CROP INSURANCE

Crop Insurance Definitions Agricultural producer – a business that grows and sell crops for a profit Crop Insurance – Insurance that covers losses to a crop’s profitability Two types: Crop-yield – insures against losses to actual crops Crop-revenue – insures against losses to crop value when prices change or the crop is damaged Crop Insurance Definitions

Crop-Yield Insurance Covers physical losses to the insured crop 2 common forms: Crop-Hail Insurance Multi-peril crop insurance (MPCI) Crop-Yield Insurance

Crop-Hail Insurance Private Insurers Type of Crop-Yield Insurance Covers more perils than just hail Typically available through private insurers Not reinsured or government subsidized This is because hail is a limited peril that does not tend to affect widespread areas all at once; private insurers usually have no problem paying all hail claims from their reserves.

Coverage Details – More Important Details Rated on an acreage basis Coverage can be a percentage of expected crop value Policies sometimes have a minimum amount of losses required before they will pay anything EXAMPLE $10,000 policy on 10,000 acres 5% minimum loss percentage If 10% loss to crop (which exceeds the 5% minimum), the policy would pay $1,000 (10% of $10,000)

Crop-Hail Insurance – Covered Peril In addition to hail Fire Lightning Wind (by endorsement) Transit to storage after harvest Wildfire

Typical Exclusions Failure to harvest a mature crop “unit normal visible stand” (i.e. crop must be up to be covered) “Before effective hour” (i.e. damage prior to start of policy) Crops that can be recovered by harvesting Crop not owned by the insured (e.g. share crops) Damage to trees bushes, fruit or nut crops Damage to leaves or plants, unless affecting the actual crop Typical Exclusions

Multi-Peril Crop Insurance (MPCI) Weather-Related: Other perils Wind Drought Excessive moisture Frost Flood Lightning Tornado Hurricane Hail (by endorsement) Volcano Earthquake Disease Insects & wildlife Insect infestations (if unavoidable) Irrigation failure (if unavoidable) Low/poor quality yields Prevented planting Late planting/replanting

Government Support & Regulation MPCI creates massive exposure for insurers Government solution: Subsidizes it with the Federal Crop Insurance Corporation (FCIC) Regulates it through the U.S. Department of Agriculture (USDA Because so many crops can be affected at the same time, insurers who provide MPCI risk being exposed to massive losses, which could “break the bank” for smaller private sector insurers. To keep this from happening, the government subsidizes MPCI through the Federal Crop Insurance Corporation (FCIC) and regulates it with the U.S. Dept. of Agriculture (USDA). This is one of the biggest differences between MPCI and Crop-Hail insurance: MPCI is government-backed and regulated; Crop-Hail is private.

Multi-Peril Crop Insurance Rules for Policy Changes Policy changes and increases only allowed before sales closing date Requires planting to be done by set planting dates No changes during growing season; must remain in effect for an entire crop year After the first crop year, a farmer may change or cancel policy, but only before the cancellation date

For example, farmers may only buy MPCI at certain predetermined times, and they can only request changes or increases before a defined “sales closing date”. In other words a farmer can't change or increase coverage at random during the growing season, like right in the middle of a drought! Coverage starts when the crop is planted, and planting must be finished before government established “planting dates”. Similarly, insurers may not cancel policies except at specific times and for specific reasons. As the government puts it, “[The] MPCI is a continuous policy and will remain in effect for each crop year after the original application is accepted."

MPCI excludes losses caused by: Neglect or malfeasance Failure to reseed Failure to follow good farming practices Losses are also excluded if they are due to a failure to follow what are called “good farming practices.” Examples of a “poor farming practice” could include not spraying for weeds or insects, or harvesting late. No records: use 65% of the Transitional Yield as farmer’s APH 1 year of records: use 80% of the Transitional Yield for the missing 3 years 2 Years of records: use 90% of the Transitional Yield for the missing 2 years 3 years of records: use 100% of the Transitional Yield for the missing year

Crop-Hail vs. MPCI Differences Between Crop-Hail and MPCI Crop-Hail insurance: Private Uses agreed-upon purchases times Insurers can choose whom to insure Multi-Peril Crop Insurance: Government subsidized Has restricted purchase time Government forces insures to cover any farmer

More Difference Between Crop-Hail and MPCI: With Crop-Hail insurance: Coverage levels based on acreage Helps when hail destroys part of a field without touching the rest of the crop Under Multi-Peril (MPCI) Coverage: Coverage based on “units” (one unit = all of a farmer’s acreage in one county). This is partially because hail, unlike other perils such as drought or flood, can completely destroy crops in one portion of a field, but leave the rest of the field untouched. Crop-hail coverage lets the farmer file a claim for the damaged acres, without considering how the rest of the crop is doing. By contrast, MPCI bases the loss amount (called the “reduced yield”) on an average loss in all the fields of the “unit.”

Example Farmer John insures a 1,000 acre field with a crop-hail policy: Hail destroys north half Crop-hail policy pays for each damaged acre The claim will not consider how the undamaged half of the crop is doing Farmer John insures same field with MPCI: Drought destroys north half MPCI considers net losses to entire field If crops are average, it will pay for lost ½ of crop yield If crops were twice as good as normal, MPCI may not pay their value, since south half makes up for losses to north half

Federal Jurisdiction of Crop Insurance Multi-Peril Crop Insurance is supervised by the National Crop Insurance Services (NCIS) NCIS: International not-for-profit organization Provides risk management tools to producers Writes over a million policies each year Issues both crop-hail insurance and MPCI

Federal Crop Insurance Act Federal Crop Insurance authorized in 1930 and expanded by Federal Crop Insurance Act in 1980 Act applies more coverages, crop types, and regions to NCIS jurisdiction Still voluntary, but most of America’s producers choose to purchase crop insurance Federal Crop Insurance Act

Risk Management Agency Promotes sound risk management practices Subsidizes the premiums of crop growers for federal crop insurance policies Reimburses private insurers for administrative costs Sets critical production dates Assigns commodity market prices to protect the producer’s revenue Risk Management Agency

Crop Policy Changes and Pilots Pilot program lets the RMA test policies in small areas before releasing to the rest of the country During this time, the RMA collects data on how the new policy performs New policies are typically pilots for several years Crop Policy Changes and Pilots

Review: Crop-Yield Insurance Provides coverage for physical loss to the crop Crop-Hail Insurance Privately sold, offering coverage for a few specified perils MPCI Government subsidized and regulated, offering wide coverage for many perils Government support Subsidized by the Federal Crop Insurance Corporation (FCIC) and regulated by the U.S. Dept. of Agriculture Review: Crop-Yield Insurance

Multi-Peril Crop Insurance (MPCI) Many types, covering yield losses, revenue losses, or both Other bundled together under Common Crop Insurance Policy Basic Provisions Combining coverages like this helps the farmer manage all of his risks without duplication or unnecessary paperwork.