As Farming In America Changes, Crop Insurance Is Everyone’s Concern

In 1790, farmers made up about 90 percent of labor force. “Farming has changed so much. The old guy wearing his overalls, holding a pitchfork and standing with his wife in front of the barn—there just aren’t very many of them anymore. Most of those people are hobby farmers. The real commercial farmers are much more sophisticated—they’re doing business on the Internet, they’re playing the board of trade, they’re into sophisticated marketing schemes—so agriculture has changed and that’s in part why crop insurance has changed so much too.”

—Paul Horel, president of the Crop Insurance Research Bureau Inc. (CIRB).

It wasn’t until the 1930s that Congress first authorized federal crop insurance. This new type of coverage remained an experiment until passage of the Federal Crop Insurance Act of 1980. And although more farmers took part in the program after passage of this Act, it did not achieve the level of participation that Congress had hoped for.

Over the past five years, the crop insurance program has grown significantly. To a large degree, program growth has been driven by major federal resource commitments made in 1994 with the Federal Crop Insurance Reform Act of 1994, and again last year with the Agricultural Risk Protection Act of 2000 (ARPA).

“Congress has been most willing to meet the needs of the American farmer and the companies delivering the product by continually modifying the legislation since it was enacted in the early ’80s,” said Justin Roth, senior Washington representative for the Independent Insurance Agents of America. “IIAA has played a major part in those modifications and pledges to continue a watchful eye in years ahead.”

CIRB’s Horel agreed that the crop insurance program has drastically changed since its inception. “It was a tiny program back in 1980 when there was just a few million dollars worth of coverage on basically the seven program crops…it was pretty much one size fits all,” he said.

In 2000, national crop insurance written liability topped $34 billion, more than 11 times the amount written just 20 years prior. Paid losses for 2000 reached nearly $1.78 billion, and total premium written for the year was just less than $2.52 billion, making for a total loss ratio of 71 percent.

Compared to other lines of p/c insurance, these would seem like excellent figures. So why is that companies aren’t falling over themselves to write the coverage?

“For a farmer to walk into his insurance agent’s office and buy crop insurance is not easy,” Horel said. “The good news is that there are a lot of options out there. The bad news is that there are a lot of options out there. So this makes an agent’s job more difficult.”

Not to mention that crop insurance loss ratios come and go with the weather. As a result, in the good years, crop insurance companies’ profits can be very good. But in the bad years, just like any line of insurance, all it takes is one bad year to hurt a company.

For example, the major drought in 1988 and the widespread floods in the Midwest and South in 1993 wreaked havoc on the crop insurance industry. “Those were horrible years, and it takes years to recoup those types of losses,” Horel said. “So that’s one of the vulnerabilities of the program—we’re subject to these sorts of massive occurrences that really set us back.”

Harvest a-plenty
Today, there are some additional crops that are insurable that hadn’t been covered in the past—”and the list of insured crops continues to grow,” Horel said. “In this country there are approximately 1,200 commercially grown crops…and we have insurance programs on very few of them.”

Needless to say, Congress is pushing to add crops to the list—not an easy task, according to Horel. “Each crop has its own sort of peculiarities when it comes to marketing schemes, agronomic aspects, etc.,” he said. “So for every new crop that is added to the program, it takes several years of gathering data and information about that crop so that [insurers] can properly underwrite it.”

In the past, products were rushed to the insurance market only to have insurers lose money because they didn’t understand enough about the crop being insured. Eventually, the program would be pulled from the market, making it no longer available to the farmers.

The pressure is on
In addition to the pressure to add more crops, there is pressure to develop new types of coverages. “Up until probably seven or eight years ago, basically the only programs that were offered were yield-based products,” Horel explained. “So if a farmer could raise 10 tons of a commodity, he might insure 65 percent of that, and then if his yield fell below 6.5 tons, then he’d get paid something.”

In this scenario, price plays an important role. “There are times when you can have a short crop, but if it’s a short crop pretty much everywhere then the price of that crop is going to go up exponentially…or you can have a big crop with very little demand, where the prices are depressed…putting you in a lot of trouble,” Horel explained.

A number of revenue-type products have been developed in an effort to help farmers in good times and in bad. Farmers now have the option of purchasing crop hail coverage, multiple peril crop insurance, crop revenue coverage, revenue assurance, income protection or a group risk plan.

“At one point in time, virtually 100 percent of the business was multiple peril, now that’s probably a little more than half of the business,” Horel said. “Catastrophic coverage, which is the low-level coverage…that’s in the 20-some percent, and various revenue products amount to about 25 percent of the program right now.”

According to Horel, the current trend is farmers continuing to move towards more specific products. “Right now you can’t buy crop revenue coverage on every crop across the board in the United States…but as we add more crops, more counties to the program, I think you’ll continue to see a movement towards those revenue products—especially in a price-depressed economy, because price really is the villain right now,” he said.

In the interest of the farmers
According to Roth, the overriding objective of the IIAA in revamping the crop insurance program is to ensure that farmers are well-served and protected, and that independent agents continue to be the most effective distribution channel for crop insurance. “Any reforms must continue to use the expertise of independent agents, and it is imperative that free-market incentives remain to ensure maximum coverage of farms,” stressed Roth.

In the best interest of farmers, it’s better to take the time to develop a program that can be properly underwritten and priced properly, Horel added. “It’s the basic principles of insurance—and as long as those are sound, then we’re ready to go with it.”

Last spring, Congress passed (with bipartisan support) and the President signed ARPA in law. The bill is a significant overhaul of the crop insurance program—more so than the 1994 reform in terms of total federal spending. An additional $8.2 billion will be invested over the next five years to further improve federal crop insurance.

ARPA dramatically increased premium subsidies for crop insurance across the board, but most significantly at the high end. And the increased subsidies mean that more meaningful levels of coverage are now more affordable than ever before.

For example, a farmer who bought a policy under the old law to protect 75 percent of his yield paid 76 percent of the premium. Now that same farmer will pay only 45 percent of the premium—a 31-percent savings.

Getting a handle on fraud
Just like any other line of insurance, fraud, waste and abuse occur in the crop insurance program. In an effort to combat the problem, more than 260,000 hours of training were provided to agents and loss adjusters in 1999. “If a farmer wants to defraud a program, there are a lot of ways to go about it, so detecting fraud can be very difficult,” Horel said.

In fact, enough concerns were raised during the debate over the 2000 reforms that Congress added a section dedicated to expanding and strengthening the anti-fraud authorities of the Risk Management Agency (RMA) and approved insurance providers.

“Congress decided to involve the Farm Service Agency offices around the country,” Horel said, explaining how the program will be under increased scrutiny. “The purpose behind it was: the more eyes out there, the better.”

The FSA will now be involved in the monitoring and fact-finding relative to allegations of program fraud, waste and abuse. “Basically, we don’t want a lot of people running around out there making irresponsible accusations. So the idea now is to get these people trained, otherwise it could create a situation that results in a huge workload chasing around false claims,” Horel said.

For producers it means that names, commodities to be insured, coverage levels and price elections will be reported to the Federal Crop Insurance Corporation (FCIC) within 30 days after the sales closing date. Any producer, agent or adjuster who willfully and intentionally provides any false or inaccurate information may be subject to a civil fine for each violation not to exceed the greater of the amount of the monetary gain or $10,000.

“It’s too early to tell how it’s going to work…it adds another level of complexity to the program,” Horel said. “But most people feel that, if handled properly, it will be very beneficial.”

High-profile line
There are a lot of aspects of crop insurance that are similar to other lines of insurance, but there are also a lot of aspects of it that make it very unique. “Probably the most unique aspect of it is that you’re trying to insure a living organism and that makes things a bit more complicated.

“It’s fairly easy to underwrite the shingles on my house. They deteriorate over time, but we all know how that happens,” Horel continued. “We also know that if a certain portion of the roof gets blown off, we can very closely ascertain just exactly what the damage is. We don’t have to wait and see if the shingles repair themselves, because they don’t repair themselves.”

Crops, on the other hand, are extremely difficult to insure and to underwrite. Crops have the ability to compensate, and in some cases, repair themselves, which makes insuring them that much more complicated. Insurers need to know about the agronomics of crops in order to make sure they develop accurate loss adjustment procedures.

“For example, if a hail storm cuts off a corn plant below the growing point, it’s dead. But if it’s cut off above the growing point, that plant will grow out of it. And in many cases, when you get towards harvest, you’ll never know that there was ever a hail storm,” Horel explained. “So should a farmer be paid damages? Well, probably not, but it really depends on the stage of growth—the closer the corn gets to maturity, the more damage that can happen.”

Becoming a crop expert
A lot has been happening since ARPA became a law last spring. “There was a tremendous amount of things that [insurance] companies have had to do in order to get ready, and a lot has to do with getting systems reset to handle all of the changes,” Horel said. “So the companies have been busy doing…some major housekeeping.”

By the same token, as the primary overseer of this program, RMA’s job has been extremely daunting. Basically, there has been a big learning curve for everyone involved, Horel said.

Companies have been busy with both getting the word out and training agents on how to market the newly enhanced products. “What we’re finding out from the sales that have been going on so far is that a lot of farmers—because of a depressed farm economy and because of lower prices on major commodities—are choosing not necessarily to buy additional coverage, but are applying those savings elsewhere,” Horel said. “Even though there are additional subsidies…I think a lot of farmers are trying to do more with what they’ve got.

“In a more flush farm economy, a lot of farmers might have been moving up to the 75, 80, 85 percent level, but we’re not seeing that great a transfer.”

Regardless, the good news for farmers is that insurance is a much more affordable product for them, and they now have the opportunity to buy up to levels that heretofore have not been available.

Suffering from players’ drought
Today, crop insurance is sold and serviced by 17 insurance companies in conjunction with a network of roughly 18,000 independent agents. “Back in the mid-’80s, there were 55 [companies]. Arguably, the ones that are in it now have been in it for a number of years—they understand the program and they are in it for the long haul,” Horel said. “There aren’t a lot of companies lining up to get into this line of business, because it takes a huge outlay of technical resources, and it requires a tremendous amount of expertise.”

So the shortage of industry players is a concern for those in the business. “We don’t want to see the pool of companies reduced much more below where it is, or we might have some real availability problems,” Horel added.

Out with the old, in with the new
The bottom line is that farming is a very important part of the food chain. “We can’t really afford to gamble with our food supply,” Horel said. “We have a situation where we just cannot allow the agricultural sector to collapse.

“The problem is that years ago, virtually everybody either lived on a farm—or if they didn’t live on a farm, they weren’t very far from it. Nowadays…most people are now a generation, or two generations, or three generations or more away from the farm so there is less sympathy for the agricultural sector.”

Unfortunately, this could be a major challenge for agriculture in the future. “They’re going to have to make their case on more economic reasons, rather than the American gothic sort of view of farmers,” Horel concluded.

According to IIAA’s Roth, adequate funding for the federal crop insurance program is important because budget cuts could undermine the effectiveness of agent delivery. “Keeping private-sector agents viable and healthy is paramount to the success of private-market delivery,” he said. “Agents are an integral part of crop insurance delivery and seeing to the needs of farmers after the policy has been sold.”

Topics Fraud Agencies Profit Loss Agribusiness