For several years the Risk Management Agency (RMA) of the United States Department of Agriculture (USDA) and the various private insurance companies that deliver crop insurance protection to millions of producers across the country have been negotiating a major overhaul of the basic policy that is used for most insurable crops. The new Common Crop Insurance Policy, sometimes known as COMBO, will go into effect for crops insured in 2011. Covered crops include corn, soybeans, grain sorghum, wheat, barley, cotton, rice, canola and sunflowers.
Anything can be insured today; let it be a cat, car, or crop. Crop insurance has been in existence since the early 1930s. Federal crop insurance was established to combat the effects of the Great Depression and the Dust Bowl. If a farmer were to pick out crop insurance today, they would have many different options to choose from. Crop insurance provides a safety net for farmers by reimbursing them due to revenue or yield diminishing problems for their crops. The two categories of crop insurance are yield-based and revenue. These are a few examples of yield-based insurance policies according to the Risk Management Agency (RMA) of the USDA.
The Risk Management Agency (RMA) has previously discussed with the NAIC the possibility of creating specific crop insurance licensing and continuing education (CE) program for insurance both crop insurance agents and adjusters. RMA staff had expressed concerns about inconsistency in licensing of crop agents and adjusters and general insufficient crop insurance knowledge requirements for licenses that were being issues, particularly with respect to the adjusters.
In some areas, producers are beginning to look at Group Risk Plans (GRP) and Group Risk Income Protection (GRIP) for reducing risk, but these programs need to be studied carefully before making a decision to base coverage on them. The GRP, according to the Risk Management Agency (RMA) uses a county index as the basis for determining a loss.
In first half of 2006 the insurance companies signed only 28 crop insurance contracts. The crops were insured at the total area of 4,5 thousand hectares. During the second half of the year the crop insurance campaign was more dynamic. The farmers insured winter crops though mostly against low temperatures. According to the preliminary results, the farmers signed about 160 agicultural insurance contracts in 2006.
Experience discounts and surcharges are calculated using individual loss experience and the comparison to area losses. Crop Insurance calculates premium discounts and surcharges by comparing the claim received to the total premium (net of experience discount) paid by the producer and governments. When an increase in the number of losses is experienced, the discount is reduced and may even result in a surcharge.
Groundnut farmers in Malawi who traditionally relied on only local seed for production were interested in planting with certified groundnut seed because the revenues from using certified seed were much higher due to the increased yields and increased value of the groundnut. Because these farmers had little cash and no access to finance, they could not afford to purchase certified seed. Banks were unwilling to lend to these farmers for a number of reasons but primarily because of the risk that farmers would not pay back their loans if there was a drought. In an effort to make these farmers more creditworthy and give them the access to finance necessary to purchase certified seed NASFAM, an agricultural marketing firm who works with farmers organized into clubs of 15-20 farmers, became interested in mitigating the weather risk these farmers faced through an index based weather insurance policy.
Managing risk is therefore important not only for smoothing out the well-being of these farmers over the good and the bad years, but also for enabling their escape from extreme poverty. If the risks facing poor farm households can be reduced, their creditworthiness can be increased. And increased creditworthiness permits them to invest in higher-yield activities, including higher value-added farming. For these reasons and others, including a probable rise in the volatility of climate shocks accompanying human-induced climate change, financial risk management is likely to come to the forefront of strategies for poverty reduction.
The U.S. Department of Agriculture's Risk Management Agency, which administers the crop insurance program, uses satellite imaging technology to monitor farm acreage that is involved in a farmer's crop insurance claim. The images have been used in courts to determine crop insurance fraud. Since 2001, less than 100 cases that used satellite images have been prosecuted. However, teamed with data mining, the agency has put about 1,500 farms on watch for suspected fraud. Its spot check list, developed through the use of the images, has saved taxpayers $71-$110 million a year in fraudulent crop insurance claims since 2001.
Experience to date indicates that it is extremely difficult, without massive government subsidies, to insure farm level crop yields from losses caused by any number of natural perils. Those who seek effective, agricultural risk management tools, offered with little or no government subsidy, need to understand the underlying problems with farm level, multiple peril crop insurance. This chapter begins by discussing those problems. The following section presents an alternative form of insurance that makes payments based not on measures of individual farm yields, but rather on either area yields or some weather event like temperature or rainfall.
Linking the use of risk-shifting innovations that are being tried around the world directly to rural finance has been largely missing. This paper builds a set of recommendations for using index insurance and, in some cases, futures markets in combination with rural finance. The intent is for the MFE to have the opportunity to purchase index insurance and put options to protect against the correlated risk of crop disaster, livestock deaths due to natural disasters, and commodity price declines. The indemnity payments can be used by the small local banking interest.
The support and subsidies provided to European farmers through the Common Agricultural Policy (CAP) has been the main reason for the limited participation of producers in risk management activities and, in particular, the use of derivative markets as a means for controlling price or yield risk. Over recent years, however, agricultural price support in the EU has been reduced and further reforms are ongoing; this is in part, a result of the necessity to change the policies of the internal market due to: the increasing cost to the taxpayers and consumers in supporting the agricultural sector.
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