Federal Crop Insurance

Federal Crop Insurance
Crop Insurance Policies
By: Allen Financial Insurance Group

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Federal Crop Insurance

It is essential that your farm, ranch or estate be protected with a federal crop insurance policy specifically designed for your operations. It is equally important that your insurance company has a strong financial background with extensive agribusiness experience. Crop insurance currently protects $80 billion of America’s agriculture production. Crop loss indemnity payments to farmers in 2011 has exceeded $6 billion dollars.

Allen Financial Insurance Group has been serving America’s farmers and ranchers for over thirty years. In the event of a loss, our customers are secure in the knowledge that their claim will be processed by our claims staff specially trained to handle agribusiness losses.

Our Federal Crop Insurance Policy offers some of the industry’s broadest and most comprehensive coverage available to the ranch or farm owner at a competitive price.

Crop coverage can be custom designed to meet the specific needs of your operation, from a small acreage hobby farm to a multi-state commercial farm.

Crop Insurance History

Because of the inherent risks and potential for widespread catastrophic losses associated with agricultural production, insuring farmers and ranchers has always posed a challenge. In 1980, Congress passed legislation that was designed to increase participation in the 1938 Federal crop insurance program and make it more affordable and accessible. This modern era of crop insurance was marked by the introduction of a public-private partnership between the U.S. government and private insurance companies. Bringing the efficiencies of a private sector delivery system together with the regulatory and financial support of the Federal government formed the basis of a new and innovative approach to solving a long-standing problem.

The Federal Crop Insurance Reform Act of 1994 dramatically restructured the program. And in 1996, the Risk Management Agency (RMA) was created in the U.S. Department of Agriculture to administer the Federal crop insurance program. Through subsidies built into the new program guidelines, participation increased dramatically. By 1998, more than 180 million acres of farmland were insured under the program, representing a three-fold increase over 1988. In 2008, more than 272 million acres are insured through the program protecting a record-setting 90 billion dollars of crop value. In May of 2000, Congress approved another important piece of legislation: the Agricultural Risk Protection Act (ARPA). The provisions of ARPA made it easier for farmers to access different types of insurance products including revenue insurance and protection based on historical yields. ARPA also increased premium subsidy levels to farmers to encourage greater participation and included provisions designed to reduce fraud, waste and abuse.

Facts & Figures

In 2011, approximately 263 million acres of farmland were protected through the Federal Crop Insurance Program.
There are 15 private sector insurance companies that currently sell and service policies through the Federal Crop Insurance program. Altogether, these companies issued more than 1.1 million policies in 2011.
According to Dr. Bert Little, Tarleton State University, the rate of fraud in the Federal Crop Insurance program is estimated to be less than one-half of one percent. By insurance industry standards, this is an extremely low rate of fraud.
More than 80 percent of insurance farmland in the United States is now protected through the Federal Crop insurance program. In 1985, that number stood at less than 18%.

How It Works

There are two types of crop insurance available to farmers in the United States:

1. Crop-Hail

Crop-Hail policies are not part of the Federal crop insurance program and are provided directly to farmers by private insurers. 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. Unlike MPCI, a crop-hail policy can be purchased at any time during the growing season.

2. Multiple Peril Crop Insurance (MPCI).

MPCI policies must be purchased prior to planting and cover loss of crop yields from all types of natural causes including drought, excessive moisture, freeze, and disease. Newer coverage options combine yield protection and price protection to protect farmers against potential loss in revenue, whether due to low yields or changes in market price.

Under the Federal crop insurance program’s unique public-private partnership, there are currently 16 private companies authorized by the United States Department of Agriculture Risk Management Agency (USDA RMA) to write MPCI policies. The service delivery side of the program — writing and reinsuring the policies, marketing, adjusting and processing claims, training and record-keeping, etc. – is handled by each private company. The program is overseen and regulated by the Risk Management Agency (RMA). The RMA sets the rates that can be charged and determines which crops can be insured in different parts of the country. The private companies are obligated to sell insurance to every eligible farmer who requests it and must retain a portion of the risk on every policy.

The Federal government also subsidizes the farmer-paid premiums to reduce the cost to farmers. The Federal government also provides reimbursement to the private insurance companies to offset operating and administrative costs that would otherwise be paid by farmers as part of their premium. Through this Federal support, crop insurance remains affordable to a majority of America’s farmers and ranchers.

By combining the regulatory authority and financial support of the Federal government with the efficiencies of the private sector, the crop insurance program has succeeded in meeting and even surpassing the goals set forth by Congress for broad participation, diversity and inclusion. By using the private sector, risk is shared among the private companies as well as the government.

Federal Crop Insurance Information

Crop - Hail

Provides protection against any yield reduction caused by hail and/or fire.

Common Crop Insurance Policy - Combo Plan

Beginning with the 2011 crop year, the Risk Management Agency (RMA) introduced a Common Crop Insurance Policy, known as the COMBO plan. Yield Protection (YP) or Revenue Protection (RP/RPE) is now available for crops traded on the commodities market.

Yield Protection (YP)

Protects against production loss due to naturally occurring events and is available for crops traded on commodity exchanges only. YP provides protection against a loss in yield. For most crops, that includes adverse weather, fire, insects, plant disease, wildlife, earthquake, volcanic eruption and failure of the irrigation water supply due to a naturally occurring event. Like the APH plan of insurance, YP guarantees a production yield based on the individual producer’s APH. Unlike the APH plan, a price for YP is established according to the crop’s applicable commodity board of trade/exchange as defined in the Commodity Exchange Price Provisions (CEPP). The projected price is used to determine the yield protection guarantee, premium, any replant payment or prevented planting payment, and to value the production to count. An indemnity is due when the value of the production to count is less than the yield protection guarantee.

Revenue Protection (RP)

Provides protection against loss of revenue due to a production loss, price decline or increase, or combination of both. RP provides protection against a loss of revenue caused by price increase or decrease, low yields or a combination of both (for corn silage and rapeseed, protection is only provided for production losses). This coverage guarantees an amount based on the individual producer’s APH and the greater of the projected price or harvest price. Both the projected price and harvest price are established according to the crop’s applicable commodity board of trade/exchange as defined in the Commodity Exchange Price Provisions (CEPP). While the revenue protection guarantee may increase, the premium will not. The projected price is used to calculate the premium and replant payment or prevented planting payment. An indemnity is due when the calculated revenue (production to count x harvest price) is less than the revenue protection guarantee for the crop acreage.

Revenue Protection with Harvest Price Exclusion (RPE)

Same as Revenue Protection except the amount of insurance is only based on the Projected Price. RP HPE is similar to RP, however RP HPE coverage provides protection against loss of revenue caused by price decrease, low yields or a combination of both. Unlike RP, the revenue protection guarantee for RP HPE is based on the projected price only and does not increase based on a harvest price.

Actual Production History Crop Insurance (APH)

APH protection, also known as MPCI, protects against weather-related causes of loss and other unavoidable perils. The APH plan of insurance provides protection against a loss in yield. For most crops, that includes drought, excess moisture, cold and frost, wind, flood, and unavoidable damage from insects and disease. This plan guarantees a yield based on the individual producer’s actual production history. The available price elections are established by the Federal Crop Insurance Corporation (FCIC). An indemnity is due when the value of the production to count is less than the liability.

Group Risk Protection (GRP)

Protection against widespread yield disaster, but does not provide protection from events on the farm. GRP coverage is based on the experience of the county rather than individual farms, so while maintaining the insured’s actual production history is encouraged, it is not required for this program. GRP indemnifies the insured in the event the payment yield falls below the insured’s trigger yield. The FCIC will issue the payment yield in the calendar year following the crop year insured. Since this plan is based on county yields and not individual yields, the insured may have a low yield on their farm and not receive payment under GRP.

Group Risk Income Protection (GRIP)

Protects against losses in revenue due to low price or in-county yields (not individual farm yields) due to insured causes, unexpected price declines, or both.

Like GRP, GRIP is based on the experience of the county rather than individual farms, so while maintaining the insured’s actual production history is encouraged, it is not required for this program. A GRIP policy includes coverage against potential loss of revenue resulting from a significant reduction in the county yield or commodity price of a specific crop. When the county yield estimates are released, the county revenues will be calculated. An indemnity is due under GRIP when the county revenue published by FCIC is less than the trigger revenue. Since this plan is based on county revenue and not individual revenue, the insured may have a loss in revenue on their farm and not receive payment under GRIP. The Harvest Revenue Option (HRO) Endorsement is available for GRIP (see below).

County Advantage Supplemental Insurance

As a supplement to GRIP, this coverage indemnifies the producer for the difference between what individual insurance coverage (i.e., CRC or RA) would have paid and what the producer’s GRIP (or GRIPHR) policy pays.

GRIP with Harvest Revenue Option (GRIP HRO)

GRIP HRO is GRIP but with an added Harvest Revenue Option. For additional premium, this option offers “upside” harvest price protection by valuing lost bushels at the harvest price in addition to the coverage offered under GRIP. GRIP HRO will pay a loss when the county revenue is less than the HRO trigger revenue, which is calculated using the higher of the projected price or harvest price.

Crop Plan Comparison Chart

This information and decision tool is provided as a means to assist growers in making crop insurance and risk management decisions.

Understanding how loss payments are determined is an important part of choosing the correct crop insurance product. Actual Production History (APH), Revenue Protection (RP), Revenue Protection with Harvest Price Exclusion (RPHPE) and Yield Protection (YP) currently account for a large proportion of the protection in force. The Loss Estimation Worksheet is a loss estimator that demonstrates the differences in how losses are calculated under the APH, RP, RPHPE and YP programs.

This worksheet is strictly a simulation of loss payments based on a set of assumptions supplied by the user. Any differences in actual yield and/or price other than those selected could cause a substantial difference in performance.

Loss Estimation Worksheet