Crop insurance
Crop insurance

Table of Contents

Crop Insurance

Crop insurance is a type of insurance purchased by agricultural producers and typically subsidized by a country’s government. It serves to safeguard against two primary types of risks: the loss of crops due to natural disasters like hail, drought, and floods, known as “crop-yield insurance,” and the loss of revenue resulting from declines in the prices of agricultural commodities, referred to as “crop-revenue insurance.”

In the United States, the federal government provides an average subsidy of 62 percent of the premium cost for crop insurance. As of 2019, crop insurance policies covered nearly 380 million acres of agricultural land. Most major crops are insurable in the majority of counties where they are cultivated, with approximately 90% of U.S. crop acreage protected under the federal crop insurance program.

In Canada, the history of crop insurance, known as CI (Crop Insurance), dates back to 1939 with the introduction of the Prairie Farm Assistance Act by the Canadian Government. This legislation offered ongoing assistance to grain producers in the Prairies and the Peace River region in the event of permanent crop loss disasters.

Meanwhile, in India, a multiperil crop insurance program called the National Agriculture Insurance Scheme (NAIS) was implemented. This scheme is administered by the Agriculture Insurance Company of India, a government-owned entity.

United States (U.S)

In the United States, the federal government plays a significant role in supporting crop insurance. On average, the government subsidizes approximately 62 percent of the insurance premium costs. In 2019, crop insurance policies extended their coverage to nearly 380 million acres of agricultural land. Most counties where major crops are cultivated offer insurable options, resulting in approximately 90 percent of U.S. crop acreage being enrolled in the federal crop insurance program.

The majority of enrolled acres are dedicated to four key crops—corn, cotton, soybeans, and wheat—which collectively account for over 70 percent of the total coverage. For these major crops, a substantial portion of plantings is protected by crop insurance.

The United States provides a subsidized multi-peril federal insurance program, overseen by the Risk Management Agency. This program operates under the authority of the Federal Crop Insurance Act, originally part of the Agricultural Adjustment Act of 1938 (P.L. 75-430), with subsequent amendments. Federal crop insurance is available for more than 100 different crops, although coverage varies by county, and not all insurable crops are available everywhere.

Amendments made to the Federal Crop Insurance Act, such as those introduced 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), have empowered the USDA to offer a basic level of catastrophic (CAT) coverage at essentially no cost to producers growing insurable crops. For an additional premium, farmers have the option to purchase higher levels of coverage beyond CAT. Crops for which insurance is unavailable are safeguarded through the Noninsured Assistance Program (NAP).

Federal crop insurance is distributed and managed by private insurance companies, with the federal government subsidizing a portion of the premium costs as well as the administrative and operating expenses incurred by these companies. The Federal Crop Insurance Corporation provides reinsurance to these companies by absorbing some of the program’s losses when indemnities surpass total premiums. Additionally, several revenue insurance products are available for major crops, offering an extra layer of coverage.

Read More : Federal Crop Insurance Corporation (U.S)

History of Crop Insurance in the United States

In 1938, the U.S. Congress passed the Federal Crop Insurance Act, establishing the initial Federal Crop Insurance Program. However, these early efforts encountered challenges, including high program costs and low farmer participation rates. The program struggled to accumulate sufficient reserves for claim payments and was financially unsustainable.

In 1980, Congress took steps to improve participation and affordability in the Federal Crop Insurance Program, marking the beginning of a new era in crop insurance. This period introduced a public-private partnership between the U.S. government and private insurance companies.

The Federal Crop Insurance Reform Act of 1994 brought about significant changes to the program, while the creation of the Risk Management Agency (RMA) within the U.S. Department of Agriculture in 1996 was pivotal in administering the Federal Crop Insurance Program. Subsidies embedded in the revised program guidelines led to a substantial increase in participation. By 1998, over 180 million acres of farmland were insured under the program, representing a threefold increase compared to 1988.

As of 2019, farmers had purchased 1.1 million crop insurance policies, protecting nearly 380 million acres of farmland, with liabilities exceeding $110 billion. These policies covered approximately 90 percent of eligible acres, and record indemnity payments totaling over $17 billion were made to farmers and ranchers in 2012.

Today, the Federal Crop Insurance Program serves as the primary risk management tool available to U.S. agricultural producers, playing a crucial role in the farm safety net. It addresses risks associated with both price volatility and unforeseen disasters.

Crop insurance is a risk-based program that covers a wide range of crops and does not provide annual subsidy payments to farmers. When it does offer financial support, it takes the form of indemnity checks to compensate for actual losses. Many farmers pay crop insurance premiums for several years without receiving indemnity payments because they have not experienced actual losses.

Crop-yield insurance comes in two main categories:

1. Crop-hail insurance, which is typically offered by private insurers and is suited to covering hail-related losses due to its localized nature. This type of insurance has been available to farmers in countries like France and Germany since the early 1820s.

2. Multi-peril crop insurance (MPCI), which extends coverage to a range of risks, including hail, excessive rain, and drought, sometimes even insect or bacteria-related diseases. MPCI policies are often offered by government insurers, with partial subsidies from the government. The U.S. Department of Agriculture implemented one of the earliest MPCI programs in 1938, managed by the Federal Crop Insurance Corporation and later by the Risk Management Agency (RMA) since 1996.

Crop-revenue insurance calculates coverage based on crop yields multiplied by crop prices. It measures deviations from the average revenue of a farmer. Futures prices from commodity exchange markets are used to determine prices, and this approach allows revenue protection before planting. The policy pays indemnities if the combination of actual yield and the cash settlement price in the futures market falls below the guaranteed level. In the United States, this program is known as Crop Revenue Coverage (CRC). Crop-revenue insurance focuses on price declines occurring during the crop’s growing season and does not cover declines from one growing season to the next.

Specialty crops

Farmers or growers might aim to cultivate a crop that possesses specific defined characteristics, potentially making it eligible for a premium compared to similar commodity crops, agricultural products, or their derivatives. These distinct attributes could relate to the genetic makeup of the crop, specific farming practices employed by the grower, or a combination of both. However, many conventional crop insurance policies do not distinguish between commodity crops and those with unique attributes. Consequently, farmers require specialized crop insurance to mitigate the risks associated with cultivating crops that possess these distinctive characteristics.

Canada

In Canada, the history of Crop Insurance (CI) began in 1939 with the introduction of the Prairie Farm Assistance Act by the Canadian Government. This act provided permanent assistance for grain producers in the Prairies and the Peace River area in case of crop loss disasters. In 1959, the CI Act replaced the Prairie Farm Assistance Act, offering more comprehensive protection to farmers across all provinces. Since 1959, CI has been a pivotal federal support program aimed at stabilizing farm incomes in the face of production-related risks.

Governments intervened in the realm of CI because the market failed to provide adequate risk management tools for farmers to address production risks effectively. Over the years, CI has maintained its core features, including participation by both federal and provincial levels of government, shared program costs, voluntary enrollment, provincial administration, and long-term actuarial sustainability.

The 1959 CI Act empowered the federal government to assist provinces in making CI available to producers with a 60% coverage level. Initially, the federal government covered 20% of total premiums and shared 50% of administrative expenses. Amendments in 1964 introduced provisions for a reinsurance agreement between provinces and the federal government. Subsequent amendments in 1966 and 1970 focused on coverage levels and the federal government’s contribution to total premiums. The 1973 amendment offered two cost-sharing options: one where federal and provincial governments each contributed 25% of total premiums and 50% of administrative costs, and another where the federal government covered 50% of premiums while provinces managed all administrative costs.

In a 1990 amendment, the maximum coverage was raised to 90% for low-risk crops, and a single cost-sharing formula was adopted. Under this formula, both the federal government and provinces paid 25% of total premiums and 50% of administrative costs. Additional changes included compensation for waterfowl crop damage and regulations pertaining to self-sustainability and actuarial soundness.

While federal legislation establishes the national framework, provinces have significant flexibility to tailor the CI program to suit the specific needs of their producers. Provincial plans are developed through consultations involving all three parties on a commodity basis. CI is accessible in all provinces for a wide range of crops, but coverage is not universal, and participation rates can vary, even though the program’s cost is subsidized by the government. The Canadian federal government allocates approximately $200 million annually to CI from its total safety net allocation of $600 million. In 1996-97, federal government expenditures on CI reached an estimated $207 million, compared to an average of $166 million over the previous three years. Provincial governments spent $251 million in 1996-97, contrasting with an average of $175 million over the previous three crop years. The largest component of the program covers grain and oilseed production in the Prairies, but even in this region, participation has fallen below 60% of the seeded area.

India

In India, the National Agriculture Insurance Scheme (NAIS) was introduced to provide comprehensive multiperil crop insurance coverage. This scheme is administered by the Agriculture Insurance Company of India, which is a government-owned entity. For farmers who have taken agricultural loans from any financial institution, enrolling in NAIS is mandatory, while it remains voluntary for all other farmers. Additionally, premium subsidies are provided to farmers who own less than two hectares of land.

NAIS operates on the basis of an area approach, wherein specific regions are insured rather than individual farmers. The insured area can vary, ranging from a gram panchayat (an administrative unit encompassing 8-10 villages) to a block, district, or even from one state to another, depending on the particular crop in question. Claims are calculated based on crop cutting experiments conducted by the agricultural departments of respective states. Compensation is provided for any shortfall in yield compared to the average yield of the previous five years.

In India, farmers have the option to choose from three major crop insurance schemes:

1. National Agricultural Insurance Scheme (NAIS)
2. Modified National Agriculture Insurance Scheme (MNAIS)
3. Weather-Based Crop Insurance (WBCI)

Read More : Agricultural insurance in India

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