Covering the history of crop insurance
Congress initially authorized federal crop insurance back in the 1930s to help agriculture recover from the Great Depression and the Dust Bowl. The Federal Crop Insurance Corporation (FCIC) was created in 1938 to administer the program, which was initially limited to major crops in main production areas of the U.S.
The Federal Crop Insurance Act of 1980 expanded the scope of crops covered across the country. The intent of the expansion was to encourage producer participation in the crop insurance program and reduce reliance on ad hoc money, which the 1960s and 70s farm bills had been known for. Participation was encouraged by authorizing a 30 percent premium subsidy for producers who purchased crop insurance at the 65 percent coverage level—a $100 crop insurance premium was $70 out of pocket for the insured.
When I started my career in the mid-1980s, 65 percent coverage was the most popular due to the cost savings the premium subsidy provided. During this time, the highest coverage level available was 75 percent; there were few takers due to the premium outlay. Today, the FCIC provides coverage level up to 85 percent of the insured’s proven yield on most crops across the country.
There were numerous acts passed by Congress (1988, 1989, 1992) to again provide ad hoc monies because the desired level of crop insurance participation hadn’t been attained. I clearly recall discussions with my employer at the time, that the continued authorization of ad hoc monies jeopardized the very existence of the private crop insurance companies—Congress would either fund ad hoc disaster monies or fund crop insurance, but not both.
Originally from a farm in central North Dakota, I began my career as a marketing representative for a crop insurance company travelling western North Dakota and northwestern South Dakota. At that time, there were roughly 36 crop insurance companies participating in the federal crop insurance program. Competition was plentiful and stiff for the agent/agency’s attention and shelf space. But in the mid-1980s, participation in crop insurance across the U.S. was low.
Enter the Federal Crop Insurance Reform Act of 1994, which made participation in the crop insurance program mandatory for growers to be eligible for benefits received from the U.S. Department of Agriculture (USDA). Due to the mandatory participation requirement, catastrophic coverage was created—think 50 percent coverage of the crop yield and price. The premium for catastrophic coverage was completely subsidized by the government; producers had only to pay $50 per crop per county.
The 1994 Act also increased premium subsidy levels and began introducing higher coverage levels (80 and 85 percent) for the major crops (corn, cotton, soybeans and wheat). Participation began to soar; from 1988 to 1998, the amount of acreage covered by crop insurance tripled.
In 1996, the Risk Management Agency (RMA) was created to administer the federal crop insurance program. RMA has 10 regional offices across the country, including one in Spokane. The Spokane office is responsible for Alaska, Idaho, Oregon and Washington and provides local interface and support for regional producers and grower associations.
The national offices in Kansas City, Mo., and Washington, D.C., are where everything related to the policy occur—leadership, actuary, policy, procedure and pricing. Kansas City also houses people that are dedicated to interfacing with the crop insurance company representatives.
In 2000, Congress enacted legislation expanding the role of the private sector (crop insurance companies), allowing participation for research and development of new products and features. Some of the products created that are now available include coverage for triticale, revenue policies for dry peas and sweet cherries and whole farm revenue protection. All newly introduced products remain “pilot programs” until sufficient data is gathered, analyzed and released as a program product or scrapped. The revenue products available today for dry peas and cherries are both still in the pilot stage.
For consistency, rate establishment for all crops follows the same format. The data is reviewed by actuary staff in the Kansas City office on a county-by-county basis every two to three years. The information reviewed includes grower participation, causes of loss and frequency of crop losses. The reason for the short cycle is for accuracy—catching any obvious trends such as yield and weather cycles.
A similar process is used when addressing and assessing transitional yields, or what’s commonly referred to as T-yields. County data is reviewed every three years to obtain the most accurate data. Insured yields on reported, planted and harvested acres are analyzed to capture any anomalies or trends.
Crop insurance is often portrayed as a public/private partnership that, for the most part, is very successful. Crop insurance, a public program administered by RMA through a network of approved insurance providers (AIPs) and independent agents (yours truly), uses government funding (subsidies) to deliver crop insurance policies to producers.
The Standard Reinsurance Agreement, established in 2004, is the financial and operating agreement between RMA and the AIPs. The agreement is the same for everyone, and everyone must agree to it in order to participate in the federal crop insurance program. The agreement outlines the duties and responsibilities of the crop company when administering and providing crop insurance policies. In return, the AIPs are reimbursed for expenses and administrative costs incurred for delivery of a policy. The policy reimbursement percentage varies by policy type. In general, a wheat revenue policy is different than a potato actual production history policy, which is different than a whole farm revenue policy.
An application, production report and an acreage report must be submitted annually to the RMA for each policy. After the data is approved, the AIP will be reimbursed for the administration and expense of that policy. They, in turn, will pay the agency or broker that placed the policy with the AIP.
The 2008 Farm Bill allowed for renegotiation of the Standard Reinsurance Agreement to reign in program costs. In 2010, USDA announced that all crop insurance companies had agreed to the new terms. The agreement can be renegotiated once every five years if USDA notifies the companies of their desire to do so. To date, there has not been any change or renegotiation since the last agreement that began with the 2011 crop year.
Much has changed in the industry during my career. The original “federal crop books” serviced by federal employees have become privately owned books of business with service typically provided by local, hometown agents and agencies. Administrative and operating costs reimbursed by RMA to each company to deliver the program (and correspondingly, yours truly), was capped by the 2011 Standard Reinsurance Agreement with a baseline funding level set at $1.4 billion (I’m not complaining, just explaining). For reference, that same budget was $1.6 billion in 2009. Those 36 crop companies have consolidated to 12 carriers nationally. Washington state has 10 carriers approved to operate in the state for 2022.
The only constant is change. Wishing you and yours the very best in health and happiness. Happy Easter.
Curtis Evanenko serves as a risk management advisor with McGregor Risk Management Services. He can be reached at (509) 540-2632 or by email at firstname.lastname@example.org.