Crop insurance – everything you need to know

Crop insurance – everything you need to know | Insurance Business

Crop insurance – everything you need to know

Crop insurance protects farmers and agricultural producers against the loss of crops as a result of extreme weather, like floods, hail, and drought, or the loss of revenue due to price fluctuation in the agricultural commodity market.

There are two types of crop insurance available to farmers in the US: crop-hail insurance, which is provided by the private sector, and multiple peril crop insurance, which is underwritten by the private sector and the federal government. Multiple peril crop insurance is offered as part of the Federal Crop Insurance Program.

Crop-hail insurance

Crop-hail insurance is provided by private insurers and is not part of the Federal Crop Insurance Program. Farmers can purchase it at any point in the growing season for protection against hail, fire, lightning, wind, and other perils like vandalism and malicious theft, while many policies also cover replanting costs. Some famers use crop-hail insurance to protect themselves against crop losses that either aren’t insured under the federal program or fall below the federal coverage threshold.

Multiple peril crop insurance

Multiple peril insurance covers loss of crop yield as a result of all types of natural causes, including drought, excessive moisture, deep freezes, unusually hot weather and disease. This policy must be purchased by the farmer prior to planting in order for any potential claims to be valid.  

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Multiple peril insurance coverage is offered under the Federal Crop Insurance Program, which is a public-private partnership between the federal government and 15 private insurers who have been approved by the US Department of Agriculture Risk Management Agency (USDA RMA) to write MPCI policies. Premium rates for multiple peril insurance distributed via insurers in the Federal Crop Insurance Program are determined by the Risk Management Agency (RMA).

Yield-based versus revenue-based insurance

Farmers can buy yield-based crop insurance policies which pay out if the farmer suffers a yield loss relative to his or her historical or average yield. Normally, catastrophe coverage will pay out if a farmer loses 50% of normal yield, and, when that happens, the farmer will typically receive 55% of the estimated crop value. Farmers don’t have to pay a premium for catastrophic coverage, but they must pay an administrative fee.

Lots of farmers prefer to go for a revenue-based policy, which can cover a single crop or an entire farm. Under a revenue-based policy, the farmer selects a level of coverage, which is typically between 50% and 75% of the average yield.  

Crop disaster assistance

The non-insured crop disaster assistance program (NAP) provides financial assistance to producers of non-insurable crops when low yields, loss of inventory, or prevented planting occur due to natural disasters. It’s administered by the USDA.

History of the Federal Crop Insurance Program

The Federal Crop Insurance Program was set up in 1938 with the passing of the Federal Crop Insurance Act. The main goal was to maintain the viability of farming and ensure the stability of the nation’s food supply. However, success in the early years was thwarted by high costs, low participation among farmers, and an inability to collect and maintain sufficient reserves to cover catastrophic losses.

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In 1980, Congress passed legislation that expanded the program and made it more affordable. The Insurance Information Institute (III) explains: “Its goals were to increase participation in the program to the point where government-funded disaster assistance programs could be abolished; raise the level of efficiency by joining with the private sector to sell, service and bear some of the risk of providing coverage (until then crop insurance was provided solely by the US Department of Agriculture); and create an actuarially sound program that would reduce federal outlays while keeping coverage affordable through subsidies.”

However, participation among farmers still remained low until Congress decided to mesh crop insurance and disaster assistance into one program, passing The Federal Crop Insurance Reform Act of 1994. The Reform Act radically restructured the program and it led to the creation of the Risk Management Agency (RMA) in 1996. The RMA was created in the US Department of Agriculture to administer the Federal Crop Insurance Program. Subsidies built into the program through the Reform Act dramatically increased participation in the program.

The Farm Bill

According to cropinsuranceamerica.org, the 2014 Farm Bill “accelerated the evolution from traditional farm price and income support to risk management, solidifying crop insurance as the primary tool for farmers in dealing with production and price risk […] It strengthened crop insurance by adding several new products and requiring a number of program revisions to increase crop insurance’s role as the primary component of the farm safety net.”

Trump signs the Farm Bill

On December 20, 2018, President Trump signed the Farm Bill, which passed in the Senate by a vote of 87-13 and in the House by a vote of 369-47. The bill, which included the federal crop insurance program, preserved vital crop insurance provisions and recognized the importance of independent insurance agents in delivering the benefits of the program to farmers.

Jon Gentile, vice president of government relations at The National Association of Professional Insurance Agents commented: “We’re pleased that Congress was able to agree on a compromise Farm Bill that includes strong support for the federal crop insurance program. The overwhelming votes in favor of the bill in both the House and Senate and the president’s signing of it signal strong, bipartisan support for the key crop insurance provisions it includes.”

In recent news

In March 2019, President Trump proposed revisions to the Federal Crop Insurance Program, including a 12% cap on underwriting gains to insurers. The cap, he said, would lead to savings of $25.7 billion over 10-years. However, this would also force farmers to pay a larger share of crop insurance premiums – jumping from 38% to 52%.

The White House said in its 150-page summary that through the cuts, it would optimize crop insurance and farm subsidies by “eliminating subsidies to higher-income farmers and reducing overly generous crop insurance premium subsidies to farmers and payments made to private-sector insurance companies.”