What is crop insurance
What is Crop Insurance?
Because of the inherent risks and potential for widespread catastrophic losses associated with agricultural production, insuring farmers and ranchers has always posed a challenge.
Before the Federal crop insurance program was established, private insurers had difficulty providing affordable insurance products to producers. In 1938, Congress passed the Federal Crop Insurance Act which established the first Federal crop insurance program. These early efforts were not particularly successful in that the program costs were high and participation by farmers was low. The program had difficulty amassing sufficient reserves to pay claims and was not financially viable.
Recognizing that they had not established a viable program to insure agricultural producers, Congress looked for other ways to assist farmers through direct payments and disaster assistance.
In 1980, Congress passed legislation that was designed to increase participation in the Federal crop insurance program and make it more affordable and accessible. This modern era of crop insurance was marked by the introduction of a public-private partnership between the U.S. government and private insurance companies. Bringing the efficiencies of a private sector delivery system together with the regulatory and financial support of the Federal government formed the basis of a new and innovative approach to solving a long-standing problem.
But while the 1980 Act helped to expand the program by increasing the number of commodities insured, participation was still far less than Congress had hoped for. Many Members of Congress were growing weary of repeated requests for ad hoc disaster assistance and emergency loans that served to undermine the crop insurance program. Even as late as the early 1990's, crop insurance participation rates hovered in the 30 percent range and in many years Congress was spending considerably more each year in disaster relief expenditures than it was on crop insurance.
The Federal Crop Insurance Reform Act of 1994 dramatically restructured the program. And in 1996, the Risk Management Agency (RMA) was created in the U.S. Department of Agriculture to administer the Federal crop insurance program. Through subsidies built into the new program guidelines, participation increased dramatically. By 1998, more than 180 million acres of farmland were insured under the program, representing a three-fold increase over 1988. In 2008, more than 272 million acres are insured through the program protecting a record-setting 90 billion dollars of crop value.
In May of 2000, Congress approved another important piece of legislation: the Agricultural Risk Protection Act (ARPA). The provisions of ARPA made it easier for farmers to access different types of insurance products including revenue insurance and protection based on historical yields. ARPA also increased premium subsidy levels to farmers to encourage greater participation and included provisions designed to reduce fraud, waste and abuse
How it Works
Two types of crop insurance are available to farmers in the United States: Crop-Hail and multiple peril crop insurance (MPCI). Crop-Hail policies are not part of the Federal crop insurance program and are provided directly to farmers by private insurers. Many farmers purchase Crop-Hail coverage because hail has the unique ability to totally destroy a significant part of a planted field while leaving the rest undamaged. In areas of the country where hail is a frequent event, farmers often purchase a Crop-Hail policy to protect high-yielding crops. Unlike MPCI, a crop-hail policy can be purchased at any time during the growing season.
MPCI policies must be purchased prior to planting and cover loss of crop yields from all types of natural causes including drought, excessive moisture, freeze, and disease.
Newer coverage options combine yield protection and price protection to protect farmers against potential loss in revenue, whether due to low yields or changes in market price.
Under the Federal crop insurance program's unique public-private partnership, there are currently 16 private companies authorized by the United States Department of Agriculture Risk Management Agency (USDA RMA) to write MPCI policies. The service delivery side of the program - writing and reinsuring the policies, marketing, adjusting and processing claims, training and record-keeping, etc. - is handled by each private company. The program is overseen and regulated by the Risk Management Agency (RMA). The RMA sets the rates that can be charged and determines which crops can be insured in different parts of the country. The private companies are obligated to sell insurance to every eligible farmer who requests it and must retain a portion of the risk on every policy.
The Federal government also subsidizes the farmer-paid premiums to reduce the cost to farmers. The Federal government also provides reimbursement to the private insurance companies to offset operating and administrative costs that would otherwise be paid by farmers as part of their premium. Through this Federal support, crop insurance remains affordable to a majority of America's farmers and ranchers.
By combining the regulatory authority and financial support of the Federal government with the efficiencies of the private sector, the crop insurance program has succeeded in meeting and even surpassing the goals set forth by Congress for broad participation, diversity and inclusion. By using the private sector, risk is shared among the private companies as well as the government.
Why it's Essential
Crop insurance helps make America's farmers and ranchers world leaders in agriculture, allowing producers to stay competitive and be more innovative. It also helps them sleep better at night knowing that should the unexpected happen, they will have the financial security to stay in business and go on to plant the next season.
More than ever before, our farmers are being asked to produce more products and achieve higher yields. Agricultural crops for food, feed, fiber and fuel are in great demand both domestically and abroad. New technology, innovation, access to capital and affordable risk management has enabled America's farmers to meet the demands placed upon them. A vibrant Federal crop insurance program is a key component to the tremendous success of our country's agricultural economy.
Crop insurance has been called the linchpin of the Federal safety net for America's farmers and ranchers. In addition to reducing risk and protecting their investments, crop insurance enables farmers to borrow money to expand and improve their businesses by providing lenders the assurance that farmers will have sufficient economic security to repay their loans. Crop insurance also provides the security that enables farmers to forward market their crops to take advantage of market opportunities.
There are many other components of the Federal safety net for America's farmers such as direct payments, disaster assistance and programs designed to support particular crops and special initiatives. But none has the universal significance of the Federal crop insurance program. The vast majority of today's farmers rely on Federal crop insurance because they recognize the value it provides.
Crop insurance has become an essential business tool for America's agricultural producers. Working in an industry where one catastrophic year could wipe out five years of profit, most farmers wouldn't think of operating without some form of crop insurance.
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