Overview of the 2012 Farm Bill 2012 NACAA AM/PIC Ag Econ Super Seminar Presentation

1. The Role of Crop Insurance in
Managing Risk
Dr. Laurence M. Crane
NATIONAL ASSOCIATION OF COUNTY AGRICULTURAL AGENTS
97th ANNUAL NATIONAL MEETING
and
PROFESSIONAL IMPROVEMENT CONFERENCE
Ag Economics Super Seminar “Managing Agricultural Risks Under the 2012 Farm Bill”
July 18, 2012
Charleston Area Convention Center
Charleston, South Carolina

2. Who is NCIS?
 National Crop Insurance Services
 Not-for-profit crop insurance industry trade
association
 Members are crop insurance companies
 All companies writing Federally sponsored Crop
Insurance are NCIS Members
◦ 97% + of all Crop Hail policies are written by an NCIS
member company
◦ International insurance and reinsurance companies
 Licensed statistical agent to State Insurance
Departments
© NCIS 2011 2

3. NCIS Functions
 MPCI and Crop-Hail Program Development and
Analysis
◦ Policy Analysis, Loss Adjustment Procedures, Legal Analysis,
Agronomic Research
 Economic and Actuarial Analysis
 Education and Training
◦ Loss Adjuster Schools – 17 (1,692 attendees)
◦ National Conferences – 5 (1,037 attendees)
◦ Annual Regional/State Meetings – 14 (531 attendees)
 Crop-Hail Advisory Organization and Statistical Agent
◦ Licensed by Individual State Insurance Department
 Public Relations and Industry Outreach
© NCIS 2011 3

4. NCIS serves as the primary
service organization for the
crop insurance industry.
© NCIS 2011 4

5. Presentation Overview
 Why a Government CI Program
 Insurance Principles
 Program Participants and Responsibilities
 Terminology and Mechanics
 Insurable Crops
 2011 CI Data
 Essential Strengths
 Educational Materials
 Summary and Conclusion
© NCIS 2011 5

6. Why a Government Program?
 Weather tends to impact a large area
 Losses are correlated, insurance works best
when losses are not correlated
 Without federal subsidies premiums would be
too high for most farmers to participate
 Without federal reinsurance, federal capital
requirements would be too high for most
companies to participate
© NCIS 2011 6

7. Insurance Principles
 Insurance is the pooling/combining of enough
small unpredictable risks so that over time the
losses for the combined group become
statistically predictable.
 Basic purpose of insurance is to provide
protection against economic loss arising from
adverse events.
© NCIS 2011 7

8. Insurance Principles
To be insurable, risks must meet this criteria:
 Loss would result in economic hardship.
 Sufficient number/quality of units must be
exposed to the same peril.
 Occurrences must be accidental/unintentional.
 Definite in time/place and measurable with
reasonable accuracy.
© NCIS 2011 8

9. Reinsurance
 A form of insurance for insurance companies
 The objective is to remove some degree of
financial uncertainty by protecting themselves
against economic loss
 Enables insurance companies to plan more
effectively for contingencies
© NCIS 2011 9

10. Program Participants and Responsibilities
Farmers
Licensed Crop Insurance Agents
Responsible for Sales and Premium Collection of the Farmer-paid Portion
Approved Insurance Providers (AIP’s)
Responsible for Delivery of the Program
Agrees to Indemnify the Insured Farmer Against Losses
Federal Crop Insurance Corporation (FCIC)
(Managed by USDA/RMA)
Responsible for Policy Development, Rating, Reinsurance, and
Administrative Expense Support
(as negotiated and contracted by the Standard Reinsurance Agreement)
© NCIS 2011 10

11. Risk Management Agency Role
 Administers Federal Crop Insurance Act
for Board of Directors of FCIC
 Headquartered in DC, major presence in
Kansas City
 Ten Regional Offices
 Six Area Compliance Offices
© NCIS 2011 11

12. What does RMA do?
 Subsidizes insurance
◦ Pays delivery reimbursement to AIPs
◦ Provides premium subsidies to farmers
◦ Offers reinsurance to AIPs
 Sets rates
 Establishes insurance policy provisions and loss
procedures
 Regulates insurance companies
© NCIS 2011 12

13. What do the AIPs (companies) do?
 Insures farmer
 Processes all paperwork
 Contracts agents and loss adjusters
 Ensures all claims are fairly and promptly paid
 Accepts risk on the insurance policies
 Interacts with RMA/agents/farmers
© NCIS 2011 13

14. What does the Agent do?
 Explains product options—quotes price
 Sells insurance contract
 Collects production and acreage report
 Notifies company in case of loss
 Informs farmer about changes to the program
 Contact for farmer - local, professional,
trusted
© NCIS 2011 14

15. What does the Adjuster do?
 Fact finding/data collection role
◦ Gathers appropriate information
 Visits the farm and physically appraises crop
damage
 Follows established procedures for determining
extent of damage
 Documents farmer provided data
 Completes claim paperwork
© NCIS 2011 15

16. The U.S. Partnership
Private Companies Government (FCIC/RMA)
(AIPs)
Players 15 approved companies 550 staff
16,000 agents & adjusters $80 mil annual budget
Products May develop products May develop products
Sales Sell and adjust all policies; Sells no policies; makes a payment
must sell to any farmer to AIPs for delivery costs
wanting coverage
Premiums Collect premiums Sets premium rates; subsidizes
premiums
Underwriting Bear underwriting risk; Sets underwriting standards;
share gains/losses with gov shares gains/losses with AIPs
Claims Pay all claims Pays no claims
Quality control Performs QC Ensures QC compliance
Education Train agents, adjusters, Informs producers
informs producers
© NCIS 2011 16

17. What is Crop Insurance?
Three Basic Types: All sold and serviced through
Private Companies
1) Yield Coverage – Regulated through USDA/RMA
2) Revenue Coverage – Regulated through USDA/RMA
Yield Coverage and Revenue Coverage are commonly
referred to as Multiple Peril Crop Insurance (MPCI)
3) Crop-Hail Insurance – Regulated by State Insurance
Departments
© NCIS 2011 17

18. Federal Crop Insurance Versus
Private Crop-Hail Insurance
Federal Crop Insurance Private Crop-Hail
Insurance
Regulator Risk Management State Departments of
Agency (RMA) of Insurance
USDA
Subsidized? Yes No
Premium Set by RMA Set by Individual
Rate companies
Perils All risk basis: Yield Named perils basis:
covered losses due to natural Losses due to hail
causes; Also revenue and others (fire,
losses due to price lightening, transit, etc)
movements and yield
losses. © NCIS 2011 18

19. Background
Federally-sponsored crop insurance in
agriculture has traditionally been yield
insurance
• Multiple peril (weather, fire, hail, wind, disease,
insects, earthquake, and wildlife)
• Losses calculated based on historical producer yields
(APH) and coverage level chosen (CAT, 50%, 65%,
70%, 75%, 80%, 85% or 90%)
• FCIC determined/developed market price converts
losses in dollars
• Revenue insurance products’ share have steadily
risen in the last decade
• Protects against both yield loss and price
movements
• More expensive than yield insurance
© NCIS 2011 19

20. Crop Insurance 2002 Subsidy Schedule
Coverage Level Subsidy % Producer Premium %
CAT—50/55 100 0
50/100 67 33
55/100 64 36
60/100 64 36
65/100 59 41
70/100 59 41
75/100 55 45
80/100 48 52
85/100 38 62
© NCIS 2012 20

21. APH and Coverage Level Set
Guarantee
 Actual production history (APH) is 4-10 years
of historical yields for the insured unit
 Average APH yield is the simple average of the
4-10 year yield history
 Coverage levels are 50%, 55%, 60%, 65%, 70%,
75% (80% & 85% some crops)
 Average APH Yield x Coverage Level =
Guarantee
© NCIS 2011 21

22. Actual Production History (APH)
 4-10 year actual yield history
 T-yield based on 10-year county average
 If < 4 years of actual records, insured receives
variable T-yield based on years of actual history:
◦ No records, but has grown the crop, 65% of T-yield
◦ 1 year of records and three 80% T-yields
◦ 2 years of records and two 90% T-yields
◦ 3 years of records and one 100% T-yield
 New Producers receive 100% of the T-yield
© NCIS 2011 22

23. Yield And Price Shorthand
 A “70/100” has 70% coverage level and
100% price election
 Catastrophic (CAT) coverage = 50/55
 Buy-up coverage is all coverage > CAT
© NCIS 2011 23

24. APH and Coverage Level Set
Guarantee
 140 bushel/acre APH yield x 65% level =
91 bushel/acre yield guarantee
 Any yield < 91 bushels = loss payment, if
due to an insured cause of loss
 Crop yields 100 bushels/acre
 No loss due as 100 > 91
© NCIS 2011 24

25. Price Determines Loss Amount
 USDA sets/determines a price for a crop
 Insured may choose from 55% to 100% of
the set price
 Price is used to determine loss amount
(price election x deficient bushel(s)
© NCIS 2011 25

26. MPCI Example-Yield Coverage
 140 bushel average  Yield guarantee: 140
APH yield x .80 = 112 bu./acre
 80% coverage level  Yield loss: 112 guar. –
 $2.50 price election 100 act. = 12 bu./acre
 100 bu./acre actual  Loss payment: 12 bu.
production
x $2.50 = $30/acre
 Loss due to drought
© NCIS 2011 26

27. How do I get coverage and who can help
me?
 Visit a crop insurance agent.
 Discuss coverage options with and get
help from an agent.
 Complete and submit an application to
an agent.
© NCIS 2012 27

28. © NCIS 2012 28

29. Process—Application
 Completed by the insured at agent’s office
 Continuous policy unless canceled in writing
 Insured elects:
◦ Which crop(s) to insure
 Must insure all acres of the crop
◦ By crop/county:
 Plan
Apply for all of the crops that you may
 Level
possibly plant. Note: You will only be
 Price charged for the crops you actually plant.
© NCIS 2012 29

30. Process—Acreage Report
 Completed:
◦ Annually by producer, with agent
◦ After crops are planted
◦ Due by a specific date
 Reported information:
◦ Includes acres, share, and plant date
◦ Determines coverage and liability
© NCIS 2012 30

31. Process—Schedule of Insurance
 Generated after acreage report is
submitted
 Details coverage and liability on each unit
 Should be reviewed carefully for accuracy
If information is not correct, contact your agent immediately.
© NCIS 2012 31

32. Process—Determining a Loss
 If loss expected, insured must file a notice
of loss
 Adjuster:
◦ Contacts insured
◦ Visits farm
◦ Determines actual production by using standard
Federal procedures
◦ Completes loss paperwork
 Loss payment is made, by company
© NCIS 2012 32

33. Producer Obligations
 Report required information accurately.
 Meet policy deadlines.
 Pay premiums when due.
 Report losses immediately.
© NCIS 2012 33

34. Mistakes That Cost You Money
Insurance mistakes that cost money:
 Under-reporting acres per unit.
 Over-reporting acres per unit.
 Harvesting the crop in a manner other
than insured.
 Destroying the insured crop without
company consent.
© NCIS 2012 34

35. © NCIS 2011 35

36. There are 21
different “plans
of insurance”
codes
© NCIS 2011 36

37. © NCIS 2011 37

38. Nationwide Recent Crop Losses
37% Drought & Heat
13% Hail
33% Excess Moisture
Summary: 75% of losses due to extremes in moisture and heat
© NCIS 2011 38

39. Multiple Peril Crop Insurance
All Industry Premium and Losses
1992 - 2011
PREM LOSS
$14,000,000,000
2011 Indemnities to date
$12,000,000,000
are more than $10.83 Billion
Loss ratio = 91%
$10,000,000,000
$8,000,000,000
$6,000,000,000
$4,000,000,000
$2,000,000,000
$0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
CROPYEAR

41. Crop Insurance Total Liability
By Crop Insurance Type
2011
60.00%
53.93%
50.00%
PERCENTAGE OF TOTAL LIABILITY
40.00%
30.00%
24.65%
20.00%
13.71%
10.00%
3.50%
2.40%
0.35% 0.32% 1.13%
0.00%
YP RP RI/VI GRP DO AGR OTHER MPCI CROPHAIL
CROP INSURANCE TYPE

42. Crop-Hail Insurance Processing System
United States Premium & Loss Totals
2002 - 2011
1,000,000,000
900,000,000 2011 Indemnities to date
are more than $975 Million
800,000,000
Loss ratio = 115.86%
700,000,000
600,000,000
500,000,000
400,000,000
300,000,000
200,000,000
100,000,000
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Prem 389,300,231 407,777,972 413,959,742 412,255,308 403,756,745 487,780,025 667,984,964 619,771,914 680,871,137 840,215,205
Loss 282,265,460 228,080,312 241,872,184 183,676,253 202,183,331 234,924,946 554,581,621 565,911,203 459,481,671 916,856,418

43. Crop-Hail Insurance Processing System
United States Loss Ratio Totals
2002 - 2011
120.00
100.00
80.00
60.00
40.00
20.00
0.00
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Series1 72.51 55.93 58.43 44.55 50.08 48.16 83.02 91.31 67.48 109.12

45. © NCIS 2011 45

46. Essential Strengths of Crop Insurance
1-- Producers Receive Individualized Risk
Management Solutions
Most farm programs are, in general, similar across all crops
and producers, despite variations in an individual farmer’s
operations. However, crop insurance allows farmers to
customize their plans and coverage to accurately reflect
individual losses and their unique yields or risk.
© NCIS 2011 46

47. Essential Strengths of Crop Insurance
2--Producers Can Use Crop Insurance as
Collateral for Loans
Crop insurance is essential to the rural economy and
preserving the production capacity of farmers; it provides
producers the financial freedom to build capacity and
innovation. The program also is fiscally sound, and has never
required a government bailout. Bankers prefer it to farm
program payments, which can be less certain.
© NCIS 2011 47

48. Why Crop Insurance is now in a
Position of Strength
3--Producers are Involved in, and Take
Responsibility for Risk Management
Choices
Producers design their own crop insurance programs and
must meet farming standards in order to qualify for payments.
Crop insurance encourages producers to become active risk
managers and operate efficiently because they are required to
meet the standards of “good farming practices” in order to be
eligible for payments when incurring losses.
© NCIS 2011 48

49. Why Crop Insurance is now in a
Position of Strength
4--Producers Can Use Crop Insurance to
Improve their Pre-Harvest Marketing
Plans
Crop insurance products provide the financial backstop
needed to optimize farm marketing. In the case of a disaster
affecting yields or prices, crop insurance revenue products
provide farmers with the income needed to settle forward
contracts, or futures and options positions.
© NCIS 2011 49

50. Essential Strengths of Crop Insurance
5--Producers Receive Crop Insurance
Indemnities in the Timeliest Way
Crop insurance payments are paid close to the timeframe
when loss occurs -- before harvest time in case of prevented
planting and replant payments, or shortly after harvest in case
of yield or revenue shortfall. Some farm programs provide
payment long after it is needed (up to 1.5 years after harvest).
Crop insurance companies are required to pay claims within
30 days after settlement.
© NCIS 2011 50

51. Essential Strengths of Crop Insurance
6--Producers Do Not Receive
Unnecessarily Excessive Payments
Crop insurance payments are related to actual loss due to
price volatility or natural disaster, whereas some farm program
payments are not related to need or performance. In addition,
a trained crop insurance loss adjuster assesses the producer’s
claim, thereby rewarding proper effort and appropriately
protecting against events beyond the producer’s control.
© NCIS 2011 51

52. Essential Strengths of Crop Insurance
7--Producer Indemnities are not Capped
by Arbitrary Payment Limits
There are no income caps to buy crop insurance, and crop
insurance premium subsidies and indemnities are not limited.
Farm programs have both caps and payment limits (ACRE
payments limited to $65,000, SURE is limited to $100,000).
© NCIS 2011 52

53. Essential Strengths of Crop Insurance
8--Producers Share in the Program Cost
Producers must contribute financially in order to receive crop
insurance. Though partially subsidized by the federal
government, these contributions help defray taxpayer costs
and encourage financial discipline.
© NCIS 2011 53

54. Essential Strengths of Crop Insurance
9--Producers Benefit from the
Efficiencies and Service of the Private
Sector Delivery System
There are 15 private sector companies that deliver the crop
insurance program, all driven by competition to meet
producer needs. Agents are trained on an ongoing basis to
understand and educate producers about the ever-changing
complexities of the program.
© NCIS 2011 54

55. Essential Strengths of Crop Insurance
10--Crop Insurance is Comprehensive
and Program Features can be
Adjusted Quickly
Crop insurance products can be quickly adjusted to the
changing needs of producers, without going through a long
legislative process. Having the flexibility to make major
program adjustments also imposes financial discipline on the
government because it has the authority to correct or
eliminate programs and features that are not working.
© NCIS 2011 55

56. Essential Strengths of Crop Insurance
11--Crop Insurance Has Already
Contributed to Deficit Reduction
The crop insurance industry provided $4 billion of the $6
billion reduction it took from the 2011Standard Reinsurance
Agreement negotiation, and an additional $6.4 billion from the
2008 Farm Bill toward deficit reduction. Congress must
understand that consideration of additional cuts for the 2012
Farm Bill could undermine the stability of the program, leaving
farmers and rural communities vulnerable.
© NCIS 2011 56

57. Essential Strengths of Crop Insurance
12--Crop Insurance Has Flexibility to
Help Meet World Trade
Organization Disciplines
Although crop insurance is considered an “amber box,” it
offers significant advantages over other farm safety net
programs. Changes to the crop insurance program and the
way it is reported to the WTO, along with provisions under
discussion in a new WTO agreement, could result in future
easing of compliance with WTO limitations.
© NCIS 2011 57

58. © NCIS 2012 58

59. Actuarial and Price Information
 RMA Website: www.rma.usda.gov
◦ Cost Estimator has replaced the Premium Calculator
◦ Actuarial Information Browser (AIP)
 See a licensed crop insurance agent
© NCIS 2012 59

60. http://www.rma.usda.gov/
© NCIS 2012 60

61. http://www.rma.usda.gov/tools/
© NCIS 2012 61

62. Guide to Agricultural Risk Management
© NCIS 2012 62

63. Information on Crop Insurance
CropInsuranceInAmerica.org
© NCIS 2012 63

64. © NCIS 2011 64

65. And they lived happily ever
after…
The End
© NCIS 2012 65