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  • 1. The Role of Crop Insurance in Managing Risk Dr. Laurence M. CraneNATIONAL 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
  • 2. 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 © NCIS 2011 2
  • 3. 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 © NCIS 2011 3
  • 4. NCIS serves as the primaryservice organization for thecrop insurance industry. © NCIS 2011 4
  • 5. 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
  • 6. 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
  • 7. 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
  • 8. 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
  • 9. 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 © NCIS 2011 9
  • 10. Program Participants and Responsibilities Farmers Licensed Crop Insurance AgentsResponsible for Sales and Premium Collection of the Farmer-paid Portion Approved Insurance Providers (AIP’s) Responsible for Delivery of the Program Agrees to Indemnify the Insured Farmer Against Losses 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) © NCIS 2011 10
  • 11. 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
  • 12. 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
  • 13. 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
  • 14. 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
  • 15. 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
  • 16. The U.S. Partnership Private Companies Government (FCIC/RMA) (AIPs)Players 15 approved companies 550 staff 16,000 agents & adjusters $80 mil annual budgetProducts May develop products May develop productsSales Sell and adjust all policies; Sells no policies; makes a payment must sell to any farmer to AIPs for delivery costs wanting coveragePremiums Collect premiums Sets premium rates; subsidizes premiumsUnderwriting Bear underwriting risk; Sets underwriting standards; share gains/losses with gov shares gains/losses with AIPsClaims Pay all claims Pays no claimsQuality control Performs QC Ensures QC complianceEducation Train agents, adjusters, Informs producers informs producers © NCIS 2011 16
  • 17. What is Crop Insurance?Three Basic Types: All sold and serviced throughPrivate 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
  • 18. Federal Crop Insurance VersusPrivate Crop-Hail Insurance Federal Crop Insurance Private Crop-Hail InsuranceRegulator Risk Management State Departments of Agency (RMA) of Insurance USDASubsidized? Yes NoPremium Set by RMA Set by IndividualRate companiesPerils All risk basis: Yield Named perils basis:covered losses due to natural Losses due to hail causes; Also revenue and others (fire, losses due to price lightening, transit, etc) movements and yield losses. © NCIS 2011 18
  • 19. BackgroundFederally-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
  • 20. 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
  • 21. APH and Coverage Level SetGuarantee 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
  • 22. 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
  • 23. 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
  • 24. APH and Coverage Level SetGuarantee  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
  • 25. 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
  • 26. MPCI Example-Yield Coverage 140 bushel average  Yield guarantee: 140 APH yield x .80 = 112 bu./acre 80% coverage level  Yield loss: 112 guar. – $2.50 price election 100 act. = 12 bu./acre 100 bu./acre actual  Loss payment: 12 bu. production x $2.50 = $30/acre Loss due to drought © NCIS 2011 26
  • 27. How do I get coverage and who can helpme? Visit a crop insurance agent. Discuss coverage options with and get help from an agent. Complete and submit an application to an agent. © NCIS 2012 27
  • 28. © NCIS 2012 28
  • 29. 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 Apply for all of the crops that you may  Level possibly plant. Note: You will only be  Price charged for the crops you actually plant. © NCIS 2012 29
  • 30. 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 © NCIS 2012 30
  • 31. Process—Schedule of Insurance  Generated after acreage report is submitted  Details coverage and liability on each unit  Should be reviewed carefully for accuracyIf information is not correct, contact your agent immediately. © NCIS 2012 31
  • 32. 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 © NCIS 2012 32
  • 33. Producer Obligations Report required information accurately. Meet policy deadlines. Pay premiums when due. Report losses immediately. © NCIS 2012 33
  • 34. Mistakes That Cost You MoneyInsurance 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 2012 34
  • 35. © NCIS 2011 35
  • 36. There are 21 different “plans of insurance” codes© NCIS 2011 36
  • 37. © NCIS 2011 37
  • 38. Nationwide Recent Crop Losses 37% Drought & Heat13% Hail 33% Excess MoistureSummary: 75% of losses due to extremes in moisture and heat © NCIS 2011 38
  • 39. Multiple Peril Crop Insurance All Industry Premium and Losses 1992 - 2011 PREM LOSS$14,000,000,000 2011 Indemnities to date$12,000,000,000 are more than $10.83 Billion Loss ratio = 91%$10,000,000,000 $8,000,000,000 $6,000,000,000 $4,000,000,000 $2,000,000,000 $0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 CROPYEAR
  • 40. Crop Insurance Total Liability By Crop Insurance Type 2011 60.00% 53.93% 50.00%PERCENTAGE OF TOTAL LIABILITY 40.00% 30.00% 24.65% 20.00% 13.71% 10.00% 3.50% 2.40% 0.35% 0.32% 1.13% 0.00% YP RP RI/VI GRP DO AGR OTHER MPCI CROPHAIL CROP INSURANCE TYPE
  • 41. Crop-Hail Insurance Processing System United States Premium & Loss Totals 2002 - 20111,000,000,000 900,000,000 2011 Indemnities to date are more than $975 Million 800,000,000 Loss ratio = 115.86% 700,000,000 600,000,000 500,000,000 400,000,000 300,000,000 200,000,000 100,000,000 0 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
  • 42. Crop-Hail Insurance Processing System United States Loss Ratio Totals 2002 - 2011120.00100.00 80.00 60.00 40.00 20.00 0.00 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
  • 43. © NCIS 2011 45
  • 44. Essential Strengths of Crop Insurance1-- Producers Receive Individualized Risk Management SolutionsMost farm programs are, in general, similar across all cropsand producers, despite variations in an individual farmer’soperations. However, crop insurance allows farmers tocustomize their plans and coverage to accurately reflectindividual losses and their unique yields or risk. © NCIS 2011 46
  • 45. Essential Strengths of Crop Insurance2--Producers Can Use Crop Insurance as Collateral for LoansCrop insurance is essential to the rural economy andpreserving the production capacity of farmers; it providesproducers the financial freedom to build capacity andinnovation. The program also is fiscally sound, and has neverrequired a government bailout. Bankers prefer it to farmprogram payments, which can be less certain. © NCIS 2011 47
  • 46. Why Crop Insurance is now in aPosition of Strength3--Producers are Involved in, and Take Responsibility for Risk Management ChoicesProducers design their own crop insurance programs andmust meet farming standards in order to qualify for payments.Crop insurance encourages producers to become active riskmanagers and operate efficiently because they are required tomeet the standards of “good farming practices” in order to beeligible for payments when incurring losses. © NCIS 2011 48
  • 47. Why Crop Insurance is now in aPosition of Strength4--Producers Can Use Crop Insurance to Improve their Pre-Harvest Marketing PlansCrop insurance products provide the financial backstopneeded to optimize farm marketing. In the case of a disasteraffecting yields or prices, crop insurance revenue productsprovide farmers with the income needed to settle forwardcontracts, or futures and options positions. © NCIS 2011 49
  • 48. Essential Strengths of Crop Insurance5--Producers Receive Crop Insurance Indemnities in the Timeliest WayCrop insurance payments are paid close to the timeframewhen loss occurs -- before harvest time in case of preventedplanting and replant payments, or shortly after harvest in caseof yield or revenue shortfall. Some farm programs providepayment long after it is needed (up to 1.5 years after harvest).Crop insurance companies are required to pay claims within30 days after settlement. © NCIS 2011 50
  • 49. Essential Strengths of Crop Insurance6--Producers Do Not Receive Unnecessarily Excessive PaymentsCrop insurance payments are related to actual loss due toprice volatility or natural disaster, whereas some farm programpayments are not related to need or performance. In addition,a trained crop insurance loss adjuster assesses the producer’sclaim, thereby rewarding proper effort and appropriatelyprotecting against events beyond the producer’s control. © NCIS 2011 51
  • 50. Essential Strengths of Crop Insurance7--Producer Indemnities are not Cappedby Arbitrary Payment LimitsThere are no income caps to buy crop insurance, and cropinsurance premium subsidies and indemnities are not limited.Farm programs have both caps and payment limits (ACREpayments limited to $65,000, SURE is limited to $100,000). © NCIS 2011 52
  • 51. Essential Strengths of Crop Insurance8--Producers Share in the Program CostProducers must contribute financially in order to receive cropinsurance. Though partially subsidized by the federalgovernment, these contributions help defray taxpayer costsand encourage financial discipline. © NCIS 2011 53
  • 52. Essential Strengths of Crop Insurance9--Producers Benefit from the Efficiencies and Service of the Private Sector Delivery SystemThere are 15 private sector companies that deliver the cropinsurance program, all driven by competition to meetproducer needs. Agents are trained on an ongoing basis tounderstand and educate producers about the ever-changingcomplexities of the program. © NCIS 2011 54
  • 53. Essential Strengths of Crop Insurance10--Crop Insurance is Comprehensive and Program Features can be Adjusted QuicklyCrop insurance products can be quickly adjusted to thechanging needs of producers, without going through a longlegislative process. Having the flexibility to make majorprogram adjustments also imposes financial discipline on thegovernment because it has the authority to correct oreliminate programs and features that are not working. © NCIS 2011 55
  • 54. Essential Strengths of Crop Insurance11--Crop Insurance Has Already Contributed to Deficit ReductionThe crop insurance industry provided $4 billion of the $6billion reduction it took from the 2011Standard ReinsuranceAgreement negotiation, and an additional $6.4 billion from the2008 Farm Bill toward deficit reduction. Congress mustunderstand that consideration of additional cuts for the 2012Farm Bill could undermine the stability of the program, leavingfarmers and rural communities vulnerable. © NCIS 2011 56
  • 55. Essential Strengths of Crop Insurance12--Crop Insurance Has Flexibility to Help Meet World Trade Organization DisciplinesAlthough crop insurance is considered an “amber box,” itoffers significant advantages over other farm safety netprograms. Changes to the crop insurance program and theway it is reported to the WTO, along with provisions underdiscussion in a new WTO agreement, could result in futureeasing of compliance with WTO limitations. © NCIS 2011 57
  • 56. © NCIS 2012 58
  • 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
  • 58. http://www.rma.usda.gov/ © NCIS 2012 60
  • 59. http://www.rma.usda.gov/tools/ © NCIS 2012 61
  • 60. Guide to Agricultural Risk Management © NCIS 2012 62
  • 61. Information on Crop Insurance CropInsuranceInAmerica.org © NCIS 2012 63
  • 62. © NCIS 2011 64
  • 63. And they lived happily ever after… The End © NCIS 2012 65