How does crop insurance work

Remember that the RP guarantee will increase if the harvest price is higher than the projected price. The actual yield is only bushels. However, the actual yield is now bushels, equal to the APH yield. Note that because of the lower harvest prices an indemnity payment was made, even though the actual yield did not fall below the APH yield. There is a payment for RP because of the increase in the revenue guarantee. The increased coverage when prices increase into harvest is especially useful for producers who normally forward price much of their production before harvest.

If they harvest fewer bushels than they forward price, the increased guarantee provides an indemnity payment that will offset the cost of purchasing the deficit bushels at a market price above the price at which they were forward contracted. It is also useful for livestock producers who have to purchase extra grain in a short crop year, often at a high price. The premiums for all types of multiple-peril crop insurance are subsidized through the Federal Crop Insurance Corporation.

The premium for an RP policy is calculated using the projected price. If the harvest price is higher, the amount of insurance coverage increases but the premium does not change. The possibility of increased coverage has already been built into the premium structure. Estimated premiums can be obtained from a crop insurance agent, the Farmdoc website or the Risk Management Agency website. 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 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.

In short, the government will help shoulder excessive losses in bad years like 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. 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.

The purpose of RP is to provide the farmer with sufficient funds to settle the forward contract. 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 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 h submissions. Section 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 h , the Federal crop insurance program has grown to cover more commodities than ever before. Farmers today can purchase policies to protect more than commodities, including specialty and organic crops. 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 , 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.

Thus, the SRA plays a central role in determining program costs. 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 , , , , and The SRA sets a target rate of return of 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 , , , , , and Whole-Farm Revenue Protection. As part of the 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.

Without the critical safety net that crop insurance provides, U. Click here to read the white paper. According to national opinion polls, Americans support farmers and farm policy investments.

This includes crop insurance, which is a cornerstone of U. Click here to learn about its evolution. 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. For more information on National Crop Insurance Services or any of our other partners, please visit the links below. Previous Next. Cost Sharing. Private Sector Delivery. RMA also has 10 Regional Offices , in various locations across the country, that you may contact for information specific to your area.

Your local insurance agent can describe the different insurance products available, and the policy rates and terms. Your agent will help you choose the best coverage for your crop based on your particular farm operation and your risk management and budgetary needs. Q: My crop insurance company denied all or part of my claim after I experienced a loss. Can RMA help me get a payment on my claim? A: RMA has a Standard Reinsurance Agreement with insurance providers to sell and service crop insurance policies according to Federal Crop Insurance Corporation policies and procedures.

As a reinsurer, RMA does not have an appeal process available for producers. Producers may seek to resolve their disputes by exercising their rights under Section 20 or Section 25, in the crop insurance policy Basic Provisions. Q: Crop insurance seems complicated. What are some of the common mistakes that producers make that can cost them money?

A: Here are some of the most common mistakes that could cost the producer money:. Underreporting your planted acreage per unit - Production to count for an insured crop is derived from all planted acreage for that crop per unit, whether you reported all of the acres in that unit or not. Therefore, if you underreport your acres your yield will be artificially inflated and you will receive a lower indemnity payment.

Over reporting your planted acreage per unit - If you have over reported your acres, your production to count will be derived from all planted acreage for that crop per unit.

The acreage will be reduced to the correct number of acres. Your indemnity will be slightly less due to the reduction in your total guarantee not your per acre guarantee and you will be refunded any overpayment of premium. Failure to report all farm serial numbers FSNs planted to the insured crop - If you fail to report all of the FSNs planted to the insured crop, the unreported FSNs will not have coverage. This oversight generally seems to occur with added land, but many times occurs because the producer fails to insert the planted acreage figure under thee farm number on their acreage reporting form.

The indemnity payment will be reduced. Failure to report the production for all farm serial numbers FSNs - If you do not report all of your FSNs, with production information, on or before the production reporting date, the production cannot be added at acreage reporting time. The unit without production will be assigned a yield based on the variable T-yield procedure discussed previously. This yield is generally lower than the grower's actual yields.

The yield guarantee will be reduced and any indemnity payment will be less. The yield guarantee will be reduced and any indemnity payment will be lower. Failure to indicate "Added Land" on your acreage report - If you fail to indicate Added Land on your acreage report for new farms, the yield will be calculated using the variable T-yield method instead of more favorable methods.