Orlando Harmon
Crop insurance is a crucial safeguard for farmers, offering financial protection against losses due to adverse events such as drought, excess moisture, damaging freezes, hail, wind, disease, and price fluctuations. When crops are damaged or fail to produce enough yield or revenue, farmers may be eligible for indemnity or loss payments. The amount of these payments is determined by factors such as the coverage level, the type of insurance plan, and the cause of the loss. The federal government, private insurers, and farmers share the cost of these payments, with the government paying billions of dollars to insurance companies to deliver the program.
| Characteristics | Values |
|---|---|
| Basis of insurance loss payment | The projected price is used to calculate the premium, replant and prevented planting payments. The harvest price is used to pay for losses. |
| Notice of loss for planted crops | Within 72 hours of the initial discovery of damage or loss of production but no later than 15 days after the end of the insurance period. |
| Notice of loss for revenue without production loss | No later than 45 days after the latest date the harvest price is released. |
| Notice of loss for prevented planting | Within 72 hours after the final planting date or the time the producer determines it is not possible to plant due to an insurable cause of loss (e.g. flood). |
| Coverage level | Refers to the percentage of commodity value that is covered. For example, a coverage level of 80% would insure losses greater than 20% of the liability but provide no protection for losses less than 20% of the liability. |
| Types of insured units | Basic, optional, enterprise, multicounty enterprise and whole farm. |
| Loss ratio | As of March 2024, the loss ratio for 2023 policies is 0.86, meaning that more premiums were paid than indemnities for losses. |
| Average annual loss ratio since 1997 | 0.81, indicating that average annual indemnities total about 81% of total premiums. |
| Average annual FCIP participation from 2000 to 2022 | 81% of eligible acres among producers of barley, corn, cotton, dry beans, flax, grapefruit, lime, lemon, mandarins, tangerines, oat, oranges, peanuts, potatoes, rice, rye, sorghum, soybeans, sugar beets, sugarcane, sunflowers, sweet potatoes, tobacco, and wheat. |
| Types of insurance plans | Actual Production History (APH), Yield Protection (YP), Revenue Protection (RP) |
| Leading causes of indemnified losses since 2000 | Drought and high temperature (43.7% of total indemnity payments), excess moisture (25.6% of total indemnity payments) |
| States with most payments | North Dakota, Minnesota, South Dakota, Iowa, Illinois and Missouri |
| States with most drought payments | Texas, Kansas, South Dakota, North Dakota, Nebraska and Oklahoma, Iowa, Illinois, Missouri and Minnesota |
| States with most excess moisture payments | North Dakota, Minnesota and South Dakota |
| States with most hail payments | Texas, Nebraska, North Dakota, Kansas, Colorado, South Dakota |
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What You'll Learn
- Loss payments are calculated based on the percentage of commodity value covered by the insurance policy
- Farmers must notify insurers of loss within 72 hours of initial discovery, but no later than 15 days after the insurance period ends
- Insurers may pay for losses caused by drought, excess moisture, damaging freezes, hail, wind, disease, and price fluctuations
- The federal government subsidises the premiums that policyholders pay to insurance companies
- The federal government and insurance companies may share losses associated with policies (underwriting losses)
Loss payments are calculated based on the percentage of commodity value covered by the insurance policy
Loss payments, or indemnities, are a crucial safeguard for farmers, protecting them from financial losses due to poor harvests or crop price declines caused by natural events. The calculation of these loss payments is based on the percentage of the commodity value covered by the insurance policy, known as the coverage level or liability. This percentage directly impacts the amount of loss a farmer must incur before receiving an indemnity payment.
For instance, a coverage level of 80% would mean that losses greater than 20% of the liability would be insured, while losses below 20% would not be covered. The higher the coverage level, the more protection the farmer has against smaller losses, but this also comes at a higher cost. On the other hand, a lower coverage level results in lower insurance costs, but the farmer must bear more extreme losses before receiving any indemnity payments.
The Actual Production History (APH) plan, the oldest federal crop insurance option, guarantees the farmer a yield based on their historical production data. If the actual production is less than the guaranteed amount, an indemnity payment is made. The calculation for this guarantee is the average yield multiplied by the coverage level elected for the farmer's share of the crop.
The Yield Protection (YP) plan, similar to APH, provides protection against loss of production but uses a projected price established by the applicable board of trade/exchange, known as the Commodity Exchange Price Provisions (CEPP). The guarantee under the YP plan is calculated by multiplying the average yield, coverage level, and projected price. If the value of the production is less than this guarantee, an indemnity may be due.
Revenue Protection (RP) plans offer protection against revenue loss caused by price fluctuations or production losses. The revenue protection guarantee is calculated by multiplying the average yield, coverage level, insured's share percentage, and projected price. When the calculated revenue (insured’s production multiplied by harvest price) is less than this guarantee, an indemnity may be issued.
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Farmers must notify insurers of loss within 72 hours of initial discovery, but no later than 15 days after the insurance period ends
Farmers must be vigilant about their crops and notify insurers of any losses within 72 hours of initially discovering them. This timely notification is crucial, as it allows for prompt assessment and processing of the potential claim. However, it's important to note that this notification should be made no later than 15 days after the insurance period ends, even if the crop remains unharvested.
This notification requirement applies to losses covered by the insurance policy, such as damage or loss of production for planted crops. For instance, if a farmer notices that their crop has been damaged by a covered peril, such as a storm or drought, they must inform the insurer within 72 hours of discovering the damage. This prompt notification ensures that the insurance company can send out adjusters or representatives to assess the loss and initiate the claims process.
In cases where there is no physical damage to the crop but a revenue loss without a production loss, the notification timeline differs. Farmers are required to notify the insurer no later than 45 days after the latest date the harvest price is released. This provision accounts for situations where the revenue generated from the crop is less than expected due to market price changes or other factors.
For crops that cannot be planted due to insurable causes of loss, such as flooding or other natural disasters, the notification timeline is also 72 hours. This timeline starts after the final planting date or when the farmer determines that planting is impossible due to the insurable cause.
It's important to remember that crop insurance policies vary, and specific requirements may differ. Farmers should carefully review their policies to understand the exact notification procedures and timelines required by their insurers. These procedures help protect farmers' interests and ensure they receive the necessary support in the event of crop losses.
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Insurers may pay for losses caused by drought, excess moisture, damaging freezes, hail, wind, disease, and price fluctuations
Crop insurance is a crucial safeguard for farmers, and insurers may pay for losses caused by various factors, including drought, excess moisture, damaging freezes, hail, wind, disease, and price fluctuations. These losses are referred to as indemnities or loss payments and are issued when the requirements of the policy have been met. The Federal Crop Insurance Program (FCIP), overseen by the USDA Risk Management Agency (RMA), offers financial protection against these adverse events. From 2000 to 2022, FCIP provided support for 134 unique agricultural commodities, covering approximately 293 million acres annually.
Drought is a significant cause of indemnity payments, with a substantial increase in losses from \$965.5 million in 2001 to \$7.6 billion in 2022. It is the leading weather-related cause of loss, closely followed by excess moisture, which also saw a notable rise in indemnities from \$1 billion to \$2.2 billion during the same period. These two factors alone accounted for almost 60% of all payouts.
Excess moisture in the soil can lead to issues such as crop damage and reduced yield, triggering crop insurance payments. Hail is another significant cause of losses, with a 204% increase in indemnities from 2001 to 2022. The impact of hail varies depending on the severity and frequency, but it can cause direct damage to crops, reducing their production and quality.
Damaging freezes are also covered by crop insurance, and they represent a considerable expense for insurers. While not all freezes are extreme weather events, they can still cause significant crop losses, especially when combined with other factors such as drought or excess moisture.
Wind damage is typically covered by crop insurance, and strong winds can occur during various weather events, including tropical cyclones, tornadoes, and hurricanes. These weather phenomena can cause direct crop damage and also impact structures and equipment used in agricultural operations.
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The federal government subsidises the premiums that policyholders pay to insurance companies
The federal government's role in subsidising premiums for policyholders is an important aspect of crop insurance. In 2022, subsidies averaged about 62% of policyholders' premiums, totalling $12 billion and comprising the largest portion of the program's total cost of $17.3 billion. Congress sets the subsidy rates, and it is worth noting that other USDA farm program benefits are not available to producers with incomes exceeding a statutory limit (a 3-year average adjusted gross income of $900,000 or more).
The Government Accountability Office (GAO) has analysed data and recommended that Congress consider reducing premium subsidies for high-income policyholders. In 2022, for instance, if subsidies for such policyholders had been reduced by 15 percentage points, the government could have saved approximately $15 million. This suggestion demonstrates a potential strategy for optimising the program's financial efficiency while minimising impact on producer participation.
The federal government's involvement in subsidising premiums is a significant factor in the crop insurance landscape. By sharing the financial burden with policyholders, the government helps to ensure that farmers can access affordable protection against various risks. This partnership between the federal government, private insurers, and farmers provides tailored support for agricultural producers across the nation.
Crop insurance policies are priced to be "actuarily fair", reflecting the understanding that the total value of premiums paid over time should be roughly equivalent to the value of indemnity payments distributed. The USDA's success in this regard is measured through a financial performance indicator known as the loss ratio, which compares indemnities paid to premiums collected for policies in a given year. As of March 2024, the loss ratio for 2023 policies was 0.86, indicating that more premiums were paid than indemnities distributed for losses.
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The federal government and insurance companies may share losses associated with policies (underwriting losses)
The Federal Crop Insurance Program is a key federal support program for agriculture in the United States. The USDA, through the Risk Management Agency (RMA), oversees the program and offers agricultural producers financial protection against losses due to adverse events, including drought, excess moisture, damaging freezes, hail, wind, disease, and price fluctuations. The federal government pays private insurance companies to deliver the crop insurance program, which includes selling and servicing policies for producers like farmers. This compensation is set out in reinsurance agreements between the USDA and the companies.
The total cost of the program in 2022 was $17.3 billion, with the government paying insurance companies about $3.7 billion to deliver the program. This compensation included about $2.2 billion in administrative and operating (A&O) subsidies, calculated as a percentage of premiums. The federal government's support for crop insurance, in partnership with private insurers and farmers, offers tailored protection against diverse risks for farmers across the nation.
Crop insurance policies are priced to be actuarily fair, meaning that the total value of premiums paid over many years should be roughly equal to the value of indemnity payments distributed. The USDA measures its success through a financial performance indicator called the loss ratio, which is defined as the indemnities paid divided by the premiums collected for policies in a given year. A loss ratio of one indicates that indemnities and premiums were equal, while a ratio greater than one means that indemnities exceeded premiums.
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Frequently asked questions
Crop insurance is a safeguard for farmers, offering protection against diverse risks, including adverse weather events and price fluctuations.
You must notify your insurance agent as soon as harvesting is complete, and an adjuster will be assigned to you. A notice of loss for a planted crop must be provided within 72 hours of the initial discovery of damage or loss of production.
Crop insurance loss payments cover financial losses due to crop price declines and poor harvests caused by natural events. This includes protection against adverse weather events such as drought, excess moisture, damaging freezes, hail, wind, and disease.
The amount paid out in crop insurance loss payments varies depending on the policy and the circumstances of the loss. The federal government pays private insurance companies to deliver the crop insurance program, and in 2022, of the program's total cost of $17.3 billion, the government paid insurance companies about $3.7 billion to deliver the program.
Crop insurance policies are priced to be actuarily fair, meaning that the total value of premiums paid over many years should be approximately equal to the value of indemnity payments distributed. The pricing for most crops insured under the Actual Production History (APH) plan is established by the USDA Risk Management Agency (RMA).
