The Basics of Crop Insurance

ProAg Basics of Crop Insurance including the history, plans and private or crop hail insuranceCrop insurance is a vital part of the American agricultural industry and a key risk management tool for the modern farmer. It is, however, a complex topic, so we would like to provide an overview of some of the basic crop insurance concepts, practices, and tools. We hope this will be informative to those who are seeking a basic understanding of crop insurance, while also serving as a resource for those better acquainted with the topic.

Federal Crop Insurance is a complex program that offers multiple risk-management opportunities for the ag producer. The program includes multiple plans of coverage for over 100 commodities. The government has entered into a partnership with private crop insurance providers, like ProAg®, to offer crop insurance on an equal-opportunity basis to agricultural producers nationwide.  This is a summary only and is meant as a supplement to the Crop Insurance Handbook, Policies and Provisions, RMA bulletins, and other documents as distributed by RMA and ProAg, not a replacement.

HISTORY OF THE CROP INSURANCE PROGRAM
Congress first authorized federal crop insurance in the 1930s along with other initiatives to help agriculture recover from the combined effects of the Great Depression and the Dust Bowl.

The Federal Crop Insurance Corporation (FCIC) was created in 1938 to carry out the program. Initially, the program was started as an experiment, and crop insurance activities were mostly limited to major crops in the main producing areas. Crop insurance remained an experiment until passage of the Federal Crop Insurance ACT of 1980.

Prior to 1980, crop insurance was strictly a government program. In the 1980s, private insurance companies became involved and, by 1998, had become the sole providers of crop insurance to the American farmer.

Although the number of insurable commodities grew with the passage of the 1980 Act, it did not achieve the level of participation that Congress had hoped for. After a major drought in 1988, ad hoc disaster assistance was authorized to provide relief to needy farmers. Another ad hoc disaster bill was passed in 1989, a third in 1992, and a fourth in 1993. Congress grew tired of these repeated requests.

By the early 1990s, Crop Insurance participation rates were still low and Congress was spending more money in disaster relief than it was on Crop Insurance. This led to the enactment of the Federal Crop Insurance Reform Act of 1994.

The 1994 Act dramatically restructured the program. This Reform act 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 participation was mandatory, catastrophic (CAT) coverage was created.

CAT coverage compensated farmers for losses exceeding 50 percent of an average yield paid at 60 percent of the price established for the crop for that year. The premium for CAT coverage was completely subsidized. Participants paid $50 per crop per county subject to maximum amounts for multiple crops and counties insured by the same individual. Subsidies for higher coverage levels were increased.

In 1996, Congress repealed the mandatory participation requirement. However, farmers who accepted other benefits were required to purchase Crop Insurance or otherwise waive their eligibility for any disaster benefits that might be made available for the crop year. These provisions are still in effect.

In the same year, the Risk Management Agency (RMA) was created in the United States Department of Agriculture to administer the Federal Crop Insurance programs and other non-insurance-related risk management and education programs that help support U.S. agriculture. Through subsidies built into new guidelines, participation grew.

By 1998, more than 180 million acres of farmland were insured under the program, representing a three-fold increase over 1988.

In 2000, Congress enacted legislation that expanded the role of the private sector, allowing entities to participate in conducting research and development of new insurance products and features. With the expansion of the contracting and partnering authority, RMA can enter into contracts or create partnerships for research and development of new and innovative insurance products.

Authority was added to allow the Board of Directors to create an expert review panel to provide assistance to the board in evaluating new insurance products for feasibility and actuarial soundness.  ARPA also increased premium subsidy levels to farmers to encourage greater participation and included provisions designed to reduce fraud, waste and abuse.

In 2008, more than 272 million acres were insured and by 2013, Crop Insurance protected more than 294 million acres. This was equal to 89% of planted cropland, including protecting 128 different crops with an insured value of $124 billion!

In 2014, The Farm Bill substantially strengthened Crop Insurance by adding several new products and options for farmers and ranchers and by making Crop Insurance more affordable for beginning farmers with a new provision called Beginning Farmer and Rancher (BFR) Benefits.

The Farm Bill required a number of program revisions to reinforce Crop Insurance’s role as the primary component of the farm safety net. The major enhancement to Crop Insurance is the addition of two supplemental policies (The Supplemental Coverage Option (SCO) and the Stacked Income Protection Plan (STAX)) that will help producers expand their protection against losses due to natural disasters or price declines.

The Farm Bill provides for increased program integrity, guaranteeing that tax dollars are used effectively and efficiently as we expand the farm safety net.

Today, the Federal Government’s role in the crop insurance industry is to establish policy provisions, rules, and regulations. Depending on the level of coverage, the government subsidizes from 38% to 67% of the producer’s premium and provides reinsurance to ProAg and other Approved Insurance Providers (AIPs). The government also provides administrative and operating (A&O) reimbursement to these companies.

HOW FARMERS PURCHASE THEIR CROP INSURANCE
Federal crop insurance is administered by Approved Insurance Providers (AIPs). Since 1998, private insurance companies reinsured by FCIC, have sold and serviced all Multiple Peril Crop Insurance products authorized under the Federal Crop Insurance Act.

ProAg and other approved AIPs enter into a Standard Reinsurance Agreement (SRA) with FCIC to administer the crop insurance program by marketing, underwriting, and adjusting claims for crop insurance policies. AIP’s transmit policy information to FCIC as required by the SRA. Each AIP is also charged with the training and monitoring of both agents and AIP staff to assure that processes and procedures established by FCIC are adhered to.

The AIP contracts with independent licensed agents to market crop insurance products. The agent receives a commission as outlined in an annual contract between the agent and the AIP. The agent provides product and premium information to the insured and collects information from the insured as required by the policy. This includes application, production, and acreage information for most products.

The agent’s ability to build business relationships with the insured is an important piece of the delivery system. One of the greatest challenges for those involved in the sale and service of crop insurance is staying current. With more crops and plans in place, the program guidelines change frequently.

The insured is one who has ownership in a crop and has entered into a contract to insure a crop in a county where the product is available. The insured is required to report required information to establish a contract and guarantee, pay applicable premiums and fees, follow appropriate farming practices, and to notify the AIP in the event of a loss. An indemnity will be paid to the insured when the requirements of the policy have been met and his guaranteed production or revenue in some cases is not met due to an insurable cause.

The insured is the main focus of the crop insurance program. Providing the ag producer with tools to manage their risks is the primary goal of the MPCI program and ProAg.

Premium rates and insurance terms and conditions are established by FCIC for the products it develops, or established with FCIC approval for products developed by insurance providers and are constant throughout the industry.

In other words, the premium for the exact same coverage will be the same from company to company and agency to agency. Companies and agencies compete with their crop insurance knowledge, customer service, and related insurance products.

PLANS OF CROP INSURANCE
Multi-Peril Crop Insurance (MPCI) is the general name given to crop coverage provided through the Federal Crop Insurance Corporation (FCIC). As the name suggests, these policies provide coverage to the ag producer for a number of naturally occurring perils.

Most MPCI policies provide coverage for loss of production. Over the last few years, products that combine yield and price coverage have been introduced. These products cover loss in value due to a change in market price during the insurance period, in addition to the perils covered by the standard loss of yield coverage.

Crop insurance policies also typically indemnify the insured person for other adverse events, such as the inability to plant or excessive loss of quality due to adverse weather. These types of coverage vary by crop due to the difference in the crop’s individual natures.

Here are some of the more common plans of insurance. Additional plans may be available in certain states or counties.

Individual plans
Individual plans are based upon the insured’s production and for some coverage, revenue history.

  • Actual Production History (APH) 
    The The APH plan of insurance is the oldest Federal Crop Insurance plan available. It provides the producer protection against a loss of production due to nearly all unavoidable, natural occurring events. This plan of insurance guarantees the producer a yield based on their production history, which is why it is called the APH plan.

The guarantee is calculated by multiplying their average yield by the level of coverage elected for the producer’s share of the crop. An indemnity may be due if the production (harvested and appraised) is less than the guaranteed amount.

The pricing for most crops insured under the APH plan of insurance is established by RMA – these prices are called price elections.

Many of our perennial crops such as apples, peaches and grapes fall under the APH plan, and also those crops that do not have revenue coverage available. Some grain crops such as oats, rye, flax and buckwheat are also covered under the APH plan of insurance.

  • Actual Revenue History (ARH) 
    The Actual Revenue History is based upon the insured’s revenue history for the crop insured. The guarantee is calculated based upon the insured’s production and revenue history. A loss occurs when the revenue to count for the current year falls below the insured’s guaranteed revenue.
  • Yield Protection (YP)
    The Yield Protection plan is very similar to the APH plan, but is only available on crops that are eligible for Revenue Protection. The Yield Protection plan of insurance provides protection against a loss of production.

It works the same as the APH plan but instead of using a price election established by RMA, the price is established according to the applicable board of trade/exchange as defined in the policy document called the Commodity Exchange Price Provisions (CEPP). The price that is used is called the Projected Price. The Projected Price is used to calculate the guarantee, premium and loss payments.

The guarantee is established by multiplying the average yield by the coverage level and by the Projected Price, and an indemnity may be due when the value of the production to count is less than the yield protection guarantee plan.

  • Revenue Protection (RP) 
    The Revenue Protection Plan provides protection against a loss of revenue caused by price increase or decrease, loss of production, or a combination of both. It is available for the same crops where YP coverage is available.

The RP plan uses the Commodity Exchange Price Provisions to establish the pricing, however it is a little different from the YP plan as it uses two different price discovery periods. The projected price is determined in the same manner as YP and is used to calculate the premium, replant and Prevented Planting payments. The harvest price is released near harvest time. This price is used to calculate an indemnity.

The revenue protection guarantee is established by: Average Yield X Coverage Level X Insured’s Share Percentage X Projected Price.

An indemnity may be due when the calculated revenue (insured’s production X harvest price) is less than the revenue protection guarantee for the crop acreage.

Note: When the harvest price is released, if it is greater than the projected price, the revenue guarantee will be recalculated using the harvest price as well.

While the revenue guarantee is increased, the insured is not charged additional premium for this increase. If the harvest price is less than the projected price, the policy guarantee remains at the projected price.

Losses are paid using the harvest price.

  • Revenue Protection With Harvest Price Exclusion (HP-HPE ) 
    The The Revenue Protection Plan with Harvest Exclusion Plan (RP-HPE) is similar to the Revenue Protection (RP) plan, however it provides coverage against loss of revenue caused by price decrease, low yields or a combination of both – the price increase is not covered because the guarantee is not adjusted up by the harvest price for this plan.

The projected price is used to determine the revenue guarantee, the premium and any replant or prevented planting payment. The harvest price is only used to value the production to count in a production or revenue loss. It is not used to recalculate the guarantee if there is an increase.

The producer does not receive the benefit of price movement with the RP-HPE plan.

  • Dollar Plans of Insurance 
    Dollar Plans of Insurance are available for some commodities. Dollar Plans of Insurance are usually insured in dollar per acre or some other measurement applicable to the crop. The maximum dollar amount per acre or other measurement is established and published by RMA. The insured chooses a percentage of the maximum dollar amount to establish the guarantee. A loss occurs when the dollar to count per acre falls below the dollar amount of insurance.

Area Plans 
Area Plans insure against an area wide usually county-wide loss of production on a crop. The idea is that when an entire county’s crop yield is low, most producers in that county will also have low yields. National Agricultural Statistical Service (NASS) county data is used to set the expected and actual county yields.

Under an Area plan, the insured chooses a percent of the expected county yield or revenue which is published by RMA in the actuarial documents. If the actual county yield or revenue falls below the expected county yield, a loss occurs.

The individual plans of insurance (APH, YP, RP, RPHPE) all require the producer to provide how much production he had in the past so a guarantee can be established.  Even though we don’t use the producer’s actual yields to establish a guarantee for area plans, the new ARPI plan (below) still requires the production to be reported at the end of the insurance period.  Maintaining this production history is mandatory and may be used by RMA as a data source to establish and maintain these area programs.

Area Risk Protection Insurance (ARPI) was released for 2014 and is the newest Area Plan of Insurance.  ARPI has its own Basic Provisions, separate from the Common Crop Insurance Policy, so all ARPI plans of insurance follow these different guidelines.

There are three ARPI Plans of Insurance:

  • Area Yield Protection Plan (AYP)
    The AYP plan provides provides coverage based on the experience of the county, rather than an individual farm.  A loss may occur if the final county yield falls below the insured’s expected (or trigger) yield.  FCIC issues the final county yield in the calendar year following the insured crop year.  Since this plan is based on a county yield and not a producer’s individual yield, it is possible for a producer to have a low yield on their farm and not receive any payment under this plan.
  • Area Revenue Protection (ARP)
    The Area Revenue Protection Plan provides the yield protection of the Area Yield Protection Plan, but also provides against a loss of revenue due to production loss, price decline or a combination of both.  ARP is similar to the RP plan as the initial guarantee is calculated using the projected price, but the revenue guarantee will increase if the harvest price is greater than the projected price. If the harvest price is lower than the projected price, the policy guarantee remains the same.  A loss occurs when the Final County Revenue falls below the Expected County Revenue (or Trigger) Guarantee.
  • Area Revenue with Harvest Price Exclusion (ARP-HPE)
    The ARP-HPE is similar to the ARP plan except that the guarantee is not adjusted up by the Harvest Price. The guarantee is always based on the projected price, but losses are calculated using the harvest price.  This plan is very similar to the RPE-HPE plan except it is based on experience of the county, rather than the individual producer.

ARPI has both a projected price and a harvest price. The prices are established using the same methodology as the YP and RP plans according to the applicable commodity board of trade/exchange as defined in the CEPP. Written agreements are not available for any of hte ARPI plans of insurance.

For more information on how ARPI plans of insurance work, you can refer to the RMA website and review the ARPI basic provisions along with any applicable ARPI crop provisions.

THE CROP INSURANCE CYCLE
RMA and insurance industry activities follow a timetable known as the annual insurance cycle. The cycle begins when RMA releases information about insurance products for the next crop year, and ends with changes to the program for the following year.

The Crop Insurance Cycle
IMPORTANT ANNUAL CROP CYCLE DEADLINES
Contract change date: The calendar date by which changes to the policy will be made for the crop year. The contract change date is found in the Crop Provisions.

Sales closing date: The Sales Closing Date (SCD) is found in the Special Provisions and is the final date that an application can be filed. It is also the last date that an insured may make coverage changes to an existing crop insurance policy.

Cancellation date: The calendar date specified in the Crop Provisions on which coverage for the crop will automatically renew unless canceled in writing by either the insured or AIP. The cancellation and sales closing date are often the same date.

Production Reporting Date: The production reporting date is 45 days from the cancellation date unless otherwise noted in the Special Provisions and is the final date that the prior year’s production and acreage may be reported for most plans of insurance.

Acreage Reporting Date: The acreage reporting date is the date contained in the Special Provisions or as provided in section 6 of the Common Crop Insurance policy, and is the final date that an insured may submit their acreage report. If acreage is not reported, insurance will not be in effect.

Notice of crop damage:

  • Planted crops with damage or loss of production: A notice of loss for a planted crop must be provided within 72 hours of the initial discovery of damage or loss of production (but not later than 15 days after the end of the insurance period, even if you have not harvested the crop).
  • Revenue loss without a production loss: If there is no damage or loss of production and a revenue plan of insurance is in effect, notice must be given no later than 45 days after the latest date the harvest price is released.
  • Prevented planting: For crops that are prevented from being planted due to an insurable cause, notice must be provided within 72 hours after the final planting date or the time the producer determines it will not be possible to plant during any applicable late-planting period.

End of insurance period: The end of insurance period is the date which the crop insurance coverage ceases for the crop year. This includes when the crop is destroyed or harvested, at the final adjustment of a loss on a unit, abandonment, or the calendar date contained in the Crop Provisions or Special Provisions for the end of the insurance period, or as otherwise specified in the Crop Provisions.

Payment due date: The premium due date is the last day a payment can be paid without being charged interest.

Termination date: The termination date is the calendar date contained in the Crop Provisions when crop insurance ceases to be in effect because of nonpayment of any amount due under the policy, including premium.

PRIVATE INSURANCE – CROP HAIL/NAMED PERIL

Crop insurance that is not part of the Federal Program is referred to as Private Crop Insurance and is sometimes referred to as Named Peril Insurance.

Most private coverage may be added to a crop to supplement coverage under the Federal Crop Insurance policy. Some plans require a Federal Crop Insurance underlying policy.

One of the most common private crop insurance types is Hail Insurance, and as the name suggests, it primarily covers against damage to the crop caused by hail, but also provides coverage against a few other things such as transit coverage and vandalism. There are several others types of private crop insurance depending on the area and crops that are grown in that area.

Most private coverage is acre by acre coverage. Production reports are not required, and instead of a production guarantee, the liability is expressed in a dollar amount.

Unlike MPCI, named peril or crop hail premiums are often due at the time of application or by a certain date following application.

Losses are paid when damage by the specified peril occurs to the crop.

Agents, please contact your ProAg Field Representative to review ProAg private crop hail or named peril coverage that’s available in your area. Insureds, contact your local ProAg agent to see what options are available to you.

LOOKING FOR A CROP INSURANCE PROVIDER THAT VALUES YOU?
For more than 80 years, ProAg has provided personal service to farmers and agents. ProAg began as a family-owned business located in Amarillo, TX, and has evolved into a visionary, privately-owned business dedicated to outstanding quality and performance in agriculture risk management.

Unlike many corporate insurance conglomerates, ProAg does not divert our capital or expertise by entering other lines of insurance – we only write crop insurance. This unique position in the industry enables us to consistently anticipate and meet the needs of our agents and farmers. We firmly embrace the advantages technology offers to our industry, and are committing significant resources to enhance our processing and quoting systems.

Above all, ProAg is dedicated to building strong and secure relationships. We believe long-term business partnerships with farmers, agents, and reinsurers (some of which span five decades) allow us to deliver a consistency of service unmatched in our industry. We value the large and small agent, as well as the family and corporate farmer.

Are you ready to be valued? Are you ready to experience the ProAg difference?

Consider becoming part of the ProAg family today. Contact your local ProAg agent today or start the journey of becoming a ProAg agent by calling your local ProAg regional office here.

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