Adverse weather and volatile prices make farming a business of highs and lows. Crop insurance is designed to protect farmers from economic damages caused by everything from a radical decline in crop prices to the inability to plant due to drought.
History of Crop Insurance
Crop-Hail, or simply Crop Insurance policies were first sold in America in 1880 by private insurance companies, to protect farmers against the damaging effects of hailstorms. Then in 1935, following record-breaking heat, dust storms began and the dusty soil from plowed fields drifted and piled up like snowdrifts, killing crops and cattle. After this, in 1937, the federal government started the first national crop insurance program to help agriculture recover from the combined effects of the Great Depression and the Dust Bowl, and in 1938 the Federal Crop Insurance Corporation (FCIC) was created to carry out the program.
Private insurance companies became involved again in 1980 and by 1998 were the sole providers of crop insurance to the American farmer. The Federal Crop Insurance Reform Act of 1994 dramatically restructured the federal program, and made participation in the crop insurance program mandatory for farmers to be eligible for deficiency payments under price support programs, certain loans, and other benefits. Because of the mandatory participation, catastrophic (CAT) coverage was created, providing yield-based coverage with premiums subsidized by the federal government. Congress repealed the mandatory participation in 1996, but farmers who accepted other benefits were made to purchase crop insurance or else waive eligibility for any disaster benefits for that crop year. That same year the Risk Management Agency (RMA) was created in the Department of Agriculture to administer the federal crop program in the U.S. With built-in subsidies, participation grew to more than 180 million acres of insured farmland by 1998. With passage of the Agriculture Risk Protection Act (ARPA) in 2000, Congress enacted legislation expanding the role of the private sector, allowing entities to partner or contract with the RMA to research and develop new and innovative insurance products. ARPA also increased subsidies to farmers to encourage greater participation and added provisions designed to reduce fraud, waste and abuse.
The crop insurance program grew rapidly, and in 2014, the Farm Bill strengthened the program with new products and options and added revisions to reinforce the role of crop insurance as the primary component of the farm safety net. Further, the bill made the insurance more affordable for beginning farmers with the Beginning Farmer and Rancher (BFR) Benefits. A major enhancement was the addition of two supplemental policies, the Supplemental Coverage Option (SCO) and the Stacked Income Protection Plan (STAX, expanding protection against losses due to natural disasters or price declines. Another major addition was the Whole Farm Revenue Protection (WFRP) policy, which provides coverage for highly diversified farms and farms selling two to five commodities to wholesale markets.
By 2018, 1.1 million policies were sold protecting more than 130 different crops over 300 million acres, with an insured value of more than $100 billion. Today, federal crop insurance is the cornerstone of U.S. farm policy and the safety net for America's farmers.
The federal government's role in the crop insurance industry today is to establish policy provisions, rules, and regulations. Federal crop insurance offers a suite of varying risk management tools that protect farmers and ranchers against the loss of their crops due to natural disasters such as drought, freeze, flood, fire, insect, disease and wildlife, or a loss of revenue due to a decline in price. Federal crop insurance is sold and serviced by private-sector crop insurance companies and agents, while being regulated by the federal government.
Depending on the level of coverage, the government subsidizes 38 percent-67 percent of the producer's premium and provides reinsurance to Approved Insurance Providers (AIPs). The government also provides administrative and operating (A&O) reimbursement to these companies.
Types of Crop Insurance
Crop-Hail policies are not part of the federal crop insurance program and are sold directly to farmers by private insurers and regulated by the state insurance departments. In areas of the country where hail is a frequent event, farmers often purchase crop-hail policies to protect high-yielding crops, as hail has the unique ability to completely destroy a large part of a planted field while leaving the rest undamaged. One advantage to a farmer for these policies is their often low or no deductible. Unlike MPCI, a crop-hail policy can be purchased at any time during the growing season. Many farmers purchase crop-hail coverage as a supplement to MPCI.
Farmers typically buy crop insurance for one single crop at a time. These policies are called single crop "multi-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.
Whole Farm Revenue Protection allows farmers to insure an amount of their operation's revenue. The federal government shares a large amount of the premium cost for more diversified operations (two or more commodities).
Index-based insurance products, such as Pasture Rangeland Forage (PRF) and Apiculture (API), base indemnity payments on a rainfall index for a geographic area where the farmer's operation is located. The fact that indemnities are triggered by an area index means that there is no need for loss-adjustment on an individual farm.
Crop Insurance Availability
Currently, private companies are authorized by the United States Department of Agriculture Risk Management Agency (USDA RMA) to write MPCI policies. The service delivery side of the program is handled by each private company, with federal reimbursement to offset operating and administrative costs that would otherwise be paid by farmers as part of their premium. The RMA oversees the program, sets the rates, and determines which crops can be insured in different parts of the country. The private companies must sell insurance to every eligible farmer who requests it and must retain a portion of the risk on every policy.
Conclusion
Combining the regulatory authority and financial support of the federal government with the efficiencies of the private sector has created an effective and successful risk-sharing partnership for U.S. agriculture. A list of available resources follows:
8/11/19