Major types of crop insurance policies

Agriculture has always come with inherent natural risks ever since our ancestors began farming crops and settled in one place. While the nature and intensities of those risks have changed over the course of time, the risks remain the same. Although our experience and modern science have allowed us to understand and mitigate many of the risks to some extent, human activities have led to further exacerbation and created others.

Moreover, with the current agricultural economy and market trends, it is becoming increasingly difficult for farmers of all scales to make risk management decisions in their operations. This is where Crop Insurance comes in. The United States and most nations understand the value of food security and thus have facilitated the crop-insurance policies that offer farmers a much-needed safety net. However, crop insurance differs from any other type of insurance available and it is essential to understand the different types of crop insurance to choose the best option which is explained later in this article.

What is crop insurance?

The basic concept of crop insurance is as simple as the name suggests: Crop insurance is insurance that insures crops of agricultural businesses and individual farmers. In other words, Crop-insurance protects farmers from identifiable and mostly predetermined risks that are not within their control such as:

• Drought
• Fire
• Hail
• Cold/Wet weather
• Flooding
• Market Price Shifting
  
  

Besides these common factors, there might be factors that are specific to a certain geographical location or a specific crop. Moreover, the type of insurance also varies based on the actual probability of occurrence of the risk factors. Risk factors can be categorized based on the level of their frequency as well as their potential of causing economic loss or severity. For example, the availability and nature of crop insurance against drought will differ in a place where drought is common from a place where drought doesn’t occur frequently. To make informed decisions while purchasing insurance for your crops, you need to understand how it is that crop insurance really works.

How does crop insurance work?

Crop insurance under the Federal Crop-Insurance Program (FCIP) is provided by approved insurers that are supported by the government. USDA’s Risk-Management-Agency operates the FCIP program in collaboration with the insurers. The supermarkets sell, distribute, and manage insurance by employing certified individual crop insurance agents. The role of the federal-government is to back the insurers in case they pay the amount in claims that they have generated from collecting premiums. In return, the government also gets a share when profit is made.

The crop insurance policies under FCIP are known are multiple-peril crop insurance policies and are based on yield or revenue. However, not all crops are insured by these policies. While the federal-government issues notice regarding the crops to be insured for each other, the most commonly insured crops include corn, cotton, soybeans, and wheat while many other crops may be insured where they are found more commonly.

The working mechanism of crop insurance lies in the concept of reference-yield or reference-revenue, which is basically yield or revenue benchmarks that are calculated by running statistical operations on historical data from the farms of the area. It is by comparison with this reference and by using the government market price of the crops that claims can be made and coverage is distributed.

It is worth remembering that farmers should purchase multiple-peril insurance policies before planting the crops before the deadline or the sales closing date (SCD). Farmers decide on the coverage (usually 50%-75%), pay the premium on time, report the acres in a timely manner, and file for the claim within the predetermined duration from the discovery of the damage using a form called the Notice of Loss (NOL).

Different from the FCIP Insurance policies, Crop hail insurance is not associated with the government and is entirely sold by private companies that can be bought at any time during the crop cycle. Hail coverage, unlike the name suggests, covers crops from risks other than hail like fire, lightning, wind, vandalism, etc. This can be a great option to cover the crops that are not coverable by federal insurance policies.

Types of crop insurance

There are major two types of crop-insurances, namely, yield-based crop insurance policies, and revenue insurance policies.

Yield based:

Yield-based insurance policies are the ones that provide coverage if the actual yield obtained becomes less than the expected yield. There are two types of insurance policies that work on the yield basis:
Multiple peril crop insurance: As discussed earlier, MPCI provides coverage for multiple natural risks like hail, wind, rain, insects, etc. when they result in the loss of crop production upon harvesting. When entering into the contract with the insurers, farmers choose the volume of the yield to be insured (which might be between (50-85)% depending upon needs) as well as the protection rates of the government.

Group risk plan: While MPCI uses the reference yield obtained from the historical data of the farmers to determine the loss, Group-Risk-Plan (GRP) uses a county yield index. This is decided by National-Agricultural-Statistics-Service (NASS). Since these calculations can take time, the time of payment upon claims can take more time than MPCI payments.

Revenue insurance:

Revenue Insurance policies, on the other hand, provide protection against a decrement in generated revenue which might be a result of loss of production as well as the change in the market price of the crops, or even both.

Crop revenue coverage (CRC):

It makes use of two varied prices, i.e. the price projected initially and the harvest price which is calculated just before harvesting. The actual time of determining the price depends on location as well as the crop.

Revenue assurance (RA):

RA includes the grower choosing a monetary sum to be covered that lies from (65-75) % of anticipated revenue. However, as farmers, you can also opt for the harvest-price option which in case it looks like a CRC except you’ll have no upside limit on harvest-price protection, unlike CRC. If production falls and prices increase, CRC/ RA_HPO will have a higher value and vice-versa.

Group revenue insurance policy (GRIP):

This type of policy is based on providing protection if and when the average county revenue of the crop under insurance drops below the revenue that is selected by the grower.

Crop insurances are vital to the financial sustainability of any farmland. Although the basic concept of crop insurance is as simple as it is necessary to understand, choosing the best type of crop insurance that suits your specific needs from a plethora of insurance policies can be a challenging task. The types of insurance policies discussed above will have given you a general idea about what might be the one for you. To make this critical decision, it is always recommended to consult with agronomic experts and agro-service providers like GeoPard.