Insurance Basics: Contracts Define Today’s Farm Safety Net

April 2017

By combining the regulatory authority and financial support of the federal government with the efficiency of the private sector, crop insurance has succeeded in surpassing the goals set forth by Congress for broad participation, diversity and inclusion. Today, crop insurance is the centerpiece of the farm safety net.

And contracts are the mortar that holds it all together, protecting everyone involved—from the farmer, to the insurers, to the American taxpayer.

Here’s how it is structured: First, a farmer works with a crop insurance agent to tailor a risk management product that is best suited for his or her operation. This policy, or contract, clearly spells out the terms of coverage and the responsibilities of the farmer in growing and caring for crops.

The crop insurance agent that sells the policy and serves a liaison between the farmer and insurance provider, in turn, has a contract with the crop insurance company that defines record-keeping and communications requirements, as well as compensation.

And crop insurers have a contract with the Federal Crop Insurance Corporation (FCIC). This Standard Reinsurance Agreement (SRA) underpins the public-private partnership that makes crop insurance unique.

The latest SRA took effect in 2011, and it defines the risk-sharing and cost-sharing arrangements between the U.S. Department of Agriculture (USDA) and insurance providers. It also details the methodology for premium rate setting by the government, reimbursements for product delivery, reinsurance terms, as well as underwriting and other regulatory requirements for insurers.

In other words, nothing is left to chance. The rules are clearly laid out and understood by all parties, and all parties know that they are being treated equitably.

This is especially important during times of crisis, when claims must be adjusted as quickly as possible so indemnities can be provided in a timely fashion. Simply put, time cannot be wasted with questions about process or squabbling about who is responsible for covering what losses.

That is a far cry from the days of ad hoc disaster bills, when Congress had to pass legislation after a disaster and the USDA had to write rules before farmers could apply for aid.

Today’s contract-based system usually results in indemnities being delivered within 30 days of a claim being finalized. And the accuracy of payments is notable.

According to the USDA, crop insurance’s improper payment rate for 2016 was twice as impressive as other government programs – 2 percent compared to the 4.67 percent government-wide average.