Crop insurance
Encyclopedia
Crop insurance is purchased by agricultural producers, including farmer
s, ranchers, and others to protect themselves against either the loss of their crops due to natural disaster
s, such as hail
, drought
, and flood
s, or the loss of revenue due to declines in the prices of agricultural commodities. The two general categories of crop insurance are called crop-yield insurance and crop-revenue insurance.
, a subsidized multi-peril federal insurance program, administered by the Risk Management Agency
, is available to most farmers. The program is authorized by the Federal Crop Insurance Act (which is actually title V of the Agricultural Adjustment Act of 1938
, P.L. 75-430), as amended. Federal crop insurance is available for more than 100 different crops, although not all insurable crops are covered in every county. With the amendments to the Federal Crop Insurance Act made by the Federal Crop Insurance Reform Act of 1994
(P.L. 103-354, Title I) and the Agriculture Risk Protection Act of 2000 (P.L. 106-224), USDA is authorized to offer basically free catastrophic (CAT) coverage to producers who grow an insurable crop. For a premium, farmers can buy additional coverage beyond the CAT level. Crops for which insurance is not available are protected under the Noninsured Assistance Program
(NAP). Federal crop insurance is sold and serviced through private insurance companies. A portion of the premium, as well as the administrative and operating expenses of the private companies, is subsidized by the federal government. The Federal Crop Insurance Corporation
reinsures the companies by absorbing some of the losses of the program when indemnities exceed total premiums. Several revenue insurance products are available on major crops as a form of additional coverage.
a multiperil crop insurance called National Agriculture Insurance Scheme (NAIS) was implemented. This scheme is being implemented by Agriculture Insurance Company of India, an Indian government owned company. The scheme is compulsory for all farmers who take agricultural loans from any financial institution. It is voluntary for all other farmers. The premium is subsidized for farmers who own less than two hectares of land. This insurance follows the area approach. This means that instead of individual farmers, a specific area is insured. The area may vary from gram panchayat (an administrative unit containing 8-10 villages) or block or district from crop to crop or state to state. The claim is calculated on the basis of crop cutting experiments carried out by agricultural departments of respective states. Any shortfall in yield compared to past 5 years average yield is compensated.http://aicofindia.org/salient_nais.html
Farmer
A farmer is a person engaged in agriculture, who raises living organisms for food or raw materials, generally including livestock husbandry and growing crops, such as produce and grain...
s, ranchers, and others to protect themselves against either the loss of their crops due to natural disaster
Natural disaster
A natural disaster is the effect of a natural hazard . It leads to financial, environmental or human losses...
s, such as hail
Hail
Hail is a form of solid precipitation. It consists of balls or irregular lumps of ice, each of which is referred to as a hail stone. Hail stones on Earth consist mostly of water ice and measure between and in diameter, with the larger stones coming from severe thunderstorms...
, drought
Drought
A drought is an extended period of months or years when a region notes a deficiency in its water supply. Generally, this occurs when a region receives consistently below average precipitation. It can have a substantial impact on the ecosystem and agriculture of the affected region...
, and flood
Flood
A flood is an overflow of an expanse of water that submerges land. The EU Floods directive defines a flood as a temporary covering by water of land not normally covered by water...
s, or the loss of revenue due to declines in the prices of agricultural commodities. The two general categories of crop insurance are called crop-yield insurance and crop-revenue insurance.
- Crop-yield insurance: There are two main classes of crop-yield insurance:
- Crop-hail insurance is generally available from private insurers (in countries with private sectors) because hail is a narrow peril that occurs in a limited place and its accumulated losses tend not to overwhelm the capital reserves of private insurers. In early 1820s, crop-hail insurance were available to farmers in France and Germany. That is among the earliest forms of hail insurance from an actuarial perspective. It is possible to implement the hail risk into financial instruments since the risk is isolated.
- Multi-peril crop insuranceMulti-Peril Crop InsuranceMulti-Peril Crop Insurance is the oldest and most common form of federal crop insurance. MPCI protects against crop yield losses by allowing participating producers to insure a certain percentage of historical crop production...
(MPCI): Coverage in this type of insurance is not limited to just one risk. Usually multi-peril crop insurance offers hail, excessive rain and drought in a combined package. Sometimes, additional risks such as insect or bacteria-related diseases are also offered. The problem with the multi-peril crop insurance is the possibility of a large scale event. Such an event can cause significant losses beyond the insurer's financial capacity. To make this class of insurance, the perils are often bundled together in a single policy, called a multi-peril crop insurance (MPCI) policy. MPCI coverage is usually offered by a government insurer and premiums are usually partially subsidizedAgricultural policyAgricultural policy describes a set of laws relating to domestic agriculture and imports of foreign agricultural products. Governments usually implement agricultural policies with the goal of achieving a specific outcome in the domestic agricultural product markets...
by the government. U.S. Department of Agriculture is known to implement the earliest Multi Peril Crop Insurance program in 1938. Federal Crop Insurance Corporation managed this multi-peril insurance program since then. The Risk Management Agency (RMA) is active in calculating the premiums based on individual risk factors since 1996. - Crop-revenue insurance: Crop-yield times the crop price gives the crop-revenues. Based on farmer's revenues, crop-revenue insurance is based on deviation from the mean revenue. RMA uses the futures prices on harvest-times listed in the commodity exchange markets, to determined the prices. Combining the future price with farmer's average production gives the estimated revenue of the farmer. Accessing the futures market offers enables revenue protection even before the crop planted. There is a single guarantee for a certain number of dollars. The policy pays an indemnity if the combination of the actual yield and the cash settlement price in the futures market is less than the guarantee. In the United States, the program is called Crop Revenue CoverageCrop Revenue CoverageCrop Revenue Coverage is a form of revenue insurance that protects a producer’s revenue for an insurable crop whenever low prices, low yields, or a combination of both causes revenue to fall below a guaranteed level selected by the producer...
. Crop-revenue insurance covers the decline in price that occurs during the crop's growing season. It does not cover declines that may occur from one growing season to another.
Specialty crops
A farmer or grower may desire to grow a crop associated with a particular defined attribute that potentially qualifies for a premium over similar commodity crops, agricultural products, or derivatives thereof. The particular attribute may be associated with the genetic composition of the crop, certain management practices of the grower, or both. However, many standard crop insurance policies do not differentiate between commodity crops and crops associated with particular attributes. Accordingly, farmers have a need for crop insurance to cover the risk of growing crops associated with particular attributes.Federal crop insurance
In the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, a subsidized multi-peril federal insurance program, administered by the Risk Management Agency
Risk Management Agency
The Risk Management Agency of the U.S. Department of Agriculture helps producers manage their business risks through effective, market-based risk management solutions. RMA's mission is to promote, support, and regulate sound risk management solutions to preserve and strengthen the economic...
, is available to most farmers. The program is authorized by the Federal Crop Insurance Act (which is actually title V of the Agricultural Adjustment Act of 1938
Agricultural Adjustment Act of 1938
The Agricultural Adjustment Act of 1938 was legislation in the United States that was enacted as an alternative and replacement for the farm subsidy policies, in previous New Deal farm legislation , that had been found unconstitutional...
, P.L. 75-430), as amended. Federal crop insurance is available for more than 100 different crops, although not all insurable crops are covered in every county. With the amendments to the Federal Crop Insurance Act made by the Federal Crop Insurance Reform Act of 1994
Federal Crop Insurance Reform Act of 1994
The Federal Crop Insurance Reform Act of 1994 is Title I of P.L. 103-354. Beginning with the 1995 crops, it modified the federal crop insurance program by authorizing a new catastrophic coverage level available to farmers...
(P.L. 103-354, Title I) and the Agriculture Risk Protection Act of 2000 (P.L. 106-224), USDA is authorized to offer basically free catastrophic (CAT) coverage to producers who grow an insurable crop. For a premium, farmers can buy additional coverage beyond the CAT level. Crops for which insurance is not available are protected under the Noninsured Assistance Program
Noninsured Assistance Program
In United States agricultural law, producers who grow a crop that is currently not eligible for crop insurance may be eligible for a direct payment under the Farm Service Agency’s Noninsured Assistance Program . NAP has permanent authority under the Federal Crop Insurance Reform Act of 1994, In...
(NAP). Federal crop insurance is sold and serviced through private insurance companies. A portion of the premium, as well as the administrative and operating expenses of the private companies, is subsidized by the federal government. The Federal Crop Insurance Corporation
Federal Crop Insurance Corporation
The Federal Crop Insurance Corporation is a wholly owned Government corporation managed by the Risk Management Agency of the U.S. Department of Agriculture. FCIC manages the Federal crop insurance program which provides U.S...
reinsures the companies by absorbing some of the losses of the program when indemnities exceed total premiums. Several revenue insurance products are available on major crops as a form of additional coverage.
India
In IndiaIndia
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
a multiperil crop insurance called National Agriculture Insurance Scheme (NAIS) was implemented. This scheme is being implemented by Agriculture Insurance Company of India, an Indian government owned company. The scheme is compulsory for all farmers who take agricultural loans from any financial institution. It is voluntary for all other farmers. The premium is subsidized for farmers who own less than two hectares of land. This insurance follows the area approach. This means that instead of individual farmers, a specific area is insured. The area may vary from gram panchayat (an administrative unit containing 8-10 villages) or block or district from crop to crop or state to state. The claim is calculated on the basis of crop cutting experiments carried out by agricultural departments of respective states. Any shortfall in yield compared to past 5 years average yield is compensated.http://aicofindia.org/salient_nais.html