The Role of Crop Insurance in Managing Risk
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Transcript of The Role of Crop Insurance in Managing Risk
The Role of Crop Insurance in
Managing Risk
Dr. Laurence M. Crane
NATIONAL ASSOCIATION OF COUNTY AGRICULTURAL AGENTS 97th ANNUAL NATIONAL MEETING
and
PROFESSIONAL IMPROVEMENT CONFERENCE
Ag Economics Super Seminar “Managing Agricultural Risks Under the 2012 Farm Bill”
July 18, 2012
Charleston Area Convention Center
Charleston, South Carolina
Who is NCIS? National Crop Insurance Services
Not-for-profit crop insurance industry trade association
Members are crop insurance companies
All companies writing Federally sponsored Crop Insurance are NCIS Members
◦ 97% + of all Crop Hail policies are written by an NCIS member company
◦ International insurance and reinsurance companies
Licensed statistical agent to State Insurance Departments
2 © NCIS 2011
NCIS Functions
MPCI and Crop-Hail Program Development and
Analysis
◦ Policy Analysis, Loss Adjustment Procedures, Legal Analysis,
Agronomic Research
Economic and Actuarial Analysis
Education and Training
◦ Loss Adjuster Schools – 17 (1,692 attendees)
◦ National Conferences – 5 (1,037 attendees)
◦ Annual Regional/State Meetings – 14 (531 attendees)
Crop-Hail Advisory Organization and Statistical Agent
◦ Licensed by Individual State Insurance Department
Public Relations and Industry Outreach
3 © NCIS 2011
NCIS serves as the primary
service organization for the
crop insurance industry.
© NCIS 2011 4
Presentation Overview Why a Government CI Program
Insurance Principles
Program Participants and Responsibilities
Terminology and Mechanics
Insurable Crops
2011 CI Data
Essential Strengths
Educational Materials
Summary and Conclusion
© NCIS 2011 5
Why a Government Program?
Weather tends to impact a large area Losses are correlated, insurance works best
when losses are not correlated
Without federal subsidies premiums would be too high for most farmers to participate
Without federal reinsurance, federal capital requirements would be too high for most companies to participate
© NCIS 2011 6
Insurance Principles
Insurance is the pooling/combining of enough
small unpredictable risks so that over time the
losses for the combined group become
statistically predictable.
Basic purpose of insurance is to provide
protection against economic loss arising from
adverse events.
© NCIS 2011 7
Insurance Principles
To be insurable, risks must meet this criteria:
Loss would result in economic hardship.
Sufficient number/quality of units must be exposed to the same peril.
Occurrences must be accidental/unintentional.
Definite in time/place and measurable with reasonable accuracy.
© NCIS 2011 8
Reinsurance
A form of insurance for insurance companies
The objective is to remove some degree of
financial uncertainty by protecting themselves
against economic loss
Enables insurance companies to plan more
effectively for contingencies
9 © NCIS 2011
Licensed Crop Insurance Agents
Responsible for Sales and Premium Collection of the Farmer-paid Portion
Federal Crop Insurance Corporation (FCIC)
(Managed by USDA/RMA)
Responsible for Policy Development, Rating, Reinsurance, and
Administrative Expense Support
(as negotiated and contracted by the Standard Reinsurance Agreement)
Approved Insurance Providers (AIP’s)
Responsible for Delivery of the Program
Agrees to Indemnify the Insured Farmer Against Losses
Farmers
Program Participants and Responsibilities
© NCIS 2011 10
Risk Management Agency Role
Administers Federal Crop Insurance Act
for Board of Directors of FCIC
Headquartered in DC, major presence in
Kansas City
Ten Regional Offices
Six Area Compliance Offices
© NCIS 2011 11
What does RMA do?
Subsidizes insurance
◦ Pays delivery reimbursement to AIPs
◦ Provides premium subsidies to farmers
◦ Offers reinsurance to AIPs
Sets rates
Establishes insurance policy provisions and loss
procedures
Regulates insurance companies
© NCIS 2011 12
What do the AIPs (companies) do?
Insures farmer
Processes all paperwork
Contracts agents and loss adjusters
Ensures all claims are fairly and promptly paid
Accepts risk on the insurance policies
Interacts with RMA/agents/farmers
© NCIS 2011 13
What does the Agent do?
Explains product options—quotes price
Sells insurance contract
Collects production and acreage report
Notifies company in case of loss
Informs farmer about changes to the program
Contact for farmer - local, professional,
trusted
© NCIS 2011 14
What does the Adjuster do?
Fact finding/data collection role
◦ Gathers appropriate information
Visits the farm and physically appraises crop
damage
Follows established procedures for determining
extent of damage
Documents farmer provided data
Completes claim paperwork
© NCIS 2011 15
Private Companies
(AIPs)
Government (FCIC/RMA)
Players 15 approved companies
16,000 agents & adjusters
550 staff
$80 mil annual budget
Products May develop products May develop products
Sales Sell and adjust all policies;
must sell to any farmer
wanting coverage
Sells no policies; makes a payment
to AIPs for delivery costs
Premiums Collect premiums Sets premium rates; subsidizes
premiums
Underwriting Bear underwriting risk;
share gains/losses with gov
Sets underwriting standards;
shares gains/losses with AIPs
Claims Pay all claims Pays no claims
Quality control Performs QC Ensures QC compliance
Education Train agents, adjusters,
informs producers
Informs producers
The U.S. Partnership
© NCIS 2011 16
What is Crop Insurance?
Three Basic Types: All sold and serviced through
Private Companies
1) Yield Coverage – Regulated through USDA/RMA
2) Revenue Coverage – Regulated through USDA/RMA
Yield Coverage and Revenue Coverage are commonly
referred to as Multiple Peril Crop Insurance (MPCI)
3) Crop-Hail Insurance – Regulated by State Insurance
Departments
© NCIS 2011 17
Federal Crop Insurance Versus
Private Crop-Hail Insurance
Federal Crop Insurance Private Crop-Hail
Insurance
Regulator Risk Management
Agency (RMA) of
USDA
State Departments of
Insurance
Subsidized? Yes No
Premium
Rate
Set by RMA Set by Individual
companies
Perils
covered
All risk basis: Yield
losses due to natural
causes; Also revenue
losses due to price
movements and yield
losses.
Named perils basis:
Losses due to hail
and others (fire,
lightening, transit, etc)
18 © NCIS 2011
Background
Federally-sponsored crop insurance in agriculture has traditionally been yield insurance • Multiple peril (weather, fire, hail, wind, disease,
insects, earthquake, and wildlife) • Losses calculated based on historical producer yields
(APH) and coverage level chosen (CAT, 50%, 65%, 70%, 75%, 80%, 85% or 90%)
• FCIC determined/developed market price converts losses in dollars
• Revenue insurance products’ share have steadily
risen in the last decade
• Protects against both yield loss and price
movements
• More expensive than yield insurance © NCIS 2011 19
Crop Insurance 2002 Subsidy Schedule
Coverage Level Subsidy % Producer Premium %
CAT—50/55 100 0
50/100 67 33
55/100 64 36
60/100 64 36
65/100 59 41
70/100 59 41
75/100 55 45
80/100 48 52
85/100 38 62
© NCIS 2012 20
APH and Coverage Level Set
Guarantee
Actual production history (APH) is 4-10 years of historical yields for the insured unit
Average APH yield is the simple average of the 4-10 year yield history
Coverage levels are 50%, 55%, 60%, 65%, 70%, 75% (80% & 85% some crops)
Average APH Yield x Coverage Level = Guarantee
© NCIS 2011 21
Actual Production History (APH)
4-10 year actual yield history
T-yield based on 10-year county average
If < 4 years of actual records, insured receives variable T-yield based on years of actual history:
◦ No records, but has grown the crop, 65% of T-yield
◦ 1 year of records and three 80% T-yields
◦ 2 years of records and two 90% T-yields
◦ 3 years of records and one 100% T-yield
New Producers receive 100% of the T-yield
© NCIS 2011 22
Yield And Price Shorthand
A “70/100” has 70% coverage level and
100% price election
Catastrophic (CAT) coverage = 50/55
Buy-up coverage is all coverage > CAT
© NCIS 2011 23
APH and Coverage Level Set
Guarantee
140 bushel/acre APH yield x 65% level = 91 bushel/acre yield guarantee
Any yield < 91 bushels = loss payment, if due to an insured cause of loss
Crop yields 100 bushels/acre
No loss due as 100 > 91
© NCIS 2011 24
Price Determines Loss Amount
USDA sets/determines a price for a crop
Insured may choose from 55% to 100% of
the set price
Price is used to determine loss amount
(price election x deficient bushel(s)
© NCIS 2011 25
MPCI Example-Yield Coverage
140 bushel average APH yield
80% coverage level
$2.50 price election
100 bu./acre actual production
Loss due to drought
Yield guarantee: 140
x .80 = 112 bu./acre
Yield loss: 112 guar. –
100 act. = 12 bu./acre
Loss payment: 12 bu.
x $2.50 = $30/acre
© NCIS 2011 26
© NCIS 2012
How do I get coverage and who can help
me?
Visit a crop insurance agent.
Discuss coverage options with and get
help from an agent.
Complete and submit an application to
an agent.
27
© NCIS 2012 28
© NCIS 2012
Process—Application
Completed by the insured at agent’s office
Continuous policy unless canceled in writing
Insured elects:
◦ Which crop(s) to insure
Must insure all acres of the crop
◦ By crop/county:
Plan
Level
Price
Apply for all of the crops that you may
possibly plant. Note: You will only be
charged for the crops you actually plant.
29
© NCIS 2012
Process—Acreage Report
Completed:
◦ Annually by producer, with agent
◦ After crops are planted
◦ Due by a specific date
Reported information:
◦ Includes acres, share, and plant date
◦ Determines coverage and liability
30
© NCIS 2012
Process—Schedule of Insurance
Generated after acreage report is
submitted
Details coverage and liability on each unit
Should be reviewed carefully for accuracy
If information is not correct, contact your agent immediately.
31
© NCIS 2012
Process—Determining a Loss
If loss expected, insured must file a notice of loss
Adjuster:
◦ Contacts insured
◦ Visits farm
◦ Determines actual production by using standard Federal procedures
◦ Completes loss paperwork
Loss payment is made, by company
32
© NCIS 2012 33
Producer Obligations
Report required information accurately.
Meet policy deadlines.
Pay premiums when due.
Report losses immediately.
© NCIS 2012 34
Mistakes That Cost You Money
Insurance mistakes that cost money:
Under-reporting acres per unit.
Over-reporting acres per unit.
Harvesting the crop in a manner other
than insured.
Destroying the insured crop without
company consent.
© NCIS 2011 35
© NCIS 2011 36
There are 21
different “plans
of insurance”
codes
© NCIS 2011 37
Nationwide Recent Crop Losses
© NCIS 2011
13% Hail
37% Drought & Heat
33% Excess Moisture
Summary: 75% of losses due to extremes in moisture and heat
38
$0
$2,000,000,000
$4,000,000,000
$6,000,000,000
$8,000,000,000
$10,000,000,000
$12,000,000,000
$14,000,000,000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
CROPYEAR
Multiple Peril Crop Insurance All Industry Premium and Losses
1992 - 2011
PREM LOSS
2011 Indemnities to date
are more than $10.83 Billion
Loss ratio = 91%
13.71%
53.93%
0.35%
3.50%2.40%
0.32% 1.13%
24.65%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
YP RP RI/VI GRP DO AGR OTHER MPCI CROPHAIL
PER
CEN
TAG
E O
F TO
TAL
LIA
BIL
ITY
CROP INSURANCE TYPE
Crop Insurance Total LiabilityBy Crop Insurance Type
2011
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Prem 389,300,231 407,777,972 413,959,742 412,255,308 403,756,745 487,780,025 667,984,964 619,771,914 680,871,137 840,215,205
Loss 282,265,460 228,080,312 241,872,184 183,676,253 202,183,331 234,924,946 554,581,621 565,911,203 459,481,671 916,856,418
0
100,000,000
200,000,000
300,000,000
400,000,000
500,000,000
600,000,000
700,000,000
800,000,000
900,000,000
1,000,000,000
Crop-Hail Insurance Processing System
United States Premium & Loss Totals 2002 - 2011
2011 Indemnities to date
are more than $975 Million
Loss ratio = 115.86%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Series1 72.51 55.93 58.43 44.55 50.08 48.16 83.02 91.31 67.48 109.12
0.00
20.00
40.00
60.00
80.00
100.00
120.00
Crop-Hail Insurance Processing SystemUnited States Loss Ratio Totals
2002 - 2011
© NCIS 2011 45
Essential Strengths of Crop Insurance
1-- Producers Receive Individualized Risk
Management Solutions
Most farm programs are, in general, similar across all crops
and producers, despite variations in an individual farmer’s
operations. However, crop insurance allows farmers to
customize their plans and coverage to accurately reflect
individual losses and their unique yields or risk.
© NCIS 2011 46
Essential Strengths of Crop Insurance
2--Producers Can Use Crop Insurance as
Collateral for Loans
Crop insurance is essential to the rural economy and
preserving the production capacity of farmers; it provides
producers the financial freedom to build capacity and
innovation. The program also is fiscally sound, and has never
required a government bailout. Bankers prefer it to farm
program payments, which can be less certain.
© NCIS 2011 47
Why Crop Insurance is now in a
Position of Strength
3--Producers are Involved in, and Take
Responsibility for Risk Management
Choices
Producers design their own crop insurance programs and
must meet farming standards in order to qualify for payments.
Crop insurance encourages producers to become active risk
managers and operate efficiently because they are required to
meet the standards of “good farming practices” in order to be
eligible for payments when incurring losses.
© NCIS 2011 48
Why Crop Insurance is now in a
Position of Strength
4--Producers Can Use Crop Insurance to
Improve their Pre-Harvest Marketing
Plans
Crop insurance products provide the financial backstop
needed to optimize farm marketing. In the case of a disaster
affecting yields or prices, crop insurance revenue products
provide farmers with the income needed to settle forward
contracts, or futures and options positions.
© NCIS 2011 49
Essential Strengths of Crop Insurance
5--Producers Receive Crop Insurance
Indemnities in the Timeliest Way
Crop insurance payments are paid close to the timeframe
when loss occurs -- before harvest time in case of prevented
planting and replant payments, or shortly after harvest in case
of yield or revenue shortfall. Some farm programs provide
payment long after it is needed (up to 1.5 years after harvest).
Crop insurance companies are required to pay claims within
30 days after settlement.
© NCIS 2011 50
Essential Strengths of Crop Insurance
6--Producers Do Not Receive
Unnecessarily Excessive Payments
Crop insurance payments are related to actual loss due to
price volatility or natural disaster, whereas some farm program
payments are not related to need or performance. In addition,
a trained crop insurance loss adjuster assesses the producer’s
claim, thereby rewarding proper effort and appropriately
protecting against events beyond the producer’s control.
© NCIS 2011 51
Essential Strengths of Crop Insurance
7--Producer Indemnities are not Capped
by Arbitrary Payment Limits
There are no income caps to buy crop insurance, and crop
insurance premium subsidies and indemnities are not limited.
Farm programs have both caps and payment limits (ACRE
payments limited to $65,000, SURE is limited to $100,000).
© NCIS 2011 52
Essential Strengths of Crop Insurance
8--Producers Share in the Program Cost
Producers must contribute financially in order to receive crop
insurance. Though partially subsidized by the federal
government, these contributions help defray taxpayer costs
and encourage financial discipline.
© NCIS 2011 53
Essential Strengths of Crop Insurance
9--Producers Benefit from the
Efficiencies and Service of the Private
Sector Delivery System
There are 15 private sector companies that deliver the crop
insurance program, all driven by competition to meet
producer needs. Agents are trained on an ongoing basis to
understand and educate producers about the ever-changing
complexities of the program.
© NCIS 2011 54
Essential Strengths of Crop Insurance
10--Crop Insurance is Comprehensive
and Program Features can be
Adjusted Quickly
Crop insurance products can be quickly adjusted to the
changing needs of producers, without going through a long
legislative process. Having the flexibility to make major
program adjustments also imposes financial discipline on the
government because it has the authority to correct or
eliminate programs and features that are not working.
© NCIS 2011 55
Essential Strengths of Crop Insurance
11--Crop Insurance Has Already
Contributed to Deficit Reduction
The crop insurance industry provided $4 billion of the $6
billion reduction it took from the 2011Standard Reinsurance
Agreement negotiation, and an additional $6.4 billion from the
2008 Farm Bill toward deficit reduction. Congress must
understand that consideration of additional cuts for the 2012
Farm Bill could undermine the stability of the program, leaving
farmers and rural communities vulnerable.
© NCIS 2011 56
Essential Strengths of Crop Insurance
12--Crop Insurance Has Flexibility to
Help Meet World Trade
Organization Disciplines
Although crop insurance is considered an “amber box,” it
offers significant advantages over other farm safety net
programs. Changes to the crop insurance program and the
way it is reported to the WTO, along with provisions under
discussion in a new WTO agreement, could result in future
easing of compliance with WTO limitations.
© NCIS 2011 57
© NCIS 2012 58
Actuarial and Price Information
RMA Website: www.rma.usda.gov
◦ Cost Estimator has replaced the Premium Calculator
◦ Actuarial Information Browser (AIP)
See a licensed crop insurance agent
© NCIS 2012 59
http://www.rma.usda.gov/
© NCIS 2012 60
http://www.rma.usda.gov/tools/
© NCIS 2012
61
© NCIS 2012 62
Guide to Agricultural Risk Management
Information on Crop Insurance CropInsuranceInAmerica.org
© NCIS 2012 63
© NCIS 2011 64
And they lived happily ever
after…
The End
© NCIS 2012 65