Basics of Crop Insurance Presented by IGF Insurance
Of all the objects pictured, which is the least likely to have some type of insurance coverage? What is it that pays for everything in this picture?
What is Crop Insurance? • Crop Insurance is Risk Protection. • Crop Insurance is Family Security. • Crop Insurance is Investment Protection. • Crop Insurance is Loan Collateral. • Crop Insurance is a Marketing Tool. • Crop Insurance is Peace of Mind. • Crop Insurance is Insurance. • In short, Crop Insurance is many things.
Benjamin Franklin may have been the First American to promote the idea of Crop Insurance. On October 24th, 1788, after hearing that a severe storm destroyed crop in a large part of the French countryside. Franklin wrote that it“must have been a terrible tempest that devastated such an extent of country . I have sometimes thought that it might be well to establish an office of insurance for farms against the damage that may occur to them storms, blight, insects, ect. A small sum paid by a number would repair such losses and prevent much and distress.”
Start of Crop Insurance • In 1883 The St. Paul Fire and Marine Insurance Company began writing Hail Insurance on Wheat in the Mississippi Valley states. Soon after, other stock companies followed.
Types of Crop Insurance • Crop-Hail Insurance • Protection from hail. • Additional perils are included in certain areas of the country • Named-Peril • Covers only the perils named in the policy. • Multiple Peril Crop Insurance • Covers numerous perils. • Is reinsured by the federal government
Crop-Hail Insurance • Original type of Crop Insurance • Insured elects a reasonable amount of coverage (dollar amount per acre) • Covers damage occurring from hail • Damage is assessed by a loss adjuster after a hail storm • Damage to the crop is what is evaluated • Past years of research supply adjuster with historical crop recovery potential.
Named-Peril Crop Insurance • Provides producer with protection from a specific peril • No other perils are covered • Niche market • Rain on tomatoes • Wind on cotton • Sugar beet soil crusting
Multiple Peril Crop Insurance • Provides protection from many perils: • Adverse weather conditions; • Fire; • Insects, but not damage due to insufficient or improper application of pest control measures; • Plant disease, but not damage due to insufficient or improper application of disease control measures; • Wildlife; Earthquake; Volcanic eruption; or • Failure of the irrigation water supply • Reinsured By the Federal Government • Federal Government pays a portion of the insured’s premium (subsidy). • Indemnities that are paid by • Federal government • IGF • Private reinsurers
Multiple Peril Crop Insurance • Under the MPCI program there are two types of coverage available: • Catastrophic Coverage (CAT) - 50% Coverage Level at 55% of the Price Election. The Administrative fee is $100 per crop/per county. A CAT policy is also available with the Group Risk Protection (GRP) program. • Additional Coverage ranges from 50/100 up to 75/100. Levels of 80% and 85% are available for some crops in some areas. The Administrative fee is $30 per crop/county.
MPCI Multi Peril Crop Insurance APH Actual Production History FCIC Federal Crop Insurance Corporation CRC Crop Revenue Coverage Units All insurable acreage of the insured crop in the county on the date coverage begins for the crop year (by share) Terms • RMA • Risk Management Association
The Applicant • Is a producer who has a bona fide interest in the crop • A producer can be: • Individual • Corporation • Partnership • Trust
The Crop • Producer must insure all acres of the crop listed on the Application. • In order to avoid adverse selection, insureds are not allowed to pick and chose which acres they wish to insure. • A level of coverage must be selected • Coverage levels range from 50% to 85% on some crops in certain areas.
The Crop (cont.) • A price amount must be selected by the producer. • These prices are set by Risk Management Agency (RMA). • Amounts higher than those set by RMA are not available.
Basic Unit Dallas CO 100% Share Land 50% Farmer 50% Landlord
Basic Unit Dallas CO • All Acres of a crop in a county by share • Receives a 10% premium discount • Production from all acres in the unit are used to determine if there is a loss 100% Share Land 50% Farmer 50% Landlord
Optional Units Dallas CO • Divides a basic unit into smaller parcels • First and most common is by Section • The next in option is by Section Equivalent • Farm Serial Number (FSN) • Farm Service Agencies have land divided by a specific Farm number • Practice • By this we mean if an insured has an irrigated practice this can be separated from the non irrigated crop • Type • some crops can be separated by type • an example would be dry beans
Rectangular Survey System (TOWNSHIP) (RANGE) R 13W R 12W R 11W T 72N T 71N T 70N
Township R 13 W 6 5 4 3 2 1 7 8 9 10 11 12 18 17 16 15 14 13 19 20 21 22 23 24 30 29 28 27 26 25 31 32 33 34 35 36 T 72N [County Actuarial Index Map; NCIS 1006 ‘95]
Section Division Section 22 NW 1/4 160 acres E 1/2 320 acres N 1/2, SE 1/4, SW 1/4 20 acres N1/2, SW 1/4 80 acres SW 1/4, SW 1/4 40 acres SW 1/4, SE 1/4, SW 1/4 10 acres [County Actuarial Index Map; NCIS 1006 ‘95]
Optional Units Dallas CO 100% Share Land 50% Farmer 50% Landlord
Practice • If an insured has an irrigated practice (IRR), it can be separated from the non-irrigated (NI) crop.
1 Unit Section 5 Optional Units • IRR and NI IRR [CIH Sec. 4 D(4)(b)4a]
Optional Units • IRR and NI May qualify for 2 units NI IRR Section 5 [CIH Sec. 4 D(4)(b)4b]
NI IRR 1 unit Section 5 NI Optional Units • IRR and NI [CIH Sec. 4 D(4)(b)4c]
Optional Units Order of precedence example 1: # 4 [CIH Exhibit 3 Example 1
Optional Units Order of precedence example 2: Spanish Land Grant [CIH Exhibit 3 Example 2]
Farm Serial Number (FSN) • Farm Service Agencies have land divided by a specific Farm number.
17 16 C A B 20 21 C A IRR. A Basic/Optional Unit Structure Exercise Given that: A: 100% Farmer Bob B: 50% Farmer Bob, 50% Smith C: 50% Farmer Bob, 50% Jones Question 1: How many basic units are there? Question 2: How many potential optional units are there?
Answers: Basic/Optional Unit Structure Exercise Given that: A: 100% Farmer Bob B: 50% Farmer Bob, 50% Smith C: 50% Farmer Bob, 50% Jones 17 16 C A Question 1: How many basic units are there? Answer: Three. A,B, and C each would be a basic unit by share. B 20 21 C A Irr. A
Answers: Basic/Optional Unit Structure Exercise A: 100% Farmers B: 50% Farmer 50% Smith C: 50% Farmer 50% Jones 17 16 C A 1 by section 1 by section Question 2: How many potential optional units are there? Answer: Five. A has 3 optional units (two by section one by practice), and C has 2 optional units by section. B 20 21 2 by section C A Irr. 2 by section A B can only be a basic unit. 3 by practice
Unit Numbering • Basic Units • 00100 • 00200 • Optional Units • 00102 • 00103 • 00201 • 00202
Identifying a Basic Unit 001 00 Basic Unit First Three numbers indicate County, Crop, and Share Since the last two numbers are “00” this indicates that this is a basic unit. (00 = Basic Unit)
Identifying an Optional Unit 001 01 Optional Unit First Three numbers indicate County, Crop, and Share Since the last two numbers are not “00” it indicates that this is an optional unit which means it is in a separate section, section equivalent, FSA number, etc.
How is Coverage Based? • Once an insured takes out a policy some type of coverage must be afforded to them. • Coverages are based on yield. • This can be an insureds own yield history or • One that is assigned to them.
Building an APH database • Insurance is based off a guarantee • Can be a producer’s actual yield • Can be assigned • penalties are imposed when a producer does not supply their actual records
Insured supplies no records • We use a percentage of the county’s Transitional yield (T yield) • This is an estimated yield provided in the Actuarial Table • Generally this is lower than what a producer is probable capable of producing.
TRANSITIONAL YIELD TABLE FCI-33 TYPE PRACTICE MAP AREA T-YIELD ----------------------------------------------------------------------------- 016 GSG 002 I 72.0 016 GSG 003 NI 72.0 GENERAL STATEMENTS See the County Special Provisions document and the County FCI-33, CROP INSURANCE ACTUARIAL MAP, for determination of high risk or unrated areas. APPROVED: ACTUARIAL BRANCH 10/27/1999 Example of a county T yield From the Benton County Mississippi Actuarial
Using the T yield from previous slides, we will calculate a producer’s APH. A four-year database is used in the calculation. What is the T yield? 72 Because no Production was supplied by the producer we use 65% of the T yield to arrive at an approved yield. 1996 1997 1998 1999 47 47 47 47 188/4= 47 Bushel Approved Yield
Same Producer Supplying Production Records 1996 1997 1998 1999 102 117 123 93 435/4 = 109 Bushel Approved Yield Producer Receives additional benefit.
Optional Units Dallas CO
Application Date_______ 3/15 Production Reporting 45 days after Cancellation Date Billing Date________ 10/1 Acreage Reporting Date____________ 6/30
How much Insurance do I have? 109 Bushel x 70 % (Level of Coverage) x $2.00 (Price Election) x 1.000 (Share) $153 (an acre)
How will a claim be paid? 109 Bushel (Approved yield) 7630 (Total unit guarantee) x – 4700 70% (Level of Coverage) (Production to Count) = = 2930 Bushel (unit deficiency) 76.3 Bushel (Guarantee per acre) x x $2.00 (Price election) 100 (Unit Acres) x = 100% (Share) = 7630 (Total unit guarantee) $ 5860 (Claim Amount)