Crop Insurance - Supplemental Booklet

Table of Contents

• Agent Basic Requirements
• Agent Renewing or Transferring a Policy
• Agent Responsibilities (Crop Insurance Handbook)
• How Did 9/11 Affect the Crop Insurance Industry?
• Expense Ratio Comparisons Between Types of Insurance
• Administrative and Operating Expense Reimbursement (A&O)
• Agricultural Risk Protection Act of 2002 (ARPA)
• Managing Risk - Why Buy Crop Insurance?
• U.S. Crop Insurance: Premiums, Subsidies, & Participation
• The History of the Crop Insurance Program
• Risk Management Agency (RMA)- Federal Crop Insurance Corporation (FCIC)
• Crop Insurance Terms

Basic Requirements for Agent and Agency

Multiple tasks to write and service policy

1. Agent and Agency Licenses – State requirements vary by state.
2. Errors and Omissions (E&O) insurance.
3. Training - due to constant changes in the program, more training and updates are required than with other lines of insurance.
   RMA REQUIREMENTS:
   New Agent: 12 hours plus testing
   Experienced Agent: 3 hours/yr plus testing every 3 years
   
4. Knowledge of ongoing changes for each different current product in addition to new products added on annual basis.
5. Understanding of farmer needs.
6. Understanding of farm program provisions and other items that affect the need for the amount of coverage.
7. Understanding of variances in requirements for each company when writing with more than one company.
8. Ability to finance agency until commissions are received (example: Spring 2003 work begins in October 2002, commission is not paid until October, November and December 2003 after all work is done).

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Renewing or Transferring a Policy/Writing an Application

Multiple tasks to write and service policy

1. Explain program changes and their impact on premium and coverage.(Examples: Preventive Planting, Yield Adjustment, Unit Division changes)
2. Review rate changes (have to wait until after Nov. 30 or when released from RMA) for products and options. Quote each crop and product and all related options to look at best product/price/coverage for customer.
3. Review changes in the farming operation -- added land, changes in the entity (corporation, father/son, partnerships etc.), new crop, and new county.
4. Set up of actual production history (APH) or review of past APH and make corrections to unit structure and production history.
5. Check for Power of Attorney requirements.
6. Agent and insured sign and date application/transfer/change form.
7. Mail to company and keep copy in file.
8. Receive confirmation from insurance company.
9. Review confirmation for accuracy and file copy.
10. Provide insured copy with policy provisions.

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Agent’s Responsibilities from Crop Insurance Handbook for Actual Production History (APH) Reporting

Multiple tasks to write and service policy

1. Explain production reporting and supporting record requirements to producers.
   Explain different date requirements by crop and by coverage for Application,
   APH, Acreage Report, Options and Claims.
2. Complete APH-related forms for farmer.
3. Calculate preliminary yields (dry down “wet bushels” based on
   government standards).
4. Review production early to determine if there is a revenue loss.
5. Review the APH form for completeness & accuracy. Agent/insured sign & date.
6. Forward the signed form and any applicable worksheets to the company.
7. Review approved APH from company for accuracy.
8. Explain approved APH yields to customer.
9. Provide copy of approved APH to insured.
10. File and retain copies of the approved APH.

APH with written agreements, category C requirements or added land requests for yield require further detailed review that must be done with the APH.

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How Did 9/11 Affect the Crop Insurance Industry?
By Jim Brost, Collins Associates, Inc.

At the last National Crop Insurance Services (NCIS) annual meeting a panel of reinsurers was assembled to discuss the impact to their company from the events pertaining to the September 11, 2001 attacks. This was the most heavily attended session in the history of the annual conference. Their comments were bold and insightful, with preliminary thoughts and opinions influenced by information that still needed time to mature. Now over one year after the attack, this article reflects back on what really did happen during 2002, with a look at various factors that will influence the 2003 crop insurance industry. In order to better comprehend the direct or indirect impact on agricultural insurance, the entire insurance arena should first be visited.

The World Trade Center (WTC) monetary losses represent the largest single event loss in the history of the insurance and reinsurance industry. Some experts have speculated the losses could reach $70 billion. Others have set forth relatively conservative estimates, by line of business affected, as follows:

To put this in historical perspective, the previous largest single event losses are shown below. Hurricane Andrew losses exceeded $20 billion, followed by the Northridge (California) earthquake at $16 billion, both of which pale in comparison to the events of September 11,2001.

The distinction between the WTC loss and these other significant events is primarily grounded in the severity of the loss and the multiplicity of lines impacted. Certainly, Hurricane Andrew had an indirect impact on Liability insurance and Business Interruption coverage; however, its impact on lines of business outside of "pure" property was not "market altering." However, the magnitude of losses emanating from 9/11 in these other lines of insurance were truly market altering, and have even brought forth fundamental changes in the underwriting of Workers’ Compensation and Life/Accidental Death & Dismemberment. Today underwriters must be cognizant of the aggregation of individuals in a specific location.

Clearly, major loss events have and will impact insurance/reinsurance pricing and coverage. Obviously, the WTC property/casualty loss is certainly one of these events. Yet on top of the WTC losses, the Enron debacle begins to unfold. Now, yet additional coverages are estimated to develop sizeable losses - Surety, Directors and Officers Liability, and Errors and Omissions insurance are all expected to respond to claims emanating from the Enron collapse. As other firms begin restating earnings, the D & O and E & O lines of business will be asked to respond further given the lawsuits filed.

To further frame the insurance market influences, it’s important to recognize the crop industry’s relative position within the insurance industry. The United States total property/casualty premium in 2001 exceeded $402 billion. In contrast, crop insurance premium (Multiple Peril Crop Insurance "MPCI" and Crop Hail insurance) was approximately $3.4 billion.

In addition to poor underwriting results, the economy’s performance has also adversely impacted the insurance/reinsurance industry. Investment returns are an important component of a company’s ultimate results. An absence of investment returns means less beneficial leverage, thus poor underwriting results have an even greater impact on the reinsurer’s bottom line.

Rate increases being realized on various primary lines were published earlier this year and are summarized below. Undoubtedly, you or your neighbor has experienced an upward movement in rates upon renewal of one (or more) of your policies.

• Homeowners 8-9 percent Personal Auto 8-9 percent Health 20 percent Commercial Property 30 percent General Liability 40 percent Workers’ Compensation 20-25 percent Directors’ and Officers Liability 30-40 percent Surety Bonds 25-30 percent
• Aviation 50-100 percent

Property/casualty reinsurance pricing varied widely depending on the classes of business covered, geographic location, and recent claim experience. Terrorism coverage was the main discussion point at the 2002 renewals, with a push by reinsurers to exclude coverage for terrorism events.

With this backdrop, we can now address the WTC event and its impact on agricultural insurance/reinsurance. There has been a large influx of new capital to the reinsurance industry. The Bermuda market alone has seen over $16 billion of new capital arrive. The London/Lloyd’s capacity has increased over 20 percent, an indication of the increased capital that has also found its way into this very established market. This capital infusion will not offset the losses created by the WTC, or the loss of capital due to the drop in the stock market; but, this new capital can and may ease some of the pricing pressures on the overall industry. However, this tremendous amount of new capital created must also be fed an appropriate amount of premium income in order to create the necessary returns.

While this might imply a reduction in rates in the scramble for new business, sophisticated underwriting models drive many of the underwriting decisions. If the modeling of the risks does not satisfy return on equity requirements, the business is simply not accepted.

In their own right, poor agricultural results have resulted in increased rates and/or reduced coverages in subsequent crop season(s), even if the property/casualty industry has developed positive results. That is, crop insurance/reinsurance has its own pricing and/or coverage cycle within the overall insurance/reinsurance industry. On the other hand, profitable crop insurance industry results have not always offset the pricing pressures that exist when the general property/casualty reinsurance results are poor.

While an argument exists that the agricultural results do not correlate, nor compound losses that occur within the property/casualty insurance industry (which has been borne out), regardless, the agricultural industry has successfully competed with the returns and profitability targets established by the insurance/reinsurance community for attracting capital or maintaining support from the risk bearers.

The 2001 season agricultural results were not influenced by any direct losses emanating from the WTC event. However, the foremost question asked following the WTC loss was "To what extent is crop insurance subject to terrorism?" As was mentioned earlier, this was a central issue during the 2002 property/casualty (and Life) reinsurance renewals. Imaginations were in full gear as everyone tried to determine or conceive what the "hidden" agricultural exposures were.

The Risk Management Agency (RMA) of the Federal Crop Insurance Corporation authored a letter, which preempted the entire issue. RMA indicated terrorism was not a covered peril within policies written under the Federally backed Multiple Peril Crop Insurance (MPCI) program. The crop hail policy also enumerates the perils covered - terrorism is not one of them.

The Crop Hail and Named Peril results have been consistent underachievers over the recent past. Nationwide rate levels have had difficulty supporting the frequency and severity of hail claims that have occurred. Named Peril coverages have undergone significant revisions in what are insurable perils, with dramatic upward revisions in rates on those perils deemed insurable.

The MPCI program has historically generated a modest underwriting gain; a gain which has been needed in order to offset the operational loss that exists within the MPCI industry. Given the extensive drought that exists, the MPCI industry will not fare well this season.

Given an absence of loss arising from the WTC, some positive underwriting results in agriculture over recent years, and no coverage issues, one might assume no pressure exists on rates and/or coverages for the agricultural insurance industry in 2003. I believe this assumption is too simplistic.

The worldwide reinsurance community just completed their annual gathering in Monaco. At this conference the state of the overall insurance/reinsurance market is the main topic of conversation. The message from this conference is for the continued, and increased, need for rate improvements in the property/casualty industry.

While the crop industry volume is small relative to the overall insurance industry, the crop industry itself is not devoid of profitability pressures exerted by the insurance and reinsurance companies. The capital supporting the agricultural insurance industry will be expecting profits sufficient to justify an appropriate return. Certainly, one could argue the capital requirements for the agricultural industry should be lower since there are fewer unknowns within the crop insurance industry. However, we must keep in mind the same capital supports both the property/casualty and crop segments of the industry. Despite differing characteristics in exposure, the capital sources may not embrace the differentiation in returns they have been receiving.

Will the crop industry ride its own cycle, or will the firmer property/casualty pricing and coverage cycle prevail? We are in a "hard" property/casualty underwriting cycle. The last time we experienced such a cycle was in the mid-1980’s. Don’t bet heavily against the property/casualty cycle prevailing; I would suggest pressure exists on the crop insurance sector to generate returns commensurate with those that are expected of the balance of the insurance industry.

Editor’s Note: Mr. Brost is the Vice Chairman of Collins Associates, Inc., a reinsurance brokerage firm located in Bloomington, MN. Article was written for the National Crop Insurance Service’s ‘Crop Today’ publication. Volume 35, issue 4, November 2002.

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Expense Ratio Comparisons Between Types of Insurance

*Expense ratio -- The percentage of the premium allocated for the cost of delivery and service of the policy.
Best’s Aggregates & Averages - These figures include both companies that use agents and direct writers and are the latest figures available (2001).

**Information from 2000

Federal Crop Insurance is among the most complicated and labor intensive lines of insurance

Responsibilities

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Administrative and Operating Expense Reimbursement (A&O)

What Is The Administrative and Operating (A&O) Expense Reimbursement?

The A&O expense reimbursement is a subsidy to the farmer, because it reduces the premium paid for crop insurance. Unlike other types of insurance, crop insurance premiums do not contain an expense load to cover administrative and operational costs. Instead, USDA has subsidized the premium to the farmer by paying a set amount to the companies for an A&O expense reimbursement. This amount varies by the product sold but it is the same for all companies, regardless of their actual delivery costs.

• FY2004 Budget Proposal Cuts Crop Insurance A&O Expense Reimbursement.

These cuts are not justified, and such a reduction could reduce service to farmers. Ten years ago, there were 64 crop insurance companies, today there are 17. The proposed cut to the A&O reimbursement would be a catalyst for further consolidation and withdrawal of the companies from the market, jeopardizing service to farmers.

• The Proposed Cuts Are Deeper Than Presented

USDA asserts: “The FY2004 budget proposal would reduce the administrative expense reimbursement from 24.5 percent to 20 percent.”

Facts: However, companies are not currently receiving 24.5 percent A&O reimbursement or 24.5 cents for every dollar of premium for all crop insurance products sold. More popular revenue products and catastrophic coverage are reimbursed at a lower level than standard multi-peril crop insurance. The present average reimbursement rate is approximately 21.5 cents per dollar of premium sold. The proposed reduction would translate to an average rate of approximately 17.72 cents per dollar of premium, due to the different reimbursement levels for different products.

• Renewals Take Time And Higher Coverage Levels Requires More Service

USDA asserts: “About 95 percent of the policies sold annually are renewals, which require less work to maintain and service than do policies sold for the first time.”

Facts: Renewal of a crop insurance policy requires an extensive amount of time to complete and many contacts throughout the year to service the policy. Most farmers produce multiple crops that are planted in both the spring and fall. Each crop is a separate insurance policy that must be reviewed each year for renewal.

USDA asserts: “These savings are achievable principally because there has been a substantial growth in premium dollars and reimbursements have increased proportionally – in essence, insuring the same number of acres at higher levels of coverage.”

Facts: Higher levels of coverage generate more claims. The Administration’s testimony ignores a basic fact of insurance. As coverage levels increase, the number of claims increase dramatically. According to RMA’s data, policies issued in 1999 at the 55 percent level of coverage had a claims frequency of 33 percent. This contrasts with claims filed 56 percent of the time on policies at the 85 percent coverage level.

Cost of delivery has soared. The additional expenses resulting from Farm Service Agency reviews, data reconciliation and data mining have been borne by the industry without any additional reimbursement.

Due to regulatory and compliance requirements, it costs more than the current average reimbursement rate of 21.5 cents on the dollar to deliver crop insurance to farmers. Crop insurance companies have been offsetting the delivery expenses in recent years with underwriting gains.

Crop Insurance Is Not A “Do It Yourself Project”

USDA asserts: “Today, the vision Congress expressed through that mandate is a reality for agricultural producers participating in the Federal crop insurance program who are doing most of the paperwork on their own.”

Facts: The insured producer who wants to make sure crop insurance is an effective risk management tool, which works for him, is not going to risk his financial future on his part-time knowledge of the crop insurance program.

USDA Did Not Cancel The SRA

USDA did not cancel the Standard Reinsurance Agreement (SRA), the contract it has with the companies to deliver the crop insurance program, RMA reasoned it was not the appropriate time given the unsettled nature of the industry, lingering drought conditions and the demise of the largest company participating in the crop insurance program. These conditions have not changed!

• Crop Insurance Is A Sound Risk Management Tool For Farmers.

In 2002, the crop insurance industry quickly and efficiently provided more than $3.8 billion to drought stricken farmers. The proposed reduction in the administrative expense reimbursement from an average of 21.5 percent to 17.72 percent would reduce localized service to America’s farmers at a time when farmers’ reliance on the program is at an all time high on a voluntary basis.

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The History of the Crop Insurance Program

A History of the Crop Insurance Program

Congress first authorized Federal crop insurance in the 1930s along with other initiatives to help agriculture recover from the combined effects of the Great Depression and the Dust Bowl. The Federal Crop Insurance Corporation (FCIC) was created in 1938 to carry out the program. Initially, the program was started as an experiment, and crop insurance activities were mostly limited to major crops in the main producing areas. Crop insurance remained an experiment until passage of the Federal Crop Insurance Act of 1980.

The 1980 Act expanded the crop insurance program to many more crops and regions of the country. It encouraged expansion to replace the free disaster coverage (compensation to farmers for prevented planting losses and yield losses) offered under Farm Bills created in the 1960s and 1970s, because the free coverage competed with the experimental crop insurance program. To encourage participation in the expanded crop insurance program, the 1980 Act authorized a subsidy equal to 30 percent of the crop insurance premium limited to the dollar amount at 65 percent coverage.

Although more farmers took part in the program after passage of the 1980 Act, it did not achieve the level of participation that Congress had hoped for. Therefore, after a major drought in 1988, ad hoc disaster assistance was authorized to provide relief to needy farmers. Another ad hoc disaster bill was passed in 1989. A third one enacted in 1992 gave farmers the option of claiming disaster losses on a farm-by-farm basis for any year between 1990 and 1992. An extremely wet and cool growing season in 1993 caused more losses, and Congress passed yet another ad hoc disaster bill. However, dissatisfaction with the annual ad hoc disaster bills that were competing with the crop insurance program led to enactment of the Federal Crop Insurance Reform Act of 1994.

The 1994 Act made participation in the crop insurance program mandatory for farmers to be eligible for deficiency payments under price support programs, certain loans, and other benefits. Because participation was mandatory, catastrophic (CAT) coverage was created. CAT coverage compensated farmers for losses exceeding 50 percent of an average yield paid at 60 percent of the price established for the crop for that year. The premium for CAT coverage was completely subsidized. Participants paid $50 per crop per county subject to maximum amounts for multiple crops and counties insured by the same individual. Subsidies for higher coverage levels were increased.

In 1996, Congress repealed the mandatory participation requirement. However, farmers who accepted other benefits were required to purchase crop insurance or otherwise waive their eligibility for any disaster benefits that might be made available for the crop year. These provisions are still in effect.

In the same year, the Risk Management Agency (RMA) was created to administer FCIC programs and other non-insurance-related risk management and education programs that help support U.S. agriculture.

Participation in the crop insurance program increased significantly following enactment of the 1994 Act.2 For example, in 1998, more than 180 million acres of farmland were insured under the program. This is more than three times the acreage insured in 1988, and more than twice the acreage insured in 1993. According to estimates by the USDA National Agricultural Statistics Service, in 1998, about two-thirds of the country's total planted acreage of field crops (except for hay) was insured under the program. The liability (or value of the insurance in force) in 1998 was $28 billion, the largest amount since the inception of the program. The total premium, which includes subsidy, and the premium paid by insured persons (nearly $950 million) were also record figures.

In 2000, Congress enacted legislation that expanded the role of the private sector allowing entities to participate in conducting research and development of new insurance products and features. With the expansion of the contracting and partnering authority, RMA can enter into contracts or create partnerships for research and development of new and innovative insurance products. Private entities may also submit unsolicited proposals for insurance products to the Board for approval. If approved by the Board, these unsolicited insurance products could receive reimbursement for research, development and operating costs, in addition to any approved premium subsidies and reinsurance. After three years the private entity may elect to retain ownership of the insurance product and charge a fee, as approved by the Board, to other insurance providers who sell the product or elect to transfer ownership of the product to RMA.

Restrictions on the development of insurance products for livestock were removed.

Authority was added to allow the Board of Directors to create an expert review panel to provide assistance to the Board in evaluating new insurance products for feasibility and actuarial soundness.
Premium subsidies were increased to encourage producers to purchase higher insurance coverage levels and to make the insurance program more attractive to prospective producers.

How the Program Works
The crop insurance contract.
A crop insurance contract is a commitment between insured farmers and their insurance providers. Either party has the right to cancel or terminate the contract at the end of each crop year.3 Unless the contract is canceled, it is normally automatically renewed the next year.

Under the contract, the insured farmer agrees to insure all the eligible acreage of a crop planted in a particular county. This choice is made county by county and crop by crop. All eligible acreage must be insured to reduce the potential for adverse selection against the insurance provider. Adverse selection generally exists whenever the insured person has better knowledge of the relative riskiness of a particular situation than the insurance provider does.

The insurance provider agrees to indemnify (that is, to protect) the insured farmer against losses that occur during the crop year. In most cases, the insurance covers loss of yield exceeding a deductible amount. Losses must be due to unavoidable perils beyond the farmer's control.

Over the last few years, products that combine yield and price coverage have been introduced. These products cover loss in value due to a change in market price during the insurance period, in addition to the perils covered by the standard loss of yield coverage.

Crop insurance policies also typically indemnify the insured person for other adverse events, such as the inability to plant or excessive loss of quality due to adverse weather. The nature and scope of this "helper" coverage vary depending on the crop. This is because of the differences in crops' individual natures.

Publication of policies.
Crop insurance contracts developed by FCIC are published in the Code of Federal Regulations (CFR). Policies may also be developed by commercial, private sector insurance providers. If approved by FCIC, privately developed policies may replace or supplement the policies developed by FCIC. However, these policies are not published as regulations. Instead, a notice of availability is published in the CFR.

Government and private sector roles.
FCIC's mission is to encourage the sale of crop insurance -- through licensed private agents and brokers -- to the maximum extent possible. FCIC also provides reinsurance (subsidy) to approved commercial insurers which insure agricultural commodities using FCIC-approved acceptable plans. Since 1998, the private insurance companies reinsured by FCIC have sold and serviced all Multiple Peril Crop Insurance authorized under the Federal Crop Insurance Act.

Since there is both public and private sector involvement in the crop insurance program, these relationships result:

A contract of insurance exists between insured farmers and their commercial insurance providers.
Premium rates and insurance terms and conditions are established by FCIC for the products it develops, or established with FCIC approval for products developed by insurance providers.
Reinsurance agreements (cooperative financial assistance arrangements) exist between FCIC and the commercial insurance providers.

The Yearly Insurance Cycle
RMA and insurance industry activities follow a timetable known as the insurance cycle. The cycle begins when RMA releases information about insurance products for the next crop year, and ends with changes to the program for the following year.

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Risk Management Agency (RMA) Federal Crop Insurance Corporation (FCIC)

Background/General Information

• Congress first authorized Federal crop insurance in the 1930’s with other initiatives to help agriculture recover from the combined effects of the Great Depression and the Dust Bowl. The Federal Crop Insurance Corporation (FCIC) was created in 1938 to carry out the program. Initially, the program was started as an experiment, and crop insurance activities were mostly limited to major crops in the main producing areas. Crop insurance remained an experimental program until passage of the Federal Crop Insurance Act of 1980.
  The Risk Management Agency (RMA) was established under provisions of the Federal Agriculture Improvement and Reform Act of 1996 (FAIR) to administer programs authorized by the FCIC’s Board of Directors and any other programs the Secretary considers appropriate.
  In 2002, crop insurance was available on 88 different crops. The number of insurable crops and commodities and types of insurance plans continue to increase annually. Coverage was available in over 3,000 counties in all 50 states and Puerto Rico for 2002.
  In 2002, producers purchased more than $37.3 billion in protection on over 215 million acres through nearly 1.3 million policies.
  Between 2000 and 2001, the level of insurance protection increased by at least a third at the 70% or higher coverage levels. As a result, crop insurance can provide more assistance to farmers in the event of a major crop loss.
  Crop insurance is sold and serviced by 17 insurance companies in conjunction with a network of 15,000 agents across the country. Crop insurance is widely available for major commodities such as corn, wheat, and cotton. Coverage is also available on a increasing number of fruit, nut, and vegetable crops.
  
• RMA continues to assist in the development and approval of new pilot programs, such as avocado, cabbage, cherry, pecan, processing chili pepper, forage seed, hay, rangeland, and raspberry/ blackberry crops. By increasing the number and types of insurance plans, the program will help producers better manage their production risks.

Federal Crop Insurance Corporation

• The Federal Crop Insurance Corporation (FCIC) promotes the national welfare by improving the economic stability of agriculture through a sound system of crop insurance and providing the means for the research and experience helpful in devising and establishing such insurance. The management of the corporation is vested in a Board of Directors subject to the general supervision of the Secretary of Agriculture.
  
• The Agriculture Risk Protection Act of 2000 (ARPA) expanded the FCIC Board of Directors so that the Agency’s policies reflect a broader range of producer and insurance expertise.

Increasing Program Integrity

• In 2002, RMA recovered nearly $29 million for improperly paid losses. In the past, RMA only recovered about $7 million in improperly paid claims each year.
  
• In 2001, projected loss ratios on 1,700 policies with unusual loss histories fell by over $100 million due to increased oversight by RMA, FSA and reinsured companies.

Research and Development/Pilots

• In 2001, RMA awarded 27 contracts worth over $18 million for the research and/or development of new risk management programs
  
• RMA has 30 pilot insurance plans available for the 2002 crop year, including the first insurance plans for livestock producers -- Livestock Risk Protection (LRP) and Livestock Gross Margin (LGM) for hog producers in Iowa.

Outreach/Education

• ARPA provides $5 million in annual funding to reach states designated as underserved. RMA now has cooperative agreements with 12 state departments of agriculture to provide customized risk management educational opportunities to producers in: Pennsylvania, Maryland, Vermont, Rhode Island, New York, Delaware, West Virginia, Maine, New Jersey, Connecticut, New Hampshire and Utah. RMA supplements these activities with additional risk management training in high schools, community colleges, and other fora.
  Because many producers in underserved states grow crops or raise commodities that may not be insurable, RMA offers a cost-share initiative in many of the designated states to encourage the use of the Adjusted Gross Revenue (AGR) insurance product. AGR policies provided producers with $189 million of protection in 2001, compared with less than $10 million in 2000.
  About $2 million annually is earmarked to provide risk management educational opportunities to specialty crop producers using many of the same avenues used in addressing underserved states. As a result, in 2001, more than 130 partnerships were formed to reach specialty crop producers. An additional $5 million was provided to the Cooperative State Research, Education and Extension Service (CSREES) for a competitive grants program to provide risk management educational opportunities.
  
• The Dairy Options Pilot Program (DOPP) was created to help dairy producers protect their income against the risk of falling milk prices. During each round of DOPP, producers in selected pilot counties receive training in the use of futures and options as price risk management tools. Within program guidelines, they may then purchase dairy put options (right to sell) through futures brokers registered with U.S. exchanges. When prices fall, the value of put options increase, thereby protecting the value of at least a portion of the producer’s dairy production. USDA assists participating farmers by funding 80 percent of the cost of the options and by paying $30 per contract toward the commission charged by the broker. In 2001, the Dairy Options Pilot Program (DOPP) was expanded to 300 counties.

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Crop Insurance Terms

The crop insurance industry is providing more and more risk management tools to help producers deal with the increasing risk they face. As the number of alternative tools increases, so does their complexity. Below is a comprehensive list of definitions.

ACT--The Federal Crop Insurance Act, (7 U.S.C. 1501 et seq.)
AGR-- Adjusted Gross Revenue
APH--Actual Production History
CAT--Catastrophic Risk Protection
CCC--Commodity Credit Corporation
CIH--Crop Insurance Handbook
CSREES--Cooperative State Research, Education, and Extension Service
FSA--Farm Service Agency
FCIC--Federal Crop Insurance Corporation
IRS--Internal Revenue Service
LAM--Loss Adjustment Manual
MPCI--Multiple Peril Crop Insurance
PHTS--Policyholder Tracking System
RMA--Risk Management Agency
USA--United States of America
USDA--United States Department of Agriculture

Crop Insurance Forms and Documents

Actuarial documents. Available at the producer’s insurance agent's office, this material for a specific crop year shows the amount of insurance or production guarantees, coverage levels, premium rates, practices, insurable acreage, and other related information regarding crop insurance in the county.

Catastrophic Risk Protection Endorsement. The part of the crop insurance policy that contains provisions specific to catastrophic risk protection.

Crop Provisions. The part of the policy that contains the specific provisions of insurance for each insured crop.

Insured crop. The crop for which coverage is available under the Basic Provisions and the applicable Crop Provisions as shown on the application for insurance.

Policy. The agreement between the producer and the insurance company, consisting of the accepted application, the Basic Provisions, the Crop Provisions, the Special Provisions, other applicable endorsements or options, the actuarial documents for the insured crop, the Catastrophic Risk Protection Endorsement (if applicable), and the applicable regulations published in the Federal Register.

Special Provisions. The part of the policy that contains specific provisions of insurance for each insured crop that may vary by geographic area.

Summary of coverage. The insurance company's statement to the producer, based upon the producer’s acreage report. It specifies the insured crop and the guarantee or amount of insurance coverage provided by unit.

Written agreement. A document that alters designated terms of a policy as authorized under the Basic Provisions, the Crop Provisions, or the Special Provisions for the insured crop.

Coverage Levels and Price Elections

Additional coverage. Crop insurance coverage equal to or greater than 65 percent of the approved yield indemnified at 100 percent of the expected market price, or a comparable coverage as established by the Federal Crop Insurance Corporation (FCIC).

Administrative fee. An amount you must pay for catastrophic risk protection, limited, and additional coverage for each crop year as specified in the Federal Register and the Catastrophic Risk Protection Endorsement. ($100 per crop policy per country).

Coverage. The insurance provided by a policy against loss of production or value, by unit, as shown on your summary of coverage.

Crop Revenue Coverage (CRC). An insurance program that guarantees a stated amount of revenue. CRC covers revenue losses due to a low price, low yield, or any combination of the two.

Catastrophic risk protection (CAT). A plan of insurance established by FCIC that provides coverage comparable to a level for a single crop that is equal to 50 percent of the approved yield indemnified at 55 percent of the expected market price. This is the minimum level of coverage required for a person to qualify for certain other USDA program benefits unless the producer executes a waiver of any eligibility for emergency crop loss assistance.

Deductible. The amount of loss incurred before insurance coverage begins, determined by subtracting the coverage level percentage you choose from 100 percent. For example, if you elected a 65 percent coverage level, your deductible would be 35 percent (100% -65% = 35%).

Economic significance. The value of a crop, or of a type or variety of a crop (if the applicable crop policy allows the producer the option to separately insure individual crop types or varieties), equal to 10 percent or more of the total value of your share of all crops grown in the county the previous crop year, or that you expect to grow in the current crop year. However, an amount is not considered economically significant if the expected liability under the Catastrophic Risk Protection Endorsement is equal to or less than the administrative fee required for the crop or the crop type or variety.

Group Risk Plan (GRP). GRP provides a dollar amount of protection. A loss payment triggers when the county average yield in a given year falls below the trend adjusted average yield by a greater percentage than the policyholder’s selected deductible. GRP does not provide prevented planting, late planting, or replant payments.

Income Protection (IP). An insurance plan that protects against reductions in gross income when yields or prices fall. The plan was developed using components from existing crop insurance programs. The multi-peril program protects against loss of production using the actual production history program and forms the foundation for income protection. The insurance unit is taken from the group risk plan. Combined, these components form a straightforward product for the protection of a percentage of gross income.

Insured Revenue. Income from the sale of agricultural commodities the insured produces, the sale of agricultural commodities the insured purchases for resale (not eligible for AGR coverage if the expected allowable income from agricultural commodities purchased for resale exceeds 50 percent of the total expected allowable income), and all other allowable income as defined in the AGR Policy.

Limited Coverage. A plan of insurance established by FCIC that provides coverage comparable to a level for a single crop that is equal to or greater than 50 percent of the approved yield indemnified at 100 percent of the expected market price but less than 65 percent of the approved yield indemnified at 100 percent of the expected market price.

Multi-Peril Crop Insurance (MPCI). An insurance program to minimize risk and help protect farmers for loss of production below a predetermined yield, known as the unit guarantee which can be calculated using the producer’s actual production history.

Price election. The prices contained in the Special Provisions or an addendum. They are used to compute the value per pound, bushel, ton, carton, or other unit of measure so that premium and indemnity can be determined.

Production guarantee (per acre). The number of pounds, bushels, tons, cartons, or other unit of measure determined by multiplying the approved yield per acre by the coverage level percentage you elect.

Revenue Assurance (RA). Protects a producer’s crop revenue whenever low prices or low yields, or combination of both, causes the crop revenue to fall below the guaranteed revenue level.

Special Provisions. The part of the policy that contains specific provisions of insurance that may vary by geographic location.

Farming Terms Used in Crop Insurance

Abandon. Failure to care for the crop, providing too little care to benefit the crop, or failure to harvest in a timely manner, unless an insured cause of loss prevents the producer from properly caring for or harvesting the crop or causes damage to it to the extent that most producers of the crop on similar acreage in the area would not normally further care for or harvest it.

Agricultural commodity. All insurable crops produced for human or animal consumption. Grain and non-grain crops, vegetables, fruits, nuts, nursery plants, floriculture, Christmas trees, Maple tree sap, animals, products from animals such as milk, eggs, etc., and any other agricultural production, excluding timber, forest, and forest products.

Changes. Changes in ownership, business structure, size of operation, share, management practices, type of farming activity, accounting methods or any other practices that may alter average farm income.

Crop year. The period within which the insured crop is normally grown and designated by the calendar year the insured crop is normally harvested.

Damage. Injury, deterioration, or loss of production of the insured crop.

Database. The data used to calculate the average/approved AGR and record the AGR history. Five continuous tax years of data are used.

Good farming practices. The cultural practices generally in use in the county for the crop. Practices required for the crop to produce at least the yield used to determine the production guarantee or amount of insurance. These practices are recognized by the Cooperative State Research, Education, and Extension Service as compatible with agronomic and weather conditions in the county.

Interplanted. Acreage on which two or more crops are planted in a manner that does not permit separate agronomic maintenance or harvest of the insured crop.

Irrigated practice. Watering a crop to produce at least the yield used to establish: 1) the irrigated production guarantee; 2) the amount of insurance on the irrigated production guarantee; or 3) the amount of insurance on the irrigated acreage planted to the insured crop.

Late planted. Acreage initially planted to the insured crop after the final planting date.

Negligence. The failure to use such care as a reasonably prudent and careful person would use under similar circumstances.

Perennial Crop. An agricultural commodity that is produced from the same root structure for two or more years.

Planted acreage. Land in which the insured crop has been properly planted.

Practical to replant. The insurance company's determination, after loss or damage to the insured crop, that replanting the crop will allow it to be harvested before the end of the insurance period. It will not be considered practical to replant after the end of the late planting period or the final planting date unless replanting is generally occurring in the area. Unavailability of seed or plants is not considered a valid reason for failure to replant.

Prevented planting. Failure to plant the insured crop by the final planting date designated in the Special Provisions for the insured crop in the county. You may also be eligible for a prevented planting payment if you were unable to plant because of an insured cause of loss that is general in the surrounding area.

Replanting. Replacing the seed or plants of the same crop in the insured acreage with the expectation of producing at least the yield used to determine the production guarantee.

Representative sample. Portion of the insured crop that must remain in the field for examination by the insurance company's loss adjuster when making a crop appraisal. In certain instances the producer may harvest the crop and leave only samples of the crop residue in the field.

Timely planted. Planted on or before the final planting date designated in the Special Provisions for the insured crop in the county.

Reports

Acreage report. A report stating the producer’s share of all acreage of an insured crop in the county, whether insurable or not insurable.

Another use, notice of. The written notice required when you wish to plant acreage to another crop.

Application. The form you must complete and that the insurance company must accept before coverage will begin. If the insurance coverage is canceled or terminated for any reason, the producer must reapply.

Claim for indemnity. Producer’s assertation for damage or loss to an insured crop.

Consent. Approval in writing by the insurance company for the insured to take a specific action.

Continuous AGR Reports. AGR reports submitted by a producer for each consecutive tax year within the base period. Continuity is interrupted if a producer is NOT entitled to income from a share in ANY agricultural commodity's production during a tax year.

Damage, notice of. A written notice the producer must file with the insurance company as soon as it is discovered the insured crop has been damaged to the extent that a loss is probable.

Loss, notice of. The producer must give notice to the insurance company not later than 72 hours after certain losses or 15 days after the end of the insurance period, whichever is earlier.

Production report. A written record showing the producer’s annual production. The insurance company uses it to determine your yield for insurance purposes. The report contains yield information for previous years, including planted acreage and harvested production. This report must be supported by written, verifiable records from a warehouseman or buyer of the insured crop, by measurement of farm-stored production, or by other records of production approved by the insurance company.

Underwriting Review. A review of the applicant/insured's underwriting information by a person designated by the insurance provider (verifier or underwriter ) who is versed in the AGR program and is proficient in the knowledge and skills necessary to evaluate the grower's request for insurance.

Units

Basic unit. All acreage of the insured crop in the county on the date coverage begins for the crop year:
1) In which the insured has 100 percent crop share; or
2) Which is owned by one person and operated by another person on a share basis. (Example: If, in addition to the land the producer owns, he rents land from five landlords, three on a crop share basis and two on a cash basis, he would be entitled to four units -- one for each crop share lease and one that combines the two cash leases and the land you own.) Land which would otherwise be one unit may, in certain instances, be divided.

Optional unit. For an additional premium, growers may subdivide their basic units by practice, section or section equivalents.

County. Any county, parish or other political subdivision of a state shown on the insured's accepted application, including acreage in a field that extends into an adjoining county if the county boundary is not readily discernible.

Enterprise unit. All acreage of the insured crop in the county in which the producer has interest in on the date coverage begins for the crop year. An enterprise unit must consist of:
1) Two or more basic units of the same insured crop that are located in two or more separate sections, section equivalents, or FSA farm serial numbers; or
2) Two or more optional units of the same insured crop established by separate sections, section equivalents, or FSA farm serial numbers.

Field. All acreage of tillable land within a natural or artificial boundary (e. g., roads, water-ways, fences, etc.).