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 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


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

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 36

There are 21

different “plans

of insurance”

codes

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

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


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


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


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


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


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


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


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


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


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

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

The Role of Crop Insurance in Managing Risk

Economy & Finance

Transcript of The Role of Crop Insurance in Managing Risk