What is covered by Crop Insurance?
Crop insurance is an important risk management tool available to farmers and ranchers to help protect them against declines in crop yields and/or revenue. Crop insurance is divided into two categories, the federally subsidized multiple-peril crop insurance and the state-regulated private crop insurance. In 2016, nearly $9.3 billion premiums were written for multiple-peril crop insurance and over $1 billion premiums were written for private crop insurance.
Crop insurance is purchased by agricultural producers, and subsidized by the federal government, to protect against either the loss of their crops due to natural disasters, such as hail, drought, and floods, or the loss of revenue due to declines in the prices of agricultural commodities.
Categories of Crop Insurance
The two general categories of crop insurance are called crop-yield insurance and crop-revenue insurance.
Farmers can purchase crop revenue insurance, which helps farmers in years when crops have a low yield and/or the price of the crop is low. The amount that an insurer will pay reflects how much lower a year’s revenues are compared to previous years’ earnings. This insurance helps farmers protect their earnings against drastic swings in crop prices, regardless of the cause.
The 2014 Farm Bill substantially strengthened crop insurance by adding several new products and requiring a number of program revisions that help make crop insurance a primary component of the farm safety net. For more information about the Farm Bill and crop insurance, visit cropinsuranceamerica.org.
A crop insurance specialist can provide guidance about which insurance is appropriate for your farming or ranch business.
Multiple-peril crop insurance (MPCI)
MPCI covers crop losses, including lower yields, caused by natural events, such as:
- Destructive weather (hail, frost, damaging wind).
- Insect damage.
- excessive moisture
- and other natural causes
MPCI is federally supported and regulated, and is sold and serviced by private-sector crop insurance companies and agents.
More than 90 percent of farmers who buy crop insurance opt for MPCI. Both the cost of insurance and the amount an insurer will pay for losses are tied to the value of the specific crop. MPCI is available for more than 120 different crops, though not all crops are covered in every geographic area.
MPCI policies must be purchased each growing season by deadlines established by the federal government—and before a crop is planted. If damage occurs early enough in the growing season, the policy may include incentives to replant—or penalties for not doing do.
MPCI covers a broad range of perils and must be purchased before planting begins.
By contrast, crop/hail insurance is coverage offered by the private market and regulated by the state insurance departments. It covers a narrower variety of perils, such as hail and fire, and is not reinsured by the FCIC.
Some of the advantages of crop/hail are the availability, as many different companies offer the product, and the flexibility, as it may be purchased at any time during the growing season.
In 1938, to help agriculture recover from the combined effects of the Great Depression and severe dust storms (the Dust Bowl), Congress passed the Federal Crop Insurance Act which established the first federal crop insurance program. The Federal Crop Insurance Corporation (FCIC), a wholly owned corporation of the U.S. Department of Agriculture (USDA), was created to carry out the federal crop insurance program.
Before the federal crop insurance program was established, private insurers had difficulty providing affordable insurance products because of the inherent risks and potential for widespread catastrophic losses associated with agricultural production. The FCIC was created with three objectives in mind: “(a) to protect the income of farmers against crop failure or price collapse; (b) to protect consumers against shortage of food supplies and extreme prices; and (c) to assist business and employment by providing an even flow of farm supplies and establishing stable farm buying power.”
Over the years, the size and scope of the federal crop insurance program has expanded dramatically. The passage of the Federal Crop Insurance Act of 1980 encouraged participation by authorizing a subsidy for premiums. The Federal Crop Insurance Act of 1980 also added coverage for additional crops and regions of the country.
Natural disasters precipitated ad hoc disaster assistance bills in 1988, 1989, 1992 and 1993. Participation in the program drastically increased with the passage of the Federal Crop Insurance Reform Act of 1994 which increased subsidies and made coverage mandatory for certain benefits previously offered for free. In 1996 the requirement for mandatory enrollment was lifted and the USDA created the Risk Management Agency (RMA) to operate and manage the FCIC. The Food, Conservation, and Energy Act of 2008 modified the legislation to reduce the overall cost and create a permanent disaster assistance program.
The federal crop insurance program was most recently reformed with the Agricultural Act of 2014 (P.L. 113-79)(the 2014 farm bill). The 2014 farm bill makes major changes in commodity programs, adds new crop insurance options and expands programs for specialty crops, organic farmers, bioenergy and rural development. The 2014 farm bill also introduces new products-including Supplemental Coverage Option (SCO) and the Stacked Income Protection Plan (STAX)-to help producers expand their protection against losses due to natural disasters or price declines.
An overview of the changes can be found here.
On average, the federal government subsidizes 62 percent of the premium. In 2014, crop insurance policies covered 294 million acres. Major crops are insurable in most counties where they are grown, and approximately 83% of U.S. crop acreage is insured under the federal crop insurance program. Four crops—corn, cotton, soybeans, and wheat— typically account for more than 70% of total enrolled acres. For these major crops, a large share of plantings is covered by crop insurance. In 2014, the portion of total corn acreage covered by federal crop insurance was 87%; cotton, 96%; soybeans, 88%; and wheat, 84%.
For a company to write federal MPCI, they must sign a Standard Reinsurance Agreement (SRA), which is a contract between the company and the FCIC which establishes the terms and conditions the FCIC will provide subsidies and reinsurance on eligible crop insurance contracts sold by that company. Seventeen companies have signed the SRA and been approved by the USDA to provide crop insurance in 2018 (Approved Insurance Providers).