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The uncertainties of weather, yields, prices, government policies, global markets, and other factors can cause wide swings in farm income. Managing risk is an important aspect of the farming business, and crop yield and revenue insurance is one of the tools used to manage risk. Producers of specific crops can purchase insurance policies at a subsidized rate, under Federal crop insurance programs. These insurance policies make indemnity payments to producers based on current losses related to either below-average yields (crop yield insurance) or below-average revenue (revenue insurance).
Program Overview
Policies are sold through private insurance companies, but USDA's Risk Management Agency (RMA) subsidizes the insurance premiums, subsidizes a portion of the companies' administrative and operating expenses, and shares underwriting gains and losses with the companies under the Standard Reinsurance Agreement. Premium subsidy rates were raised under the Agricultural Risk Protection Act of 2000, so that most farmers pay around 40 to 50 percent of the premiums. Insurance is widely available, though coverage is not available for all crops in all areas, and all types of insurance are not available for all crops. Farmers sign up for insurance prior to planting but usually pay premiums after harvest.
Several types of crop yield and revenue insurance are available. Each has some unique features.
Yield Insurance Plans
- APH (Actual Production History) coverage is the oldest and most widely available crop insurance product. It protects farmers against yield losses due to natural causes such as drought, excessive moisture, hail, wind, frost, insects, and disease.
Yield coverage levels are based on a producer's expected yield, which is calculated from the farm's actual production history (average yields over the last 4 to 10 years). The farmer selects a yield coverage level, ranging from 50 to 75 percent of average yield (up to 85 percent in some areas), and an indemnity price, ranging from 55 to 100 percent of the crop price established annually by RMA. If the harvested yield is less than the insured yield (i.e., less than the yield coverage level), the farmer receives an indemnity based on the difference between the actual yield and the insured yield. The total indemnity equals this yield shortfall times the indemnity price times acres insured.
- Catastrophic (CAT) coverage provides a lower level of coverage on yield losses at a low cost to producers. It pays indemnities at a rate of 55 percent of the established price of the commodity when farm yield losses are more than 50 percent. CAT premiums are paid by RMA, but producers must pay a $300 administrative fee for each crop insured. CAT coverage is not available on all types of policies. Coverage above the CAT level is often referred to as "buy-up."
- Group Risk Plan (GRP) policies use county yields as the basis for determining a loss. When the county yield for the insured crop falls below the trigger level chosen by the farmer, an indemnity is paid. Yield coverage is available for up to 90 percent of the expected county yield. GRP's premiums are usually lower than those for individual insurance, but an individual farmer's crop loss may not be completely covered if the county yield does not suffer a similar level of loss. This type of insurance is best suited for farmers whose crop losses typically follow the county pattern.
- Dollar Plan coverage pays for both quantity and quality yield losses and is limited to some high-value crops (e.g., fresh market tomatoes and strawberries). It guarantees a dollar amount per acre rather than a particular yield level.
Revenue Insurance Plans
2008 Farm Act Changes
Provisions of the 2008 Farm Act change rates and timing of some subsidy payments and other costs of the Federal crop insurance program. The 2008 Farm Act reduces the target loss ratio (indemnities divided by premiums) used to calculate program costs. It specifies when the Standard Reinsurance Agreement between Federal Crop Insurance Corporation (FCIC) and the crop insurance companies may be renegotiated. The Act also increases administrative fees paid by producers for CAT crop insurance coverage and for Noninsured Assistance Program (NAP) coverage for those crops without crop insurance.
The 2008 Farm Act clarifies restrictions on payment of insurance premiums and fees on behalf of producers and continues "data mining" to identify unusual crop insurance claims. The Act makes, with some exceptions, native-sod acreage that has been tilled for crop production ineligible for crop insurance or NAP coverage for 5 years.
The 2008 Farm Act requires FCIC/RMA to contract for studies that could reduce or eliminate the premium surcharge for producers of organic crops and that develop procedures to offer a separate price election for organic crops. It requires that RMA establish specified pilot programs of insurance and contract for studies of insurance policies for specified crops, cropping practices, aquaculture, poultry, and bees. The Act directs special emphasis of risk management education and outreach to beginning farmers or ranchers, socially disadvantaged farmers or ranchers and other categories of farmers and ranchers.
The 2008 Farm Act establishes a supplemental disaster assistance program. In most cases, producers are required to have obtained crop insurance or to pay NAP administrative fees in order to receive disaster payments. For further information, see Natural Disaster and Emergency Assistance Programs.
Economic Implications
The 2008 Farm Act reduces budgetary costs of the crop insurance program by increasing the administrative fee paid by producers for CAT coverage, decreasing the premium subsidy for area plans of insurance, reducing the rates on Administrative and Operating (A&O) subsidies paid to insurance companies, and shifting the timing of payments of premiums, A&O subsidies, and underwriting gains.
The increase in administrative fees and share of premium paid by producers could reduce participation in the CAT and area plans of insurance. The decrease in CAT and area insurance plans is likely to be slight given that high crop prices have also increased producer premium costs for other plans of insurance. Moreover, the effects of the changes in fees and premium subsidies on overall program costs are likely to be small because CAT and area insurance plans account for small shares of the crop insurance program.
The reduction in the rates of A&O subsidies paid to insurance companies reduces the amount of subsidy the companies would have otherwise received. The reduction in subsidy amounts under the 2008 Farm Act, however, is small relative to the increase in A&O subsidy payments in recent years. The A&O subsidy rates, which vary by insurance plan, are applied to the premium value of the policy. As the premium values of crop insurance policies have increased, largely the result of increased crop prices, so have A&O subsidies. The 2008 Farm Act reduces the subsidy rates by 2.3 percentage points, or roughly 10 percent on the most popular insurance plans, though only half of the reduction will apply in a State when the State loss ratio exceeds 1.2.
The shifts in the timing of crop insurance payments will affect the fiscal years in which FCIC will receive income (insurance premiums) and make expenditures for the crop insurance program. In general, the changes under the 2008 Farm Act move income (premiums) earlier and move expenditures (A&O subsidies and underwriting gains) later, thus reducing the cost of the crop insurance program that is recorded in the final year of the Act. The shifts in timing will affect producer and insurance company cash flows. Prior to the 2008 Farm Act changes, producers typically paid insurance premiums at the same time any indemnities were paid, usually shortly after harvest. (Premiums were netted out of any indemnity payments.) The 2008 Act shifts the premium payment date earlier in the insurance year, requiring producers to pay premiums from operating funds. The 2008 Farm Act moves the payments to insurance companies for program delivery (A&O subsidies and underwriting gains) later in the insurance year, which shifts an economic cost (time value of money) from FCIC to the insurance companies.
The new supplemental disaster assistance programs provide payments to farmers and ranchers that supplement crop insurance indemnities and NAP payments. In most cases, producers are required to have obtained crop insurance or to pay NAP administrative fees in order to receive disaster payments, thus providing incentives for increased participation in the crop insurance program. Moreover, one factor in determining the amount of the disaster payment is the level at which the producer is participating in crop insurance; the higher the crop insurance coverage level, the greater the disaster payment. Whether potential disaster program payments provide producers with sufficient incentives to purchase higher, and more expensive, crop insurance coverage will depend on producers' individual situations.
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