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Crop Insurance

Crop Insurance. Sept. 1, 2015 Chad Hart Associate Professor/Crop Markets Specialist chart@iastate.edu 515-294-9911. Crop Insurance. One of many risk management strategies Traditionally set up to protect farmers in times of low crop yields Now offers coverage for low prices

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Crop Insurance

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  1. Crop Insurance Sept. 1, 2015 Chad Hart Associate Professor/Crop Markets Specialist chart@iastate.edu 515-294-9911

  2. Crop Insurance • One of many risk management strategies • Traditionally set up to protect farmers in times of low crop yields • Now offers coverage for low prices • Available on over 100 commodities

  3. Why Crops Fail

  4. Federal Crop Insurance • Federal Crop Insurance Corporation – 1938 • Government’s initial move in crop insurance • Federal Crop Insurance Act of 1980 • Premium subsidies • Federal Crop Insurance Reform Act of 1994 • Catastrophic coverage and higher subsidies • Agricultural Risk Protection Act of 2000 • The 2008 and 2014 Farm Bills

  5. Federal Crop Insurance:A Public/Private Partnership The Federal Government works with private insurance companies to offer crop insurance. Since 1998, all federal crop insurance products are sold and serviced by private companies. The Federal Government sets and/or approves premium rates and insurance terms. Both entities share risks and returns from crop insurance.

  6. Federal Crop Insurance

  7. Product Innovation • Agricultural insurance products developed by private companies, reviewed and approved by FCIC • Examples: • Crop Revenue Coverage (CRC) • Revenue Assurance (RA) • Income Protection (IP) • Group Risk Income Protection (GRIP) • Livestock Risk Protection (LRP) • Livestock Gross Margin (LGM)

  8. Federal Crop Insurance:Total Acres Insured

  9. Policy Development Process • Policies can be developed by the Risk Management Agency (via contract with private companies/individuals) or directly by private companies/individuals. • Any new policy is judged based on: • 1) producer interest, • 2) sound insurance principles, and • 3) actuarial fairness.

  10. Policy Development Process • Private parties may submit: • 1) complete policies, • 2) modifications to existing policies, and • 3) premium rate determinations. • Currently, the process is conducted in two stages: • 1) Concept Proposal • 2) 508(h) Submission

  11. Concept Proposal A written proposal for an insurance product that contains sufficient information for the Federal Crop Insurance Corporation (FCIC) Board of Directors to determine if the product could be successfully developed. Regulations define what must appear in the concept proposal and when the proposal may be submitted. http://www.rma.usda.gov/fcic/2009/107procedures.pdf

  12. Concept Proposal Contents • Applicant’s name and contact information • Applicant’s insurance qualifications • Detailed description of proposed insurance product • Detailed description of the need for the product, coverage (or lack thereof) from existing products, expected demand, and potential impact of the product

  13. Concept Proposal Contents • Feasibility study of the product, outlining the risks covered, the development process, preliminary actuarial work, and reinsurance possibilities • Time and financial resources needed to develop the product

  14. Concept Proposal Timing Concept proposals are to be submitted during the first 5 business days in January, April, July, and October. Proposals must be submitted in both electronic and paper form. Proposals submitted at other times will be held until the next submission window.

  15. Concept Proposal Review RMA staff first review the submission for completeness and quality. If sufficient, the submission is forwarded to the FCIC Board for their review. The submitter is required to present the submission to the Board for approval. If the Board rejects the submission, the submitter is allowed to modify the proposal and try again.

  16. Concept Proposal Review If the Board accepts the submission, another review, conducted by at least 2 independent reviewers, is conducted. The reviewers assess the likelihood of product development, the differentiation of the product from existing policies, the potential impacts of the product, and the actuarial fairness of the product. The appointment of the independent reviewers starts a 120 day period for possible approval.

  17. Concept Proposal Upon approval, the Board may pay up to 50 percent of the estimated research and development costs for the product. And if any payment is paid, the submitter must develop a full product submission, known as a 508(h) submission.

  18. 508(h) Submission A 508(h) submission is a complete product description. As with the concept proposal, the information within the submission is detailed in regulations. Many of the requirements from the concept proposal are carried forward in the 508(h) submission. http://www.rma.usda.gov/fcic/2013/submissionchecklist.pdf

  19. 508(h) Submission Contents • General information on the applicant and proposed product • Benefits from the proposed product • Detailed policy language • Marketing information on the policy • Underwriting and loss adjustment rules

  20. 508(h) Submission Contents Price and premium rate settings Actuarial certification Insurance forms Sales statements and justification of provisions, if not authorized under current law Software and data requirements

  21. 508(h) Submission Contents Training provisions Reimbursement request for research, development, and maintenance costs Other certification statements

  22. Source: USDA-RMA

  23. Crop Insurance Top 10s

  24. Crop Insurance Top 10s

  25. Crop Insurance Top 10s

  26. Yield Insurance Payout Graph No Payout Payout

  27. RPE Payout Graph No Payout Payout

  28. Harvest Price Option

  29. RP Payout Graph No Payment Neither Pay RPE Pays YP Pays Both Pay RP Pays

  30. Optional Units: Each farm is separate Basic Units: Combine owned and cash rented acres in same county Enterprise Units: Combine all acres of the same crop in same county Whole Farm: Combine all crops in county What Units to Choose?

  31. Current Subsidy Rates

  32. 2015 Insurance Premiums Per Acre Premiums ($ per acre) Cov. Level YP RPHPE RP_ 50% 0.64 0.53 0.69 55% 0.93 0.79 1.10 60% 1.23 1.02 1.57 65% 1.89 1.57 2.59 70% 2.32 1.98 3.55 75% 3.08 2.96 5.60 80% 4.37 4.78 9.33 85% 6.60 7.95 15.58 For an example farm in Story County, Iowa for corn

  33. 2015 Insurance Premiums Per Acre Premiums ($ per acre) Cov. Level YP RPHPE RP_ 50% 6.76 6.35 8.26 55% 9.08 8.67 11.26 60% 11.03 10.79 13.98 65% 15.07 15.08 19.41 70% 17.89 18.10 23.27 75% 23.08 23.42 30.18 80% 31.11 31.89 40.98 85% 42.89 44.44 56.85 For our example farm in Anoka County, MN for corn

  34. Corn Acres Insured in 2014 87% of all corn acres are insured

  35. Soy Acres Insured in 2014 88% of all soybean acres are insured

  36. 2014 Corn and Soy Coverage Levels

  37. Coverage Levels for YP

  38. Coverage Levels for RP

  39. Thank you for your time!Any questions?My web site:http://www2.econ.iastate.edu/faculty/hart/Iowa Farm Outlook:http://www2.econ.iastate.edu/ifo/Ag Decision Maker:http://www.extension.iastate.edu/agdm/

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