CROP INSURANCE 101

What is crop insurance? It is a public-private partnership that forms the centerpiece of U.S. farm policy and helps American farmers manage risk.

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WHY CROP INSURANCE WORKS:
Cost Sharing

Crop insurance is a unique program where taxpayers, farmers and private insurance companies all share in the risk.

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WHY CROP INSURANCE WORKS:
The Risk Pool

Crop insurance is like other kinds of insurance. The more people it covers, the more people there are to shoulder risk. And the more people there are to shoulder risk, the cheaper coverage is for everyone. Remove participants, and things get riskier…and more expensive.

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Private Sector Delivery

WHY CROP INSURANCE WORKS:
Private-Sector Delivery

Private-sector delivery is a key strength of crop insurance because time is of the essence when a major loss occurs.

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CROP INSURANCE: A HISTORY

1788

Benjamin Franklin wrote, “I have sometimes thought it might be well to establish an office of insurance for farms against the damage that may occur to them from storms, blights, insects, etc.”
1797

The first crop-hail insurance association is formed in Europe, where farmer demand for coverage was growing and early stock fire insurance companies first began to offer policies.
1880
A group of tobacco farmers from Connecticut formed the first crop insurance company in America to insure against hail damage.
1883
The first stock fire insurance company entered the business in America and offered hail insurance to a few prairie states, prompting more companies to follow.
1915
More than a dozen stock fire insurance companies formed the Western Hail and Adjustment Association to devise a system for adjusting losses and compiling statistical data.
1919
Hail insurance expanded and covered 25 percent of principal crop acreage in America, but farmers lacked coverage for perils beyond hail.
1935

The Dust Bowl era began, killing crops and cattle, and showing how vulnerable U.S. agriculture was to non-hail disasters.
1938
Congress passed the Federal Crop Insurance Act, which established the first multi-peril insurance program and created the Federal Crop Insurance Corporation to deliver coverage.
1945
Low farmer participation led to the bankruptcy of the government’s Federal Crop Insurance Corporation.
1948
The program was restructured on a limited experimental basis until 1979, but farmer participation remained very low in the government-delivered program.
1949
Demand for private-sector hail insurance remained high and 62 companies formed the Crop-Hail Insurance Actuarial Association to advise companies on actuarial matters as the industry expanded.
1980
Congress passed the Crop Insurance Act, allowing private-sector insurance delivery and establishing the public-private partnership that still exists today.
1988
A major drought necessitated ad hoc disaster assistance as most farmers remained uninsured because coverage remained expensive and limited.
1993
Bad weather necessitated another ad hoc disaster bill – the fourth in six years – prompting lawmakers to seek improvements to the crop insurance system.
1994
Congress passed the Federal Crop Insurance Reform Act, which discounted premiums and established inexpensive catastrophic coverage to boost participation.
1996
The USDA’s Risk Management Agency was formed to administer the FCIC and offer risk management and education programs to support U.S. agriculture.
1998
Farmer participation skyrocketed with 180 million acres covered – more than triple the acres in 1988.
1998
USDA defined Good Farming Practices (GFPs), encouraging farmers to adopt smart production practices, such as no-till planting. No-till is a way of planting crops without tilling the ground, improving carbon sequestration and soil health. According to the Conservation Technology Information Center (CTIC), no-till planting is now used on more than 65 million acres of farmland.
2000
Congress passed the Agriculture Risk Protection Act, a bill that increased premium discounts, introduced revenue insurance, encouraged the private sector to create additional products, and targeted waste, fraud and abuse.
2001
Crop insurance participation continued to climb, covering 210 million acres.
2004
The crop insurance industry began a program to educate Indigenous farmers on their risk-management options, including crop insurance, supported by partial funding from RMA.
2008
Crop insurers continued to improve coverage and expand product offerings, helping participation grow to 272 million acres.
2011
Private-sector insurers entered into the current Standard Reinsurance Agreement with the government – a contract that spells out the business terms of Federal crop insurance.
2012
The Farm Belt was hit with the worst drought since the Dust Bowl. Crop insurance paid $17 billion in indemnities and Congress did not need to pass supplemental disaster assistance.
2012
The crop insurance industry began a partnership with the historically black 1890 Land-Grant Universities, offering free risk-management and business-planning workshops to socially disadvantaged and limited-resource farmers. Many of these workshops were supported by RMA and/or the National Institute of Food and Agriculture (NIFA) through competitive grants awarded to NCIS.
2014
Congress passed the Agricultural Act, which strengthened crop insurance and positioned it as a cornerstone of farm policy.
2015
The introduction of Whole-Farm Revenue Protection increased crop insurance accessibility and provided meaningful risk protection for non-traditional or specialty crops.
2018
Congress passed the Agriculture Improvement Act, which built on the 2014 Farm Bill to expand product offerings, improve specialty crop coverage, and invest in beginning and veteran farmers.
2018
Cover crops were recognized as a Good Farming Practice (GFP), giving farmers a new tool to help prioritize soil health and resiliency.
2020
USDA released data that showed a record number of acres enrolled in crop insurance – nearly 400 million nationwide.
2020
A new crop insurance plan, Hurricane Insurance Protection – Wind Index Endorsement, took effect just in time for the most active Atlantic hurricane season on record.

Actual Production History (APH)

Crop insurance is a data-driven program, so when determining how much crop insurance protection can be provided and how much the premium will be, insurers utilize a farmer’s Actual Production History (APH). This looks at the historical average of the farmer’s yield – or harvest – of a particular crop, in comparison to that of other surrounding farming operations. Farmers with a higher APH are eligible to receive lower insurance premiums. This incentivizes farmers to increase their APH by using efficient production techniques and proven Good Farming Practices (GFP) while avoiding planting on lands that are not suitable for their crop.

Actuarially Sound

Crop insurance, by law, is directed to be run in an actuarially sound manner. That is, the amount of money in the crop insurance system must be sufficient to meet the costs of running the system and paying claims. To achieve this goal, premium rates are adjusted to reflect current market and crop conditions. Being actuarially sound, the Federal crop insurance program has a loss ratio objective of “not greater than 1.0” – meaning that over time, indemnity payments to farmers should equal total premiums.

Administrative & Operating (A&O) Payments

Unlike other insurance products, crop insurance premiums do not allocate funds for servicing policies. That makes coverage more affordable for farmers, but insurers cannot service policies for free. So, the government pays part of the delivery costs to insurance companies on farmers’ behalf. This is known as an Administrative and Operating (A&O) reimbursement.

Unfortunately for crop insurers, A&O payments do not cover all the costs they incur, which continue to climb as more Federal requirements and paperwork are piled on insurance providers. In fact, A&O payments have fallen short of actual company delivery expenses, with an average shortfall of 7.7 percent from 1998 to 2015, according to an industry analysis by accounting firm Grant Thornton LLP. The shortfall in 2015 alone totaled $777 million. Because expenses tend to increase over time, but A&O payments are locked-in under the terms of the SRA, the shortfall is expected to increase in future years.

Approved Insurance Providers (AIPs)

An Approved Insurance Provider (AIP) is a company that is authorized to sell and service Federally regulated multi-peril crop insurance. There are currently 14 AIPs, which collectively offer coverage in all 50 states on more than 100 different crops. A complete list of AIPs is available here.

To become an AIP, companies must sign the Standard Reinsurance Agreement, follow Federal rules and regulations, and submit an annual business plan to the United States Department of Agriculture’s (USDA) Federal Crop Insurance Corporation (FCIC) for approval.

AIPs were first tapped to deliver Federal crop insurance in 1981 after government-delivered insurance failed to gain popularity. Since that time, coverage has expanded greatly thanks in part to private-sector efficiency and ingenuity. Today, AIPs work closely with a network of agents to tailor coverage for farmers’ individual needs, and they employ thousands of people who process claims and quickly provide indemnity checks after disaster strikes. They also maintain the vast infrastructure required to service the system.

Claim

When disaster strikes, a farmer who carries crop insurance can file a claim indicating damage with the insurance provider. The insurer, in turn, sends a claims adjuster to verify and quantify the loss. Once the claim is finalized, the farmers will receive indemnity checks covering the loss minus any deductible outlined in the insurance policy’s contract.

Crop Insurance

Crop insurance in America can trace it roots all the way back to 1880, when private insurance companies first sold policies to protect farmers against the effects of hail storms. These crop-hail policies are still sold today by crop insurance companies and are regulated by individual state insurance departments. In 2018, farmers spent $980 million on crop-hail insurance to protect $36 billion worth of crops.

In addition, farmers may also purchase Federal crop insurance, also known as multi-peril crop insurance, a risk management tool that protects against the loss of their crops due to natural disasters such as drought, freezes, floods, fire, insects, disease and wildlife, or the loss of revenue due to a decline in price. This form of crop insurance is federally supported and regulated and is sold and serviced by private-sector crop insurance companies and agents.

Deductible

Farmers must shoulder an agreed-upon portion of losses before receiving a crop insurance indemnity on verified losses. The percentage of loss to be shouldered, or deductible, is laid out in each crop insurance contract, and farmers can elect different deductible rates based on their individual risk tolerance. As with other lines of insurance, high-deductible policies are less expensive than policies with low deductibles.

The lowest deductible available on multi-peril crop insurance is 15%, and the average deductible carried on all U.S. policies is 25%. Farmers shouldered more than $9 billion in losses in 2018.

Federal Crop Insurance Corporation (FCIC)

The Federal Crop Insurance Corporation, or FCIC, is a wholly owned government corporation that administers Federal crop insurance. Managed by an independent board of directors, and overseen by the USDA’s Risk Management Agency, the FCIC is charged with researching, developing and amending crop insurance products.

And the FCIC has been busy. In the early days of crop insurance, coverage was only available for wheat, cotton, flax, corn and tobacco for a total of 391 county-crop programs. Today, crop insurance covers more than 100 different commodities and 62,000 county-crop programs.

Expansion to additional crops and new provisions and plans of insurance has been the result of Congressional actions, notably in farm bills; RMA contracting with private entities often at the request of farmers; and new pilot programs introduced through the 508(h) process, also spurred by farmer interest. Through these means, crop insurance has been successfully expanded to many new specialty crops as well as to pasture, range, forage and livestock products. New insurance plans, such as Actual Revenue History and Whole Farm Revenue Protection, have been designed to improve coverage for specialty crop and diversified farmers.

Good Farming Practices (GFPs)

America’s farmers are the most efficient and productive in the world – and they do the job right. In fact, crop insurance requires responsible stewardship. Good Farming Practices (GFPs) are science-based production methods generally recognized by agricultural experts or organic agricultural experts as defined by the USDA’s Risk Management Agency and required as a condition of insurance. They are constantly monitored and improved to keep pace with new technologies, regional research and changes in the market, weather, and land management.

GFPs help farmers address climate change and improve conservation practices, land management, soil health and water conservation, among other benefits. Environmentally beneficial GFPs that have been adopted by agriculture and embraced by crop insurance in recent years include recognition of new drought-resistant seed varieties, more efficient irrigation systems, no-till planting buffer strips, cover crops, and use of precision agricultural technology and equipment.

Improper Payment

An improper payment is a closely-watched standardized measure of waste and efficiency in government programs. An improper payment for crop insurance occurs when funds go to the wrong recipient; when the correct recipient receives too little or too much indemnity; or when the recipient uses funds in an improper manner. Many errors are simply rooted in data entry and reporting mistakes.

The Risk Management Agency and Approved Insurance Providers from the private sector made improving crop insurance’s improper payment rate a priority as it strives to be a good steward of taxpayer dollars. The program’s FY2018 rate of 1.81% marked the fourth consecutive year it declined, falling from 2017’s 1.96% and 2.02% and 2.20% in 2016 and 2015. The last time a government-wide figure was posted, it was twice as high as crop insurance’s rate.

Indemnity

An indemnity is a contractual obligation of an insurance provider to compensate the loss of an insurance policy holder. In crop insurance, once a claim of loss has been verified and the contract holder meets the required deductible, then an indemnity check will be paid by the insurer to cover remaining losses. In 2018, crop insurers paid indemnities totaling $7 billion.

Moral Hazard

Moral hazard is a phrase commonly used in the business community that means people act or perform differently when they are fully insulated from risk. The concept is at the core of insurance products, including crop insurance.

A driver with great insurance, a cheap premium and no deductible, for example, might drive more aggressively and be willing to file repair claims on every little scrape or ding. That’s why auto insurance policies have deductibles and why previous accidents and claims are factored into future premium rates.

Crop insurance customers similarly share in the cost of premiums, receive rates based on past production and shoulder deductibles as a deterrent to risky behavior. Farmers who know they will lose money by planting a crop not suitable to a specific soil or climate, will not plant that crop. Instead, they plant the best crops for their regions and work hard for a bountiful harvest while purchasing insurance protection to offer some assistance in the event that disaster strikes.

In short, farmers have little moral hazard because they share in the cost of their own safety net.

Premium

A premium is the amount of money that a business or individual pays to an insurer for an insurance policy. In crop insurance, the premium cost is shared by the farmer and the government, in order to make coverage more affordable and encourage participation. Farmers collectively spend $3.5 billion to $4 billion a year out of their own pockets on crop insurance premiums.

Unlike other forms of insurance, premiums are not set by insurers but rather by the government. And premium rates are set using a formula that takes into account production history. Because rates are set by the government, insurance providers must compete for business on customer service rather than price.

Premium Discount

The government pays a portion of crop insurance premiums on farmers’ behalves to encourage widespread participation and make coverage more affordable. The amount that the government pays, or discounts the premium, is based on several factors including the kind of coverage and the type of farmer. Congress, for example, included higher premium discounts for different segments of farmers, such as new and beginning farmers, in past farm bills.

Public-Private Partnership

The public-private partnership is the term used to describe crop insurance’s unique structure, whereas the government oversees a policy that is administered by the private sector.

Under this arrangement, private-sector crop insurance companies employ more than 20,000 licensed agents, certified loss adjusters and company staff who sell policies to farmers, determine the extent of losses, collect premiums, and pay claims.

The government, through the Risk Management Agency and Federal Crop Insurance Corporation, sets program standards, approves new products, sets premium rates and discounts farmer premiums. The Federal government further makes crop insurance affordable for farmers by offsetting delivery costs that would otherwise be built into the premium. The government also reinsures the crop insurance companies through the Standard Reinsurance Agreement (SRA), whereby the government and the companies share gains and losses of the program.

Reinsurance

Reinsurance is insurance that is purchased by an insurance company, in which some part of its own insurance liabilities is passed on to another insurer. In crop insurance, the Federal government acts as the biggest reinsurer, and the terms of risk-sharing arrangement between crop insurers and the government are spelled out in the Standard Reinsurance Agreement (SRA)

As a reinsurer, the government bears a portion of the companies’ underwriting losses (which occur in years when indemnities exceed premiums) on a state-by-state basis, and in return, the government takes a share of the companies’ underwriting gains (which occur when premiums exceed indemnities). In short, the government will help shoulder excessive losses in bad years like 2012 but will receive underwriting gains from farmer premiums in good years.

Because agriculture is inherently risky, there is potential for large-scale losses. Approved Insurance Providers are required by law to have access to extensive capital reserves so most crop insurers also purchase additional reinsurance from the private market.

Revenue Protection (RP)

Revenue Protection (RP) provides coverage to protect against loss of revenue caused by low prices or low yields or a combination of both. This crop insurance policy has become a valuable risk management tool for farmers across the United States. More than 75% of the Federal crop insurance policies sold today are Revenue Protection.

One of the key components of a revenue policy is the utilization of a fall harvest price. RP policies allow the farmer to use the greater of the fall harvest price or the projected harvest price to determine the revenue guarantee.

The RP policy is designed to provide additional assurance to those farmers who market their crop before harvest. Many farmers enter a forward contract to sell a portion of their production before harvest. Usually these contracts pay the farmer for the production they deliver after harvest based on contracted prices. If the farmer loses the crop, he is still obligated to deliver under the forward contract. But since the crop is lost, the farmer would have to buy the commodity at the harvest price and deliver that or financially settle the buyer’s contract at the contract price. The purpose of RP is to provide the farmer with sufficient funds to settle the forward contract.

Risk Management Agency (RMA)

The United States Department of Agriculture’s Risk Management Agency (RMA) was created in 1996 to serve American agriculture through market-based risk management tools that strengthen the economic stability of farmers and rural communities.

RMA manages the Federal Crop Insurance Corporation to provide crop insurance products to America’s farmers and ranchers. RMA also works alongside private-sector Approved Insurance Providers who share the risks associated with catastrophic losses due to major weather events.

Risk Pool

Insurance works best when it expands the number of people it covers because the broader the participation, the more widely risk can be spread. And by spreading the chance of loss among a diverse group of insureds, premiums become more affordable for everyone involved. This concept is known as the risk pool.

Section 508(h)

The Federal crop insurance program is continually evolving to adjust to the changing needs of agriculture. One way this is accomplished is through Section 508(h) submissions. Section 508(h) of the Federal Crop Insurance Act allows commodity groups, researchers and even individual farmers to submit proposals for new crop insurance policies or provisions, as long as they are in the best interests of producers, marketable, and actuarially sound. This process provides an opportunity for private sector individuals to identify ways to expand crop insurance coverage where it is needed.

Thanks in part to Section 508(h), the Federal crop insurance program has grown to cover more commodities than ever before. Farmers today can purchase policies to protect more than 130 commodities, including specialty and organic crops.

Standard Reinsurance Agreement (SRA)

This is the formal contract between the Federal government and private-sector insurance providers. It spells out the details of the public-private partnership that makes crop insurance unique.

The latest agreement took effect in 2011, and it defines the contractual arrangement between the USDA and Approved Insurance Providers. The SRA spells out expense payments and risk-sharing by the government, including the terms under which the government provides reinsurance (i.e., insurance for insurance companies) on eligible crop insurance contracts sold or reinsured by insurance companies. Thus, the SRA plays a central role in determining program costs. The SRA, however, does not affect policy premiums paid by farmers, which are based on the Risk Management Agency’s estimates of risk and on premium discounts set by statute.

Target Rate of Return

The Standard Reinsurance Agreement (SRA) includes a targeted rate of return for crop insurers, but this rate of return is hardly guaranteed. In fact, crop insurers lost money in 2012, 2002, 1993, 1988, 1984 and 1983.

The SRA sets a target rate of return of 14.5%, but it is important to remember that this figure is a gross figure that does not account for all expenses. When you subtract all expenses, like technology and complying with government regulations, insurers’ net income has come in below the 14.5% targeted during this SRA.

Underwriting Gain/Loss

An underwriting gain happens when premiums collected on an insurance product over the course of a year are greater than the indemnities paid out. An underwriting loss occurs when indemnities outstrip premiums received. Put another way, it defines when an insurer turns a profit or has a loss.

Most lines of insurance see underwriting gains every year – after all, businesses need to make money to survive. But, crop insurers have experienced losses in 2012, 2002, 1993, 1988, 1984, and 1983. The 2012 drought, for example, resulted in underwriting losses of $1.3 billion.

As a reinsurer, the government bears a portion of the companies’ underwriting losses on a state-by-state basis, and in return, the government takes a share of the companies’ underwriting gains.

Whole-Farm Revenue Protection

As part of the 2014 Farm Bill, Congress increased crop insurance accessibility and provided meaningful risk protection for non-traditional or specialty crops through the introduction of a new insurance coverage option: Whole-Farm Revenue Protection. Whole-Farm Revenue Protection allows producers to insure a variety of commodities, offering fruit and vegetable growers, organic growers and producers with diversified farms more flexible, affordable risk management options.

FACT SHEETS

THE CROP INSURANCE CYCLE
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CROP INSURANCE BASICS
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CROP INSURANCE STRENGTHS
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VIDEOS

CROP INSURANCE 101

WHY CROP INSURANCE WORKS:
COST SHARING

WHY CROP INSURANCE WORKS:
THE RISK POOL

WHY CROP INSURANCE WORKS:
PRIVATE SECTOR DELIVERY

DR. KEITH COLLINS:
THE IMPORTANCE OF CROP INSURANCE

CROP INSURANCE:
AVAILABLE, AFFORDABLE & VIABLE

HOW CROP INSURANCE SUPPORTS THE USE OF COVER CROPS

CROP INSURANCE INVESTS IN AGRONOMIC RESEARCH

WHITE PAPER

An Introduction to Crop Insurance

Without the critical safety net that crop insurance provides, U.S. farmers could not provide high-quality, affordable food for millions of Americans every day. Click here to read the white paper.

PRESENTATION

A Cornerstone of U.S. Farm Policy

According to national opinion polls, Americans support farmers and farm policy investments. This includes crop insurance, which is a cornerstone of U.S. farm policy. Click here to learn about its evolution.

PEER-REVIEWED ARTICLE

Study Highlights Crop Insurance’s Role in Maintaining Healthy Soil

A peer-reviewed study in the renowned Journal of Environmental Management found that crop insurance is not acting as a barrier to the adoption of conservation practices and has a role in helping farmers maintain healthy soil. Click here to learn more about how crop insurance promotes conversation practices.

Our Partners

Crop Insurance 101 is a project of National Crop Insurance Services. For more information on National Crop Insurance Services or any of our other partners, please visit the links below.

AMERICAN ASSOCIATION
OF CROP INSURERS

CROP INSURANCE AND
REINSURANCE BUREAU

CROP INSURANCE
IN AMERICA

CROP INSURANCE
IN MY STATE

CROP INSURANCE
PROFESSIONALS ASSOCIATION

INDEPENDENT INSURANCE AGENTS
AND BROKERS OF AMERICA

NATIONAL ASSOCIATION OF
PROFESSIONAL INSURANCE AGENTS