Federal Crop Insurance Program

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Federal Crop Insurance Program

• Financial Management Training
• U. S. Department of Agriculture
• June 10, 2008

Margo E. Erny Chief Financial Officer USDA Risk
Management Agency Federal Crop Insurance
Corporation
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Federal Crop Insurance

• Program Overview
• Program Growth
• Participation, Loss Ratio, Premium
• Crop Insurance Delivery
• Government Reinsurance
• Priorities and Recent Activities
• New Farm Bill

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Program Overview
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How U.S. Crop Insurance Works

• Annual enrollment prior to planting
• Coverage based on
• Recent yield history
• Price forecasts
• Futures contracts
• Multiple-peril insurance, revenue and index based
  plans
• Premium rates based on coverage and risk
• Indemnity paid if index is triggered or the yield
  and/or revenue at end of season is below guarantee

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The Birth of Federal Crop Insurance

• The Agricultural Adjustment Act of 1938
• "It is the purpose of this title to promote the
  national welfare by improving the economic
  stability of agriculture through a sound system
  of crop insurance and providing the means for
  research and experience helpful in devising and
  establishing such insurance."

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Federal Crop Insurance Corporation (FCIC)

• FCIC is USDAs crop insurance company
• The management of the FCIC is vested in a Board
  of Directors (Board)
• The Board consists of
• Undersecretary of Farm and Foreign Agriculture
  Service (FFAS) - Dr. Mark Keenum
• USDA Chief Economist - Joseph Glauber
• FCIC Manager (non-voting) - Eldon Gould
• FCIC Associate Manager (non-voting) James
  Callan
• Four farmers, one of whom grows specialty crops
• Frank Bedford Jones, Jr.
• Timothy M. Kelleher
• Luis Monterde
• Curt Sindergard
• An individual involved in insurance (often an
  agent), Willard Dean (Bill) Classen
• An individual knowledgeable about reinsurance or
  regulation, Mike Pickens

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Risk Management Agency

• RMA is the USDA agency
• that supervises and administers
• the day to day activities of FCIC
• RMAs key functions
• Underwriting policy design and maintenance
• Program rules and regulations
• Premium rates and crop price elections
• Data collection, auditing, and management
• Payment of reinsured companies reinsured losses
  and Administrative and Operating (AO) expenses
• Auditing and oversight of finances and
  market-behavior

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Program GrowthParticipation, Loss Ratio, Premium
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Program GrowthParticipation By Crop
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Program GrowthFCIC Loss Experience, 1981-2007
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Program GrowthTotal Premium by Crop, 2007
Others
Corn (Maize)
Wheat
Cotton
Soybeans
Total premium 6.56 billion.
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Crop Insurance Delivery
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How Crop Insurance Is Delivered

• Policies sold and serviced by private insurance
  companies
• Insurance agents paid sales commissions by
  company
• Loss adjusters employed by company
• Administrative and operating subsidy paid to
  companies
• Because premium reflects risk only, no overhead
  costs
• Based on total premium sold by company
• Rate varies by type of insurance
• Government provides first level of reinsurance

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Subsidy Paid to Companies for Crop Insurance
Delivery
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Government Reinsurance
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Standard Reinsurance Agreement

• Annual agreement specifying risk sharing between
  companies and government
• Also specifies administrative and operating
  subsidy rates
• Last negotiated - 2005
• Companies designate crop insurance policies to
  reinsurance funds
• Different level of risk in each fund

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Priorities and Recent Activities
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FCIC Board and RMA Priorities

• Prioritize and monitor product development
  initiatives
• Balance program initiatives with agency IT
  capacity
• Simplify and streamline where practical
  appropriate
• Combat and prevent fraud, waste and abuse through
  technology and strategic compliance initiatives

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Recent Activities

• New Products
• Apiculture (Vegetative and Rainfall)
• Biotech Yield Endorsement
• LGM Dairy
• Processing Pumpkins
• GRP Sugarcane Declining Yield Proposal Status
• LRP Lamb

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New Farm Bill
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Crop Insurance Provisions in the Farm Bill

• AO reduced by 2.3 percentage points with 50
  snap back in states with a loss ratio over 1.2
• CAT fees raised to 300
• Target loss ratio reduced from 1.075 to 1.0
• Renegotiation of SRA by 2011 reinsurance year
• Authorizes funding for IT and data mining

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Summary

• Variety of insurance plans and coverage levels
• Premium subsidies--insurance participation
• Private sector delivery of crop insurance
• Administrative and operating subsidies
• Reinsurance
• Approval of new products and technologies
• Program expansion

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For More Information
Margo E. Erny [phone] margo.erny_at_rma.usda.g
ov RMA website www.rma.usda.gov