Finance
Executive Summary
With growing concerns related to climate change, the farming profession is exposing the farmers to significant risk of low yields or other crop related failure. Moreover, with weather trend highly unpredictable, farmers always live under the cloud of high uncertainty relating to their livelihood.
Therefore, farmers are understanding the significance of crop insurance and how these contracts mitigate the risk factor associated with the farming profession. Important to note, American farmers have two insurance options: Multiple Peril Crop Insurance(MPCI) and Crop-Hail Insurance. While the MPCI is a federal crop insurance program and is run through public-private partnership with private insurance companies sponsored by Federal Government overlooks the operational and underwriting tasks of the insurance contracts, Federal Government oversees the activities through its supervisory authority. Any premium under this insurance contract is subsidized by the Federal Government and farmers are required to purchase the policy before the growing season. On the other hand, Crop- Hail Insurance is sold by private insurers only and is famous amongst areas that are worst affected by hailstorms. Unlike MPCI, the premium under these insurance policies are not subsidized, however, these policies come with the flexibility to purchase the insurance anytime during the year. Additionally, some of the private companies are also offering the option to add more risk factors such as theft to the insurance contracts.
In addition to the above two contracts, the Federal Government also have Financial Assistance program for non-insured Crops, Noninsured Crop Disaster Assistance Program (NAP) that provides financial assistance to the non-insured farmers who face crop losses on account of natural disasters or face loss of inventory and preventory planting.
About the paper
Agricultural activities are always exposed to multiple risk in the form of dynamic weather conditions, overall supply and other innumerable factors. The federal government, along with the private insurance companies have been doing a commendable job to mitigate the risk for the farmers in the form of crop insurance policies. The layout of the crop insurance policy is like any other insurance policy as the farmer first select his preferred coverage and pay a portion of the insurance premium, which in case of federal insurance policies, is majorly borne by the Federal Government only. The success of these crop insurance programs is validated from the fact that by the end of 2014, federal crop insurance policies covered 294 million acres of the farms.
Federal Crop Insurance- Multiple Peril Crop Insurance (MPCI)
Multiple Peril Crop Insurance is one of the oldest and most common form of federal crop insurance available for the farmers in the United States. This crop insurance policy is required to be purchased prior to the planting of the crop, and is designed to cover the yield loss of the farmers for the entire growing season. New MPCI policies being underwritten now are also covering price protection to guard the farmers against any loss of revenue either due to loss in yield or price fluctuation.
- Features and Management
It is considerable that this crop insurance program is operated under the unique private-public partnership framework, as part of which, 18 private companies are authorized under the United States Department of Agriculture Risk Management Agency (USDA RMA) to write these MPCI policies. While all the operating functions of the policy, i.e. underwriting, reinsuring, marketing, claims process, record-keeping, et cetera are handled by the private companies, the policy is solely regulated and insured by Risk Management Agency (RMA) of Federal Crop Insurance Corporation.
All the premium set forth in this crop insurance policy is subsidized by the Federal Government with the intent to reduce the cost to the farmers. Additionally, since the operational tasks of the crop insurance policy are overlooked by the private insurance companies, Federal Government also provides reimbursements to these companies to offset any operating or administrative costs borne by these companies and which are not recouped on account of the subsidized premium collection from the farmers. Therefore, the balanced federal support for farmers as well as the insurance companies keeps the policy affordable for the farmers as well as profitable for the insurance companies.
Therefore, it is through the combination of the federal regulation, oversight and financial support of the government, along with managerial and marketing efficiency of the private sector, this crop insurance program has been a successful affair for the Federal Government and has consistently surpassed the goals set forth by US Congress for broad participation, diversity and inclusion of the farmers. At the same time, while farmers are benefited with this crop insurance policy, the private-public partnership has also allowed for the risk sharing between the private insurance companies and the federal government.
-Coverage:
The policy coverage is designed to insure the yields of the farm producers and also the loss from any price fluctuation over the entire growing season. Important to note, MPCI program offers two levels of coverage, Catastrophic and Buy-up. The details of both types of coverage is discussed below:
Catastrophic Coverage:
If the farmer opts for this coverage, the crop insurance policy will only cover his loss in the event of extreme losses such as complete crop failure or fire chaos in the farms. As for Catastrophic Coverage, MPCI policy clearly states that the insurance company will reimburse the insured farmer only when the actual production falls short of 50% of the actual production history(APH), while the loss of yield is evaluated at 55% of the price election percentage. Therefore, even under the extreme conditions, the insured farmer will only get 27.5% of his crop value.
The premium for the Catastrophic coverage under this policy is subsidized except for $60 administrative cost which is required to be paid by the farmer only. Important to note, Catastrophic coverage does not allow the farmer to purchase additional coverage in any event.
Buy-up Coverage
This is the second type of coverage available to the insured farmer and unlike the Catastrophic coverage, Buy-up coverage allows the producer to purchase additional coverage. However, the premium paid for this coverage is only partially subsidized by the Federal Government.
It is considerable that Federal government is taking commendable steps to encourage the farmers to purchase more amount of coverage for their crops. While the catastrophic coverage premium is highly subsidized, Federal Government has proposed the use of emergency farm bill for channelizing additional financial assistance to reduce the buy-up coverage and additional coverage by 30%.
-Perils Covered
MPCI majorly covers the loss on account of weather activities and covers perils like wind, ram, drought, hail, fire, prevented planting due to too much rain, flood, disease, insects, cold, frost, or any other reason for low yields during the growing season.
-Purchasing the MPCI
The involvement of federal government and direct supervision of the authorities over the operating performance and environment undertaken by the private insurance companies, has created a unique social insurance program that operates on a completely different and hassle-free framework than other privately underwritten insurance contracts.
Important to note, since the MPCI is operated with public/private partnership, public policy have significant influence on the operations of program. Therefore, the private insurers are required to accept all applicants and are also required to detail everything about the insurance program to the farmer while the decision relating to the coverage amount is left entirely on the farmer only. Moreover, the pricing and policy designs of this crop insurance program are decided by the Congress, therefore, any change in public policy considerations may also result in unanticipated changes to the coverage after the policies are sold. However, in all cases, Federal Government consider the farmer interest ahead of all the considerations related to the crop insurance program.
Private Crop Insurance- Crop Hail Insurance
-Features
Crop-Hail is the second type of crop insurance provided to the farmers. However, unlike the MPCI, this crop insurance policy is provided solely by private insurers directly without any federal aid or supervision. This type of crop insurance is particularly popular amongst the farmers of the county where hail is the significant part and has the ability to destroy the crop field. Important to note, even though MPCI also covers hail as part of the perils covered by the insurance contract,however, owing to flexibility to take insurance anytime during the growing season and not before the growing season, and with coverage option provided on acre-to-acre basis rather than the entire farm, farmers usually prefer private based crop-hail insurance over the federal based MPCI, and thus hold both MPCI and crop-hail insurance contracts to cover all the type of possible losses.
-Coverage
As discussed briefly in the preceding paragraph, unlike MPCI, which is purchased for the entire farm crop by the farmers, crop-hail insurance policy is sold on an acre-to-acre basis, therefore, the farmers do not have to purchase a policy for the entire farm. This exclusive feature of the crop-hail insurance policy allows the farmer to cover specific cover of their farm, which they believe is at most risk. However, opting for acre-to-acre coverage means that once the policy is purchased for a specific covered area, farmers cannot move to cover another area once the farmer finalize the purchase.
The policy covers up to the expected value of the crop covered under the policy, with a condition that any damage caused to the crop should be caused by events that are covered by the contract. The expected value of the crop is calculated on dollar per acre basis, and this amount is chosen by the farmers only.
Important to note, even though farmers cannot add more acres for a specific policy once the policy purchase is confirmed and the policy document is issued to them, however, crop-hail insurance policy offers the option to add more risk events for the farmers. In other words, if after the policy purchase is confirmed, farmers may find that their crop is prone to more weather related risks such as frost, wind, et cetera, in that case, they can purchase policy add-ons. In some cases, private insurers have also started offering purchase coverage against crop theft.
In the nutshell, though MPCI policies also include coverage for hail damage, however, farmers may also prefer crop-hail insurance with the intention to provide protection on an acre-by-acre basis. Therefore, even if there is only a part damage to the farmland, which is not a uncommon vulnerability for the areas affected by hailstorms, farmers may still be eligible for payment, which is not possible under MPCI policy. Additionally, Also, while MPCI policies tend to have high deductibles to cover catastrophic loss of huge yields, crop-hail allows for a smaller deductible to cover spot losses, thus making it a preferable policy product for the farmers in some cases.
-Difference between MPCI and Private Insurance
The structure of both these types of policies is different as, while the MPCI is a Federal sponsored insurance policy carried under the public-private framework, crop-hail is an all private insurance product sold by private insurers only.
b)Premium:
In order to promote wider coverage and more participation of the farmers in the crop insurance product, the premium for MPCI policies are subsidized as farmers are required to pay lower premium while the remainder is borne by the Federal government to cover any expense or losses for the private insurers overseeing the operational aspects of the policy. On the other hand, premiums for crop-hail insurance policy are not subsidized and are charged in full from the farmers by the private insurers.
c) Time of purchase
The timing difference between MPCI policy and Crop-hail policy is also a noteworthy consideration. Important to note, while farmers are required to purchase the MPCI policy before the growing season, crop-hail offers them the flexibility to purchase the policy anytime during the year.
Financial Assistance for Non-Insured Crops
While the Federal Government is ensuring maximum crop coverage and participation of the farmers in the crop insurance program, however, still many farmers are leaving there crops un-insured. In that case, the federal government has designed the Noninsured Crop Disaster Assistance Program (NAP) that provides financial assistance to the non-insured farmers who face crop losses on account of natural disasters or face loss of inventory and preventory planting. Some of the eligible crops in this program include, but not limited to, are:
Crops grown for food
Livestock feed
Specialty and value loss
Sea oats and sea grass
References
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Frank F. Schnapp, J. L. (2010). Ratemaking Considerations for Multiple Peril Crop lnsurance .
Ohio Farmers Diversified Services. (n.d.). Crop Hail Insurance. Ohio Farmers Diversified Services.
Shields, D. A. (2015). Federal Crop Insurance: Background. Congressional Research Services.
Thamas Agency. (n.d.). Iowa Crop Insurance. Retrieved May 14, 2016, from http://thamsagency.com/farm/iowa-crop-insurance/
USA.Gov. (n.d.). Financial Assistance After a Disaster. Retrieved May 14, 2016, from https://www.usa.gov/disaster-financial-help
USDA- Risk Management Agency. (n.d.). Policies. Retrieved May 14, 2016, from http://www.rma.usda.gov/policies/
USDA. gov. (n.d.). Multiple Peril Crop. RME Publications.
