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Crop insurance is purchased by agricultural producers, including farmers, ranchers, and others to protect themselves against either the loss of their crops due to natural disasters, such as hail, drought, and floods, or the loss of revenue due to declines in the prices of agricultural commodities. The two general categories of crop insurance are called crop-yield insurance and crop-revenue insurance.
- Crop-yield insurance: There are two main classes of crop-yield insurance:
- Crop-hail insurance is generally available from private insurers (in countries with private sectors) because hail is a narrow peril that occurs in a limited place and its accumulated losses tend not to overwhelm the capital reserves of private insurers. In early 1820s, crop-hail insurance were available to farmers in France and Germany. That is among the earliest forms of hail insurance from an actuarial perspective. It is possible to implement the hail risk into financial instruments since the risk is isolated.
- Multi-peril crop insurance (MPCI): Coverage in this type of insurance is not limited to just one risk. Usually multi-peril crop insurance offers hail, excessive rain and drought in a combined package. Sometimes, additional risks such as insect or bacteria-related diseases are also offered. The problem with the multi-peril crop insurance is the possibility of a large scale event. Such an event can cause significant losses beyond the insurer's financial capacity. To make this class of insurance, the perils are often bundled together in a single policy, called a multi-peril crop insurance (MPCI) policy. MPCI coverage is usually offered by a government insurer and premiums are usually partially subsidized by the government. U.S. Department of Agriculture is known to implement the earliest Multi Peril Crop Insurance program in 1938. Federal Crop Insurance Corporation managed this multi-peril insurance program since then. The Risk Management Agency (RMA) is active in calculating the premiums based on individual risk factors since 1996.
- Crop-revenue insurance: Crop-yield times the crop price gives the crop-revenues. Based on farmer's revenues, crop-revenue insurance is based on deviation from the mean revenue. RMA uses the futures prices on harvest-times listed in the commodity exchange markets, to determined the prices. Combining the future price with farmer's average production gives the estimated revenue of the farmer. Accessing the futures market offers enables revenue protection even before the crop planted. There is a single guarantee for a certain number of dollars. The policy pays an indemnity if the combination of the actual yield and the cash settlement price in the futures market is less than the guarantee. In the United States, the program is called Crop Revenue Coverage. Crop-revenue insurance covers the decline in price that occurs during the crop's growing season. It does not cover declines that may occur from one growing season to another.
A farmer or grower may desire to grow a crop associated with a particular defined attribute that potentially qualifies for a premium over similar commodity crops, agricultural products, or derivatives thereof. The particular attribute may be associated with the genetic composition of the crop, certain management practices of the grower, or both. However, many standard crop insurance policies do not differentiate between commodity crops and crops associated with particular attributes. Accordingly, farmers have a need for crop insurance to cover the risk of growing crops associated with particular attributes.
Federal crop insurance
In the United States, a subsidized multi-peril federal insurance program, administered by the Risk Management Agency, is available to most farmers. The program is authorized by the Federal Crop Insurance Act (which is actually title V of the Agricultural Adjustment Act of 1938, P.L. 75-430), as amended. Federal crop insurance is available for more than 100 different crops, although not all insurable crops are covered in every county. With the amendments to the Federal Crop Insurance Act made 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), USDA is authorized to offer basically free catastrophic (CAT) coverage to producers who grow an insurable crop. For a premium, farmers can buy additional coverage beyond the CAT level. Crops for which insurance is not available are protected under the Noninsured Assistance Program (NAP). Federal crop insurance is sold and serviced through private insurance companies. A portion of the premium, as well as the administrative and operating expenses of the private companies, is subsidized by the federal government. The Federal Crop Insurance Corporation reinsures the companies by absorbing some of the losses of the program when indemnities exceed total premiums. Several revenue insurance products are available on major crops as a form of additional coverage.
In Canada, the history of CI (Crop Insurance) begins in 1939 with the introduction of the Prairie Farm Assistance Act by the Canadian Government. This act provided permanent crop loss disaster assistance for grain producers in the Prairies and the Peace River area. In 1959, the CI Act was passed to replace the Prairie Farm Assistance Act and provide more adequate protection to farmers in all provinces. CI has been a key federal support program since 1959 aimed at helping to stabilize farm incomes against production related risks. The reason governments got involved in CI was because the market failed to provide risk management tools for farmers to deal appropriately with production risk. CI has varied little over the years in that it was designed on the basis of participation by both levels of government (federal and provincial) and producers, shared program costs, voluntary participation, provincial administration, and actuarial soundness in the long run.
The CI Act of 1959 enabled the federal government to assist provinces in making CI available to producers at a 60% coverage level. Originally the federal government's share of total premiums was 20%, with a 50% share of administrative expenses. In 1964, the Act was amended to incorporate general provisions for a reinsurance agreement between the provinces and the federal government. Further amendments were made in 1966 and 1970 concerning coverage levels and the federal government contribution to total premiums. The next amendment to the Act, in 1973, provided two options for the federal-provincial-producer cost-sharing arrangements. In one option, the federal and provincial governments each contributed 25% of total premiums and 50% of administrative costs. In the other option, the federal government contributed a total of 50% of premiums and the provinces paid all administrative costs. In the 1990 amendment, the maximum coverage was increased to 90% for low risk crops. Furthermore, the single cost-sharing formula was adopted, where the federal government and provinces each pay 25% of total premiums and 50% of administration costs. Other changes included waterfowl crop damage compensation, and regulations concerning self-sustainability and actuarial soundness requirements.
Although federal legislation establishes the national framework, a lot of flexibility exists for provinces to modify the program to meet the needs of their producers. Provincial plans are developed through consultations with all three parties on a commodity basis. CI is available in all provinces for a wide variety of crops but coverage is not universal, nor are participation rates necessarily high in spite of the fact that the cost of the program is subsidized by government. Currently, AAFC allocates approximately $200 million per year to CI from its total safety net envelope of $600 million. In 1996-97 it is estimated that the federal government's expenditures reached $207 million compared to an average of $166 million over the three previous years (AAFC 1997b). Provincial governments spent $251 million in 1996-97 which compares to an average of $175 million over the previous three crop years. By far the largest component of the program covers grain and oilseed production on the Prairies, but even here participation has fallen below 60% of seeded area.
In India a multiperil crop insurance called National Agriculture Insurance Scheme (NAIS) was implemented. This scheme is being implemented by Agriculture Insurance Company of India, an Indian government owned company. The scheme is compulsory for all farmers who take agricultural loans from any financial institution. It is voluntary for all other farmers. The premium is subsidized for farmers who own less than two hectares of land. This insurance follows the area approach. This means that instead of individual farmers, a specific area is insured. The area may vary from gram panchayat (an administrative unit containing 8-10 villages) or block or district from crop to crop or state to state. The claim is calculated on the basis of crop cutting experiments carried out by agricultural departments of respective states. Any shortfall in yield compared to past 5 years average yield is compensated.
- US application 20,060,287,896 “Method for providing crop insurance for a crop associated with a defined attribute”
- Adapted from CRS Report for Congress: Agriculture: A Glossary of Terms, Programs, and Laws, 2005 Edition - Order Code 97-905, a document in the public domain.
- USDA Risk Management Agency (Federal Crop Insurance Company)
- USDA Designated List of Crop Insurance Providers
- Crop Insurance as a Risk Management Strategy in Bangladesh-Md. Nurul Alam Siddique
- “National Agricultural Insurance Scheme” (NAIS)-Md. Nurul Alam Siddique
- Bangladesh Institute of ICT in Agriculture(BIID)