Federal Crop Insurance Program Research Articles

Utilizing large‐scale insurance data sets to calibrate sub‐county level crop yields

AbstractCrop yields are crucial for research on agricultural risk and productivity but are typically only available at highly aggregated levels. Yield data at more granular levels of observation have the potential to enhance econometric identification and improve statistical power but are typically inaccessible. Crop insurance contracts offered via the US Federal Crop Insurance Program (FCIP) are priced, in part, based on past yields of the farm meaning year‐to‐year variation in premium rates has the potential to provide insight into how yields vary over time. This paper introduces methods to use observed FCIP rating parameters to calibrate yields for insurance transactions lacking such data. These methods are validated with 148,243 farm‐level observations from Kansas for which yields are known. The calibrated yields are applied empirically to examine the impact of asymmetric information in the FCIP via choice of insurance unit structure and the extent to which legislative changes mitigated this effect.

Directional aspects of crop yield correlation: Implications for insurance rating and contract design

AbstractWe estimate directional anisotropic models of linear correlation for crop yields. We find that directional distances (i.e., the degree to which yield correlation decays depending on direction) tend to differ from one another, with east to west distances being “longer” than north to south distances (i.e., correlation tends to decline slower in the east to west direction), at least for the major crops of corn and soybeans. Results for wheat are somewhat ambiguous. However, in all cases, average yield aggregates made up of east to west linked counties tend to be more accurate than is the case for north to south linkages. Implications for rating and contract design in the US area yield federal crop insurance program are offered.

Actuarial implications of prevented planting coverage

AbstractWithin the Federal Crop Insurance Program (FCIP), prevented planting (PP) coverage provides payments for pre‐planting costs associated with crops that ultimately cannot be planted due to adverse weather. PP indemnities, which are not considered production losses within the FCIP rating methodology, influence premium rates differently than typical losses. This study utilizes a panel data set consisting of approximately 77,697 county level observations from RMA's summary of business to identify the relationship between the prevalence of prevent plant use and a number of actuarial related outcomes. Overall, we find that increases in the share of total indemnities attributable to PP claims over the preceding 10 years produce generally negligible changes to loss ratios, but can significantly increase loss ratios among subsets of the FCIP that heavily utilize PP coverage (greater than 20% of total indemnities). This suggests that, despite loss ratios being robust to typical rates of PP claims, actuarial performance can degrade when PP payments are high relative to indemnities from all other perils. Additionally, a simulation is conducted in which prevent plant indemnities are counterfactually treated as production losses when pricing FCIP contracts as opposed to current practice of recovering prevent plant costs via a fixed rate load. Doing so suggests significant improvements in loss ratios for crops that have historically had high shares of prevent plant indemnities, however, these improvements come at the expense of higher premiums and reduced demand for crop insurance.

Insurance, Weather, and Financial Stability

In this paper, we introduce a model to study the interaction between insurance and banking. We build on the Federal Crop Insurance Act of 1980, which significantly expanded and restructured the decades-old federal crop insurance program and adverse weather shocks—over-exposure of crops to heat and acute weather events—to investigate some insights from our model. Banks increased lending to the agricultural sector in counties with higher insurance coverage after 1980, even when affected by adverse weather shocks. Further, while they increased risky lending, they were sufficiently compensated by insurance such that their overall risk did not increase meaningfully. We discuss the implications of our results in the light of potential changes to insurance availability as a consequence of global warming.

Does crop insurance influence crop yield impacts of warming temperatures? A farm‐level analysis

AbstractWe examine the effects of the federal crop insurance program on crop production under extreme heat using farm‐level data from Kansas. We find that insured dryland corn is 38% more sensitive to extreme heat than uninsured dryland corn. Results also suggest that a uniform C warming scenario leads to yield reductions of 16.7% (11.8%) for insured (uninsured) corn production; and 6.0% (4.4%) for insured (uninsured) wheat production. Warming had a stronger impact with reduced rainfall, especially on insured farms compared with uninsured farms, while altered growing seasons showed potential benefits for wheat but limited improvements for corn.

Race and premium misrating in the U.S. Federal Crop Insurance Program

AbstractUSDA farm support programs have an established history of racial discrimination. Today, the Federal Crop Insurance Program is among the largest and most important programs available to U.S. farmers. Previous research has documented systematic misrating of crop insurance premiums with sizable welfare implications. In this paper, we explore whether producer race measured at the county level has explanatory power in a model of crop insurance misrating. We find that in some cases it does, raising concerns about the possibilities of racially discriminatory impacts of the RMA's rate‐setting methodology. Further research is needed to isolate the mechanisms that explain our findings.

The crop insurance demand response to premium subsidies: Evidence from U.S. Agriculture

Premium subsidies are a common policy tool to promote crop insurance participation in many countries. However, the relationship between subsidies and demand is not entirely obvious given the variation in the use of subsidies and crop insurance participation within the international crop insurance landscape. Focusing on the U.S. Federal Crop Insurance Program (FCIP) demand is modeled as a system of equations representing decisions at the intensive [coverage level] and extensive [net insured acres] margins. The model makes use of an identification strategy that leverages exogenous variation in government-set pricing policy to address potential sources of endogeneity. Applying the model to over one million insurance pool level FCIP observations spanning two decades (2001–2022) suggest an inelastic response at both extensive and intensive margins to changes in producer-paid premium rates with the response to premium rates becoming increasingly more elastic as subsidies decrease. These estimated elasticities are on the low end compared to previous literature, however, significant heterogeneity across commodity, production practices, policy type, and location are observed suggesting subsets of producers are likely to respond to changes in the cost of insurance in different ways.

Premium subsidies and selection in the federal crop insurance program

AbstractUnderstanding how subsidies affect the selection of farms with different risk exposure into insurance products is key to evaluating the efficiency of government‐supported insurance programs. We study the US crop insurance program, which is a major federally supported insurance program, to assess the impact of premium subsidies on the riskiness of the insured. By exploiting two waves of policy changes, we find that the average loss per insured liability falls as premium subsidies increase, which implies that crop producers with lower risk are more responsive to the price of insurance.

A Bibliography of Key Final Agency Determinations of the United States Department of Agriculture Risk Management Agency

This Article is the first law review article to comprehensively examine Final Agency Determinations (FADs) of the United States Department of Agriculture. A key part of the administrative process within the Risk Management Agency of USDA, FADs contribute to the interpretation and understanding of the Common Crop Insurance Policy, which is the federally-reinsured multi-peril insurance contract. This Article surveys ten of the most significant recent FADs and emphasizes the importance of FADs to litigated disputes between insurance providers and insureds with regard to the federal crop insurance program. Overall, understanding of FADs is critical for stakeholders with the multi-peril crop insurance program.

Understanding the effect of cover crop use on prevented planting losses

AbstractCover cropping has the potential to improve resilience of agriculture to climate‐change‐induced extreme weather events. However, rigorous quantitative evidence on the resilience effect of cover crops is still lacking. Using a novel data set that combines satellite‐based cover crop information and county‐level crop insurance data, we examine the impact of planting cover crops on prevented‐planting‐related losses that are typically caused by heavy rainfall events. The US federal crop insurance program offers “prevented planting” coverage, which pays indemnities if insured growers are unable to plant their crop due to adverse weather. Linear fixed effects models, instrument‐based estimation methods, long‐difference models, and a number of other robustness checks are utilized in the empirical analysis to achieve the study objective. Our findings suggest that counties with higher cover crop adoption rates tend to have lower levels of crop insurance losses due to prevented planting. The resulting reduction in prevented planting risk also becomes larger with longer term, multiyear cover crop use. These results support the notion that cover crops improve soil conditions such that the likelihood and magnitude of prevented planting losses decrease. We posit that the ability of cover crops to handle excess moisture (i.e., through better water absorption and improved water infiltration in the soil) is the main factor in its ability to reduce prevented planting losses in the US Midwest.

Program Necessity or Regulatory Inequity: Collection of Indemnity Overpayments Under the Federal Crop Insurance Program

Program Necessity or Regulatory Inequity: Collection of Indemnity Overpayments Under the Federal Crop Insurance Program

The impact of policy design on payment concentration in Ad-hoc disaster Relief: Lessons from the Market Facilitation and Coronavirus food Assistance programs

This study examines the distributional implications of two recent ad-hoc disaster aid programs, the 2018 and 2019 Market Facilitation Payment (MFP) programs that have distinctly different program designs, and the federal crop insurance program. Farm-level data are used to estimate the relationship between farm size, measured by crop sales, and the distribution of program benefits. Results indicate payments are more concentrated on larger farms that receive higher per acre payments under the 2018 MFP and federal crop insurance programs. Under the Coronavirus Food Assistance Program, with a design similar to the 2018 MFP, payments are also more heavily concentrated on larger farms.

Utilizing Topographic and Soil Features to Improve Rating for Farm‐Level Insurance Products

Previous studies have shown a strong correlation between topographic/soil features and agricultural production; however, linkages between these features and agricultural insurance products are scarce. Agricultural insurance is an ever‐growing means of governmental support for producers globally. However, failure to set insurance premiums that accurately reflect risk exposure can lead to low participation rates and/or adverse selection. The U.S. federal crop insurance program partly guards against this at the farm level by inducing pricing heterogeneity via a rate multiplier curve, which does not consider topographic/soil information. We develop a method for econometrically incorporating this information into existing rating procedures used by the Risk Management Agency (RMA). The empirical application leverages 149,267 farm‐level observations of Kansas producers across four dryland crops (corn, soybean, sorghum, and wheat), spanning forty‐six years, and matched to fine‐scale topographic/soil features. The results suggest that incorporating these features does improve the prediction accuracy of yield losses and can, in general, improve rating performance. However, these improvements are specific to farms with limited yield histories, as there are no improvements for farms with the commonly used yield history of ten years. This suggests substantial rating improvements for new farms or those with limited histories for a particular crop, but more general improvements for the program are not likely to occur given a large number of current participants with a full ten‐year yield history.

Understanding Irrigated Cotton Producer’s Crop Insurance Coverage Level Choices Under the 2014 Farm Bill

The Agricultural Act of 2014 (2014 Farm Bill) significantly changed the Title I commodity programs, and shallow loss insurance programs were added to the federal crop insurance program (Title XI). Stacked Income Protection Plan and Supplemental Coverage Option were new insurance programs enacted in the 2014 Farm Bill. Participation in these programs is influenced by premium subsidies and the type of coverage provided. Relationships between insurance agents and producers also have the potential to influence program participation. These changes could impact the producer’s insurance choice decision. The overall objective of this research is to understand the impact of the new insurance options on Texas cotton producers’ risk management decisions and participation and understand the change in coverage level of primary crop insurance due to availably of other protection. A mail survey was conducted among cotton producers in Texas to collect insurance choices data for 2014 and anticipated choices for 2015. Responses from 42% of Texas counties were received. In 2015, the USDA Risk Management Agency reported 155 counties in Texas produced cotton. Regression analysis conducted on anticipated change in coverage level of crop insurance indicated Common Crop Insurance Policy coverage level choice for larger farm size and higher non-farm income had an increase in coverage level effect; whereas enterprise unit, revenue protection, price, yield, and insurance agents had a decrease in coverage level effect. Results suggest that greater insurance agent involvement in program design and implementation of an insurance program could contribute to program success.

Premium misrating in federal crop insurance programs: scale, geography, and fiscal impacts

PurposeFederal crop insurance programs are the primary risk management programs of the US farm programs. Currently, these programs have been criticized for being disproportionally in favor of the riskier areas. Despite previous researchers having widely speculated its existence, a formal study of the scale, spatial pattern and fiscal impacts of such misrating phenomenon is still missing in the literature.Design/methodology/approachThis paper first purposes an empirically testable definition of misrating, and then detects the scale of the misrating phenomenon by using over two million actuarial records collected by United States Department of Agriculture (USDA's) risk management agency since 1989. Furthermore, multiple spatial statistics methods have been adopted to study the spatial patterns of the misrating statuses. Finally, the paper builds a simple theoretical model to study the potential fiscal impacts of any policy attempts to mitigate the misrating issue.FindingsThe result reveals that roughly 40% of the counties display some degree of misrating. Furthermore, the distribution of misrating displays a significant pattern of positive global spatial autocorrelation, which reflects the existence of regional clusters of premium rate mispricing. Last but not least, the paper concludes that whether an attempt toward fair rating decreases the total program outlay or not relies on the demand elasticity of crop insurance in both overrated and underrated regions.Originality/valueThis paper offers the first attempt to quantify the scale, identify the spatial pattern and evaluate the fiscal impact of the premium misrating in federal crop insurance programs.

The influence of crop insurance agents on coverage choices: The role of agent competition

AbstractWe examine how competition among crop insurance agents affects coverage choice in the federal crop insurance program. Agents may influence producers’ insurance decisions to maximize their total compensation. We develop a theoretical model of producer–agent interaction to examine how loss potential, agent compensation mechanisms, and market competition affect the coverage level selected. Using crop insurance unit‐level datasets from five states, we find evidence that agent market concentration and agents’ market share matter in the insurance coverage decisions of producers but that the economic significance of the influence is relatively small. Agent influence over coverage level, premium, and liability choice is generally positive but inconsistent across states, which may be attributable to differences in loss risk and agent compensation mechanisms.

Rating exotic price coverage in crop revenue insurance

PurposeRevenue insurance is the most popular form of insurance available in the US federal crop insurance program. The majority of crop revenue policies are sold with a harvest price replacement feature that pays out on lost crop yields at the maximum of a realized or projected harvest price. The authors introduce a novel actuarial and statistical approach to rate revenue insurance policies with exotic price coverage: the payout depends on an order statistic or average of prices. The authors examine the price implications of different dependence models and demonstrate the feasibility of policies of this type.Design/methodology/approachHierarchical Archimedean copulas and vine copulas are used to model dependence between prices and yields and serial dependence of prices. The authors construct several synthetic exotic price coverage insurance policies and evaluate the impact of copula models on policies covering different types of risk.FindingsThe authors’ findings show that the price of exotic price coverage policies is sensitive to the choice of dependence model. Serial dependence varies across the growing season. It is possible to accurately price exotic coverage policies and we suggest these add-ons as a possible avenue for developing private crop insurance markets.Originality/valueThe authors apply hierarchical Archimedean copulas and vine copulas that allow for flexibility in the modeling of multivariate dependence. Unlike previous research, which has primarily considered dependence across space, the form of exotic price coverage requires modeling serial dependence in relative prices. Results are important for this segment of the agricultural insurance market: one of the main areas that insurers can develop private products around the federal program.

Has Technology Increased Agricultural Yield Risk? Evidence from the Crop Insurance Biotech Endorsement

The conventional wisdom that technological advances in seed breeding and genetic modification of corn traits have lowered yield risk has recently been challenged by research that argues that the converse is true. The implications of this research have been applied to models of climate change and have led to the conclusion that these advances have actually increased agronomic risk, such that climate change is asserted to raise important concerns regarding the stability and viability of agricultural output in the future. In a large body of empirical work, the argument is based upon assertions that corn yields have become more sensitive to weather stresses. This increased sensitivity has coincided with the introduction of a variety of genetically engineered (GE) crops in the 1990s and 2000s. We use corn yields and data from the US federal crop insurance program to evaluate these claims. An initial examination of yield responses to droughts in 1988 and 2012 suggests more robust yields in the latter period, in spite of very comparable weather stresses. We next consider side‐by‐side data collected under the Biotech Endorsement (BE) to the federal crop insurance program between 2008 and 2011. This endorsement provided substantial discounts for growers using certain GE hybrids, reflecting policymakers' beliefs that these hybrids had lower yield risk. We find that risk, as measured by the rate of indemnities paid per units insured, was significantly lower for crops insured under the BE. We also find that the difference in risk tends to be greater when growing conditions are less favorable.

The US federal crop insurance program: a case study in rent seeking

PurposeRent seeking is endemic to the process through which any policy or regulatory initiative is developed in the USA. The purpose of this paper is to show how farm and other interest groups have formed coalitions to benefit themselves at the expense of the federal government by examining the legislative history of the federal crop insurance program.Design/methodology/approachThe federal crop insurance legislation and the way in which the USDA Risk Management Agency manages federal crop insurance program are replete with complex and subtle policy initiatives. Using a new theoretical framework, the study examines how, since 1980, three major legislative initiatives – the 1980 Federal Crop Insurance Act, the 1994 Crop Insurance Reform Act and the 2000 Agricultural Risk Protection Act – were designed to jointly benefit farm interest groups and the agricultural insurance industry, largely through increases in government subsidies.FindingsEach of the three legislative initiatives examined here included provisions that, when considered individually, benefitted farmers and adversely affected the insurance industry, and vice versa. However, the joint effects of the multiple adjustments included in each of those legislative initiatives generated net benefits for both sets of interest groups. The evidence, therefore, indicates that coalitions formed between the farm and insurance lobbies to obtain policy changes that, when aggregated, benefited both groups, as well as banks with agricultural lending portfolios. However, those benefits came at an increasingly substantial cost to taxpayers through federal government subsidies.Originality/valueThis is the first analysis of the US federal crop insurance program to examine the issue of coalition formation.

Feasibility questions about government-sponsored insurance for business interruption losses from pandemics

Widespread economic losses to many businesses due to COVID-19 business closures have led many plaintiffs’ attorneys to assert in lawsuits that business interruption (BI) insurance policies cover these losses, while insurers generally contend that their BI policies exclude coverage for a variety of reasons. We explain the basic coverage contentions below. Additionally, several states are considering measures that would retroactively establish coverage for pandemic-caused losses under BI policies. While the resolution of coverage disputes and the legality of retroactive coverage expansions in the courts is uncertain, clearly there is strong interest in making BI pandemic insurance available going forward. While a few insurers have offered BI pandemic coverage, no firms have purchased it (Lerner, 2020). Further, many insurers are reluctant to expand their BI policies to cover pandemic losses. Hence, there is strong interest in creating a federal government insurance program that would provide BI pandemic coverage. Currently, there are at least two formal proposals to establish such a program. One proposal is the Pandemic Risk Insurance Act of 2020 (PRIA), which was introduced in the U.S. Congress as H.R. 7011; PRIA would establish a Pandemic Risk Reinsurance Program (PRRP) modeled after the Terrorism Risk Reinsurance Program (TRRP) established by the Terrorism Risk Insurance Act (TRIA). Three industry trade associations also have proposed a Business Continuity Protection Program (BCPP) as an alternative to PRIA that is similar in some regard to the National Flood Insurance Program (NFIP). PRIA intends to create a public and private insurance program that would provide BI insurance for pandemics, with participating private insurers retaining 5% of losses above a deductible. We critique the program contemplated by PRIA and discuss the BCPP. Additionally, we consider a program concept of our own design that would also borrow from the NFIP (but would differ somewhat from the BCPP), as well as a program similar to the federal crop insurance program. We conclude that frameworks based on the NFIP or the federal crop insurance program would have several advantages over PRIA, which has a number of problems, but even these alternative frameworks would face many challenges. This policy brief provides a preliminary review of the PRIA and BCPP drafts, as well as other alternative frameworks, and draws from a longer working paper by the authors (Klein and Weston, 2020)