Last Updated 9/26/19
Issue: Crop insurance is an important risk management tool available to farmers and ranchers to help protect them against declines in crop yields and/or revenue. Crop insurance is divided into two categories, the federally subsidized multiple-peril crop insurance and the state-regulated private crop insurance. In 2018, nearly $10.1 million in premiums were written for multiple-peril crop insurance and over $1 million in premiums were written for private crop insurance.
Multiple-peril crop insurance (MPCI)
In 1938, to help agriculture recover from the combined effects of the Great Depression and severe dust storms (the Dust Bowl), Congress passed the Federal Crop Insurance Act which established the first federal crop insurance program. The Federal Crop Insurance Corporation (FCIC), a wholly owned corporation of the U.S. Department of Agriculture (USDA), was created to carry out the federal crop insurance program.
Before the federal crop insurance program was established, private insurers had difficulty providing affordable insurance products because of the inherent risks and potential for widespread catastrophic losses associated with agricultural production. The FCIC was created with three objectives in mind: "(a) to protect the income of farmers against crop failure or price collapse; (b) to protect consumers against shortage of food supplies and extreme prices; and (c) to assist business and employment by providing an even flow of farm supplies and establishing stable farm buying power."
Over the years, the size and scope of the federal crop insurance program has expanded dramatically. The passage of the Federal Crop Insurance Act of 1980 encouraged participation by authorizing a subsidy for premiums. The Federal Crop Insurance Act of 1980 also added coverage for additional crops and regions of the country. Natural disasters precipitated ad hoc disaster assistance bills in 1988, 1989, 1992 and 1993. Participation in the program drastically increased with the passage of the Federal Crop Insurance Reform Act of 1994 which increased subsidies and made coverage mandatory for certain benefits previously offered for free. In 1996 the requirement for mandatory enrollment was lifted and the USDA created the Risk Management Agency (RMA) to operate and manage the FCIC. The Food, Conservation, and Energy Act of 2008 modified the legislation to reduce the overall cost and create a permanent disaster assistance program.
The federal crop insurance program was most recently reformed with the Agricultural Act of 2014 (P.L. 113-79)(the 2014 farm bill). The 2014 farm bill makes major changes in commodity programs, adds new crop insurance options and expands programs for specialty crops, organic farmers, bioenergy and rural development. The 2014 farm bill also introduces new products-including Supplemental Coverage Option (SCO) and the Stacked Income Protection Plan (STAX)-to help producers expand their protection against losses due to natural disasters or price declines. An overview of the changes can be found here.
MPCI covers a broad range of perils (e.g., drought, excessive moisture, freeze, disease and other natural causes) and must be purchased before planting begins. For a company to write federal MPCI, they must sign a Standard Reinsurance Agreement (SRA), which is a contract between the company and the FCIC which establishes the terms and conditions the FCIC will provide subsidies and reinsurance on eligible crop insurance contracts sold by that company.
By contrast, crop/hail insurance is coverage offered by the private market and regulated by the state insurance departments. It covers a narrower variety of perils, such as hail and fire, and is not reinsured by the FCIC. Some of the advantages of crop/hail are the availability, as many different companies offer the product, and the flexibility, as it may be purchased at any time during the growing season.
Understanding Crop Insurance
Insurance Information Institute
Federal Crop Insurance: Background
Congressional Research Service
Crop and Livestock Insurance
U.S. Department of Agriculture
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Manager - Research and Actuarial Department