CROP INSURANCE IN THE UNITED STATES Risk Management Agency 2 Why - - PowerPoint PPT Presentation

CROP INSURANCE IN THE UNITED STATES

Risk Management Agency

Why Do We Have Crop Insurance?

• Farming is risky!
• Flooding
• Drought
• Freeze/Frost
• Hail
• Disease
• Insects

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And Why is the U.S. Government Involved?

• Agricultural risks are not easy to insure
• Poor experience in U.S. of purely private system

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History

• 1938: Federal Crop Insurance Corporation (FCIC) established
• Great Depression, Dust Bowl
• Limited crop options
• 1980: Introduced private sector delivery
• Expanded crops and areas
• Low participation; Poor performance

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History

• 1994: Crop insurance reform
• CAT coverage (linkage); Increased premium subsidy; Larger private sector role
• Program integrity; Actuarial targets
• Significant increase in participation; Improved actuarial performance
• 2000: Additional reform
• Increased premium subsidy; Private product development
• 2014 Farm Bill
• General move towards risk management

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How U.S. Crop Insurance Works

• Government (470 Employees)
• Create insurance policies – over 130 crops
• Set premium rates
• Oversee/reinsure private companies
• Private Insurance Companies (12,500 agents; 5,000 loss adjusters)
• Sell & service policies to farmers
• Ensure farmers comply with the rules
• Farmer (1.2 million Policies)
• Decides to purchase months before planting
• Responsible for portion of premium
• Good farming practices

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New Product Development – Private Sector

• Private persons or entities may propose new products
• Policies/provisions of policies and rates of premium
• Modifications or endorsements to existing plans
• Viable & marketable policy
• Coverage in significantly improved form
• Owned and maintained by developer (compensated by Government)
• Changes to approved plan made by developer
• Developer responsible any error, mistake or flaw
• If approved, can be reimbursed for R&D costs
• Around 30 new products so far

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New Product Development - Government

• Contracts are announced to a contracting “pool”- the “pool” submits

competitive bids for development contracts

• Bids are reviewed by RMA for technical soundness and cost
• Or, government may develop a new product itself
• Around 30 new products so far

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Premium Subsidy

• 1991: Average subsidy rate: 26%, Participation: 31%
• 2015: Average subsidy rate: 62%, Participation: 81%

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Percent of Premium Paid by Government Coverage Level 50% 55% 60% 65% 70% 75% 80% 85% 2015 Subsidy Rate 67% 64% 64% 59% 59% 55% 48% 38%

Crop Insurance Policies

• Yield Coverage (20% of Total Premium)
• Covers 50% to 85% of grower’s expected yield
• Expected Yield = 4 to 10 year average
• Revenue Coverage (70% of Total Premium)
• Covers 50% to 85% of a grower’s expected revenue
• Revenue = Expected Yield x Expected Price (from Commodity Exchange Market)
• Area Risk Coverage (4% of Total Premium)
• Covers 70% to 90% of area yield or revenue
• Often based on average for a county
• Other Policy Types (6%)

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Calculating an Indemnity on a Revenue Policy

• A loss occurs when the revenue for a crop produced for the unit falls below the

revenue production guarantee as a result of price decline. Example uses corn in Iowa. 185 Bushels Per Acre (based on 10 year Actual Production History) x .75 Coverage Level 138.8 Yield Guarantee 138.8 Yield Guarantee x $4 Projected Price (est. announced in March based on futures contracts) $555.20 Revenue Guarantee

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Calculating an Indemnity on a Revenue Policy cont.

90 Bushels Per Acre Actually Produced X $3.75 Harvest Price (est. announced in Nov. based on futures contracts) $337.50 Revenue $555.20 Guarantee

• $337.50

Revenue $217.70 Indemnity

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Whole Farm Revenue Protection

• The Agricultural Act of 2014 (Farm Bill) instructed RMA to develop a whole-

farm diversified risk management plan of insurance

• WFRP provides coverage for all revenue produced on a farm
• Recognizes diversity with higher subsidy levels
• Whole-farm subsidy is designed for farms with 2 or more commodities meeting

the diversification requirements

• It is the first crop insurance policy available in EVERY county in the United

States

• In 2014 when it was not yet available in every county and only in 44 states,

there were 1,084 policies in force, totaling $1.1 billion in liability

• As of June 9, 2015, already more than 1500 policies are in force totaling more

than $1.6 billion in liability

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WFRP cont.

• A producer’s revenue guarantee with WFRP is based on his/her farm tax

records

• If a producers believes there will be a loss of revenue due to an insured event
• Must file notice of loss within 72 hours (like other policies)
• Inspection may be required (like other policies)
• But claims may not be filed until after the farm taxes have been filed for the year in which

the loss occurred

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Participation Rate in Crop Insurance

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

(Insured acres / planted acres)

Top 10 Commodities Nationwide by Liability

Rank 2015 Commodity 2015 Liability Percent of Total 1 CORN $40.2 Billion 39.3% 2 SOYBEANS $24.2 Billion 23.7% 3 WHEAT $8.4 Billion 8.2% 4 COTTON $3.0 Billion 2.9% 5 ALMONDS $2.9 Billion 2.9% 6 RICE $1.5 Billion 1.5% 7 NURSERY $1.5 Billion 1.4% 8 GRAPES $1.5 Billion 1.4% 9 ORANGE TREES $1.3 Billion 1.2% 10 APPLES $1.2 Billion 1.1% ALL OTHER $16.5 Billion 16.3% TOTAL $102 Billion

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Market Penetration…More Than Just Row Crops

Crop Category Item 1990 2000 2011 2014 Principle Crops*** NASS Acres* 246,527,700 253,140,800 253,835,155 258,002,360 RMA Acres 94,420,238 187,793,518 214,602,614 219,843,840 Market Penetration 38% 74% 85% 85% Other Field Crops NASS Acres* 11,421,300 15,454,200 11,799,727 15,882,869 RMA Acres 378,054 9,167,445 8,227,024 9,647,757 Market Penetration 3% 59% 70% 61% Fruits and Nuts NASS Acres* 3,501,570 4,100,300 4,037,690 4,285,999 RMA Acres 607,297 3,002,739 2,938,322 3,184,154 Market Penetration 17% 73% 73% 74% Vegetables NASS Acres* 2,821,910 3,726,910 2,846,570 2,766,090 RMA Acres 441,138 1,072,964 921,358 992,964 Market Penetration 16% 29% 32% 36% Total (excluding hay/livestock/ nursery/PRF) NASS Acres* 264,272,480 276,422,210 272,519,142 280,937,318 RMA Acres 95,846,727 201,036,666 226,689,318 233,668,715 Market Penetration 36% 73% 83% 83%

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But Little Coverage for Livestock

• In addition to coverage through Whole Farm Revenue Protection, several

policies exist to help dairy, beef, lamb, and pork producers.

• We are not able to provide as much risk protection to livestock producers

because RMA is limited to $20 million in underwriting capacity for all 8 livestock policies

• Most popular program to date has been Livestock Gross Margin for Dairy

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Livestock Gross Margin--Dairy

• Provides protection when feed costs rise, or milk prices drop
• The Gross Margin is the market value of milk minus feed costs
• Uses future prices for corn, soybean meal, and milk to determine the expected

and actual gross margin

• Producers not eligible to participate in both LGM-Dairy and the Farm Service

Agency Dairy Margin Protection Program

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Actuarial Performance of Crop Insurance

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0,00 0,25 0,50 0,75 1,00 1,25 1,50 1,75 2,00 2,25 2,50 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Loss Ratio

Loss Ratio, U.S. Crop Insurance Program, 1980 to 2015

1980-1993 Average = 1.58 1994-2015 Average = 0.88

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Base Premium Rates, Non-Irrigated Corn

Program Integrity

• 6 Compliance Offices
• Data Mining
• Focusing limited resources
• Spot checks

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IMPROPER PAYMENTS

2012 2013 2014 2015 RMA 4.08% 5.23% 5.58% 2.20% USDA 5.11% 5.36% 5.52% Government

• wide

4.35% 3.53% 4.02%

Lessons Learned

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Summary

• Success only after much trial and error
• Replace ad-hoc assistance
• General trend toward risk management in farm programs
• Not all crops want insurance
• Other ways to manage risk
• Seeking further improvements
• Expanding options for local/regional producers, organic producers, and livestock
• Technology; precision agriculture
• ‘Big Data’

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Thank you