’s income in good years (by paying a discounted premium) to income in bad years (by receiving an indemnity), and this benefit accrues to all farmers, large or small.
Reducing financial risk helps a farmer maintain, expand, and increase the efficiency of the farm, improves access to credit, increases investment in production assets and enables the farm to recover after disaster. These are benefits to farmers, both large and small, and to society.
In fact, the 2014 Farm Bill took steps to make crop insurance even more attractive to small farms, including organic operations and those run by new and beginning farmers.
It should be noted that every acre enrolled in crop insurance helps spread risk, which ultimately lowers premiums for all. Therefore, the involvement of larger, more efficient operations, helps bring down costs for smaller farms and keeps crop insurance affordable.
By reducing financial risks and facilitating investment, crop insurance may contribute to increasing farm size, but analysts have estimated the impact is quite small and dominated by other factors. For example, one study estimated that crop insurance’s risk reduction leads to a slight increase in crop specialization, which increases the acreage in a crop on a farm. A USDA study estimated that, by raising returns, crop insurance accounted for a one percent increase in cultivated cropland between 1998 and 2008 in North Dakota and South Dakota.
The major factor driving farm size is the farmer’s desire to increase income, which may be achieved by increasing farm size. The small effects of crop insurance support on farm size have been put in context in another recent and thorough USDA study of farm structure, which concluded that larger crop farms realize better financial performance than smaller farms, and the difference is not due to higher revenue, but due to lower production costs. Labor hours per acre decline sharply as acreage increases for crops like corn and soybeans. Wide-ranging technologies are the keys, enabling a single farmer to operate more acres and reduce the total amount of labor needed. The study concludes, “… larger farms utilize labor and capital more intensively, which provide them with the primary source of their financial advantage.”
The study identifies multiple other factors affecting farm size, including tax and regulatory policies, research programs, lending programs and farm commodity programs. The study also points out that many commodities that are not, or are minimally, covered by crop insurance, such as most livestock and many specialty crops, have experienced rates of increase in farm size similar to the major field crops. In short, crop insurance should not be viewed as a major factor in the rising average size of U.S. farms. Crop insurance is a valuable risk management tool for farms of all sizes and is a major force in supporting a growing and globally competitive U.S. agriculture where 96 percent of farms continue to be family farms.
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 2014, 1.2 million polices were sold protecting more than 120 different crops covering 294 million acres, an area larger than Texas and California combined, with an insured value of $110 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 2013, Crop-Hail liability was $39.5 billion, and premium was $956 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 cornerstone of farmers and ranchers risk management portfolios.
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.
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, enter farming and become the next generation of producers that meet the growing global food and energy needs – provisions that were strengthened in the 2014 Farm Bill.
Crop insurance is an effective taxpayer investment that helps ensure the stability of America’s producers of food, feed, fiber and fuel supply 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.