Use your social profile entry

Crop insurance in the United States, presentation at the international conference on agricultural insurance in Madrid (Spain, November 2006)

Author: James Callan, Associate Administrator, USDA Risk Management Agency, Deputy Manager, Federal Crop Insurance Corporation
File: 
Source: www.mapa.es

How Insurance Works in the USA

Annual enrolment should be done prior to planting. Coverage is based on recent yield history, price forecasts or future contracts. Commodity exchange is used for future price discovery.  Multi-peril crop insurance is the basis of the agricultural insurance and risk mitigation system subsidized by the government. Premium rates are based on coverage and risk (natural risks causing loss of crop). Indemnity is paid if yield or revenue at the end of season was below the guarantee level. About 700,000 farmers purchase insurance coverage annually. The total liability sum on agricultural insurance program in 2006 was 50 billion USD. During the last 5 years the annual liability sum increased at 25%. The insurance companies, participating in the program, paid out about 4,5 billion USD of indemnities in 2006.

Scope of U.S. Insurance Program

The program offers crop-by-crop coverage. It is available for over 100 crops. There is a variety of insurance plans (370) which provide overall insurance of farm business:

–          Yield or revenue;

–          Area or individual farm;

–          Assets (e.g. fruit trees, nursery, etc.);

–          Whole farm.

The coverage levels include:

–           catastrophic (CAT) coverage at 50% of yield and at 55% of price (50/55) – 27,5% coverage;

–          Buy up coverage at any level higher than CAT (from 50/60 to 85/100).

The sum of premiums collected in 2006 was 4,57 billion USD. Most premiums were collected on corn (appr. 35%), soy beans (20%), wheat (15%) and cotton (10%) insurance contracts. RMA representatives indicated that nursery insurance becomes an important line of crop insurance program.

Farm-level revenue plans (crop revenue insurance, revenue assurance and income protection) are the most popular with farmers. Revenue plans supply over 60% of premiums collected on the agricultural insurance program. Farm-level yield plans (actual production history and grower yield certification) provide about 20% of the premiums. Group risk income protection is the third important insurance plan providing about 10% of the premiums collected. Group risk plan supplies less than 3% of the premiums and it is least important insurance plan in the U.S. system of agricultural insurance though there is a number of other plans providing coverage for field crops, fruits and vegetables, etc. which share in the total premium sum is about 7%.

Coverage Levels

Catastrophic (CAT) coverage provides 50% yield guarantee. The crop is indemnified at 55% of price (50/55). Entire premium is subsidized by the government of the USA – the farmer pays flat fee for participation in the program.

All buy-up coverage levels are greater than CAT. The coverage levels range from 50/60 to 85/100 while the most popular levels are 65% yield or revenue coverage. Up to 85% coverage is available for some crops. A portion of premium is subsidized by the government depending on the coverage level (the higher coverage level – the smaller subsidy percentage). The farmer pays the other portion of the premium plus small administrative fee of 30USD.

Insured Acreage

There are 123 million hectares insured in the USA. Increased premium subsidy led to increase of buy-up coverage. While in 1995 CAT coverage was purchased for over 120 million acres (60% of arable land), the farmers started to prefer buy-up coverage while the government provided more subsidized (CAT – 40% in 1996, 30% in 1998, 25% in 2000, 10% in 2005-2006). The government of the USA plans to revise the farm bill in 2007 and the insurance subsidy program will be transformed from the insurance program into risk management and safety net system.

Since 1998 farmers obtain higher coverage levels. While in 1998 the most popular were 60% and 65% coverage levels (42% and 48% of the insured acres were insured at these levels), by 2006 the farmers preferred to purchase higher coverage levels – 70% (29% of acres), 75% (20% of acres). In 1998 the farmers did not purchased 80-85% coverage but about 10% of the agricultural land was insured under these coverage levels. The banks require collateral and crop insurance when providing credits to farmers and some categories (especially young farmers) of farmers started to purchase high level of coverage to avoid possible crop loss and problems with banks.

Crop Insurance Delivery

In 2006 there were 16 companies offering subsidized agricultural insurance products in the USA. The premium subsidies increased in 2001 and 2004 as the government paid more attention to the insurance of agricultural production (2001 – Risk protection Act was adopted in the USA). In 2006 the government provided about 2,7 billion USD for insurance premiums subsidies which means that about 65% of premium sum is subsidized by the government in the average.

The policies are sold and services by private insurance companies. Insurance agents get sales commissions from the insurers. Loss adjusters are employed by the companies.

The government pays administrative and operating subsidies to the insurance companies which equals 21,5% of the total premium. The subsidies are based on the total premium sold by companies. Because premium reflects risk only, there are no overhead costs. The rates vary by the types of insurance coverage. The government provides the first level of reinsurance. The sum o administrative and operating subsidy paid to the insurance companies increased from 380 million USD in 1995 to about 850 million USD in 2006.

Government Reinsurance

The government signs with the participating insurance companies the Standard Reinsurance Agreement. The annual agreement specifies risk sharing between companies and government. It also specifies administrative and operating subsidy rates (last negotiated for 2005). The companies designate crop insurance policies to reinsurance funds – different level of risk in each fund.

For a company’s policies in each reinsurance fund, the company retains/cedes different portions of premium and associated liability (proportional reinsurance). The government shares gains or losses on premium and associated liability retained by company (non-proportional reinsurance).

Reinsurance funds:

–          Assigned Risk Fund – minimal retention and exposure (for insurance companies);

–          Commercial Funds  – maximum;

–          Developmental Funds – intermediate

The two last reinsurance funds are subdivided into CAT, Revenue and other sections. There is diversity in risk retention by the insurance companies in the USA – large amount of risk is retained in mid-western states (Iowa, Illinois, etc.). At the same time the companies prefer to cede large amount of risks at the southern-eastern states (Texas, Florida, etc.).

New Directions

RMA pays attention to the new lines of agricultural insurance products and coverage levels. Although, there are already 370 various coverage levels on agricultural insurance products, the agency looks for developing new products for the types of agricultural commodities currently not covered by the subsidized agricultural insurance program. One of the examples is the introduction of lamb insurance pilot product in 2007. There is no commodity exchange trading lamb contracts so RMA and insurance companies have to decide which price discovery method to use for this product.

The government will continue to develop revenue insurance as it believes that it is the most important component in the development of a modern risk management and safety net system for agricultural sector.

RMA will further develop insurance products for livestock sector including:

–          Pasture, rangeland, and forage;

–          Price protection products.

Summary

There is a variety of insurance plans and coverage levels in the USA.

Increasing premium subsidy levels the government increase farmers’ participation in the agricultural insurance program.

Private sector delivers crops insurance, but the government provides administrative and operating subsidies to the insurance companies and also offers reinsurance support.

The program will expand beyond crop insurance in the future.

Adaptation of the presentation for publication by Roman Shynkarenko, www.agroinsurance.com