Federal Crop Insurance Program Research Articles

Developing Variable Unit‐Structure Premium Rate Differentials in Crop Insurance

AbstractFederal crop insurance programs offer producers the option of insuring farm units individually or as an aggregate unit. Existing programs offer a fixed 10% discount for most growers taking coverage at the aggregate level. This article describes an analysis of risk changes when units are aggregated. The methods described here, which base unit aggregation discounts on observable farm characteristics, are approved for implementation into the Federal Crop Insurance Program.

Factors affecting crop insurance purchase decisions by farmers in northern Illinois

PurposeThe purpose of this paper is to determine which factors are most influential to farmers' crop insurance purchasing decisions in northern Illinois.Design/methodology/approachA mail survey method was used to collect information from farmers in a 42 county region of Illinois.FindingsOf the factors analyzed, price had the most significant effect on crop insurance purchase decisions. While acres farmed had statistically significant impact on most of the crop insurance purchase decisions, different factors played a role in purchase decisions based on types of insurance and types of crops covered.Research limitations/implicationsThe results of this study warrant additional research relative to crop insurance purchase decisions. Analyzing the affect of varying degrees of government subsidization across crop insurance plans and coverage levels on purchase decisions is recommended. Questions regarding the relationship between crop insurance subsidization, farm program payments, and ad hoc disaster payments would be relevant in light of World Trade Organization and federal budget discussions. Also, asking participants to indicate if they have a written grain marketing plan and if that plan leverages crop insurance coverage to support forward contracting or pre‐harvest pricing would provide additional insights in determining how crop insurance purchase decisions are made. Questions regarding the claims process should be incorporated into future studies on this topic. The timeliness of claims payments, as well as the farmer's level of satisfaction with the claims adjustor and claims process may factor into the decision‐making process.Practical implicationsIllinois farmers and crop insurance agencies could benefit from this study. Findings could improve the crop insurance products and services available to Illinois farmers and make the federal crop insurance program more effective in enhancing farmers' ability to manage crop production risk.Originality/valueThis paper identified the factors that are most influential to farmers' crop insurance purchasing decisions in northern Illinois.

Distributional and Risk Reduction Effects of Commodity Revenue Program Design*

O of the purposes of U.S. agricultural programs has been to support or stabilize farm incomes by mitigating the effects of low crop prices and yields. Commodity programs such as the counter-cyclical payment and Marketing Loan programs have provided benefits or made payments to producers of several major field crops when crop prices fall short of expected or target levels. At the same time, the federal crop insurance program has provided support that has focused on yield shortfalls but has increasingly included revenue coverage. Several proposals to reform U.S. commodity programs have received attention in the 2007 farm bill debate (American Farmland Trust; National Association of Corn Growers; USDA). Generally, these proposals would alter or replace commodity price programs with programs that would make payments when revenues, that is, prices multiplied by yields, fall short of expected or target levels (Coble, Dismukes, and Thomas). Interest in revenue as the basis for farm programs is not new. In 1983, a national-level revenue program was studied as a way to control federal outlays for commodity programs (CBO). In the early 1990s, a regional-level revenue program was analyzed as a way to mitigate the need for supplemental, ad hoc disaster payments (Miranda and Glauber). More recently, a county-level revenue guarantee program has been promoted as providing protection when it is needed while reducing the chances that annual payments would exceed domestic commodity support limits allowed under the World Trade Organization Agreement on Agriculture (Babcock and Hart).

THE ECONOMICS OF AQUACULTURE INSURANCE: AN OVERVIEW OF THE U.S. PILOT INSURANCE PROGRAM FOR CULTIVATED CLAMS

One important issue affecting the continued growth and success of the aquaculture industry is risk management. Aquaculture producers face a number of production risks (e.g., weather, disease) that substantially affect their output quantity and quality. Crop insurance is one important potential mechanism for managing these risks, but aquaculture has historically had limited insurance availability in the United States, in part because of unique challenges associated with implementing crop insurance programs in aquatic settings. The Cultivated Clam Pilot Insurance Program, which began in 2000 in four Atlantic Coast states, is the first United States, federal crop insurance program for aquaculture. This program experienced relatively high loss ratios in the early years of the program, but substantial modifications beginning with the 2004 crop year resulted in a significant improvement in actuarial performance. Experiences with clam insurance can provide insight into the potential development and application of insurance programs for other aquaculture products.

Evaluating a proposed modification to Federal Crop Insurance

A proposed modification to the Federal Crop Insurance Program would allow crop producers to simultaneously purchase both a farm-level crop insurance policy and a supplemental county-level crop insurance policy. This study evaluates this proposal for representative cotton farms in Georgia. The goal is to test whether the additional risk protection provided by the supplemental policy is considered to be worth the additional cost.

Estimating the Prevalence and Cost of Yield‐Switching Fraud in the Federal Crop Insurance Program

Producers who manipulate and switch their reported crop‐yields between separately insured units can increase their insurance indemnities substantially. A statistical model that identifies potential yield switching is developed. The unrestricted statistical model is singular and is identified by imposing a mixture of system‐estimable and system‐nonestimable restrictions. Lower bound estimates of yield‐switching fraud incidence and costs are obtained by applying the model to 207,067 multiple unit producers who purchased crop insurance in 1998.

Crop Insurance Reconsidered

During the late 1980s and early 1990s, there was much debate over how to fix what were perceived as the “failures” of the Federal crop insurance program. The Federal Crop Insurance Improvement Act of 1980 made crop insurance the primary form of disaster protection for agricultural producers, replacing a standing disaster assistance program with subsidized crop insurance. To encourage sales, private companies were enlisted to deliver the product and significantly share in the underwriting risks. Almost overnight, the crop insurance program was converted from a pilot program offering limited coverage to a limited number of crops nationwide, to a nationwide program covering most major field crops in most major growing regions.1 The perceived failures of crop insurance were many. At the time of passage of the 1980 Act, Congress envisioned a participation rate approaching 50% of eligible acres by the end of the decade. Despite premium subsidies and expanded coverage, crop insurance participation grew very slowly. When a major drought struck the Midwest in 1988, only 25% of eligible acreage was enrolled in the program nationwide and participation was even less in states such as Illinois and Indiana (Chite). Widespread crop losses and poor participation in the insurance program prompted Congress to pass supplemental disaster legislation throughout the decade including almost $5 billion in disaster assistance to cover crop losses in 1988 and 1989 alone (Glauber and Collins). In addition to its failure to replace disaster assistance, the actuarial performance of the

An Empirical Analysis of Acreage Effects of Participation in the Federal Crop Insurance Program

The extent to which crop insurance programs have resulted in additional land being brought into production has been a topic of considerable debate. We consider multiequation structural models of acreage response, insurance participation, CRP enrollment, and input usage. Our analysis focuses on corn and soybean production in the Corn Belt and wheat and barley production in the Upper Great Plains. Our results confirm that increased participation in insurance programs provokes statistically significant acreage responses in some cases, though the response is very modest in every case. In the most extreme cases, 30% decreases in premiums as a result of increased subsidies provoke acreage increases ranging from 0.2% to 1.1%. A number of policy simulations involving increases in premium subsidies are considered.

Risk Management Strategies in Humid Production Regions: A Comparison of Supplemental Irrigation and Crop Insurance

Recent federal agricultural programs have accelerated the devolution of enterprise risk management responsibility from the state to individual producers. Using a biophysical simulation model, the risk management benefits of federal crop insurance and supplemental irrigation are derived and compared to uninsured rainfed crop production in an expected utility framework. Federal crop insurance programs are inefficient at reducing producer exposure to weather-related production risk in humid regions, and the risk management benefits from supplemental irrigation are found to be scale and technology dependent. Environmental policies that regulate resource development will increase the investment cost of irrigation alternatives and reduce economic feasibility.

Patterns of Collusion in the U.S. Crop Insurance Program: An Empirical Analysis

This article analyzes anomalous patterns of agent, adjuster, and producer claim outcomes and determines the most likely pattern of collusion that is suggestive of fraud, waste, and abuse in the federal crop insurance program. Log–linear analysis of Poisson-distributed counts of anomalous entities is used to examine potential patterns of collusion. The most likely pattern of collusion present in the crop insurance program is where agents, adjusters, and producers nonrecursively interact with each other to coordinate their behavior. However, if a priori an intermediary is known to initiate and coordinate the collusion, a pattern where the producer acts as the intermediary is the most likely pattern of collusion evidenced in the data. These results have important implications for insurance program design and compliance.

Extending Federal Crop Insurance Programs to Commercial Fisheries: The Case of Bristol Bay, Alaska, Sockeye Salmon

AbstractThis paper analyzes the feasibility of extending the U.S. Department of Agriculture's crop insurance program to the Bristol Bay, Alaska, capture fishery for sockeye salmon Oncorhynchus nerka. The impetus for this program has been a string of poor sockeye salmon fishing seasons followed by a series of disaster declarations in western Alaska. The mission of the Risk Management Agency, for whom this analysis was prepared, is to help stabilize the agricultural sector, not to provide disaster payments that offset permanent industry shifts by assuring producers some historical (but no longer attainable) production or revenue levels. Without a contemporaneous effort to restructure and rationalize the program of limited entry, the proposed crop insurance program for Bristol Bay cannot provide meaningful relief to a maladaptive industry that is beleaguered by excessive costs and increased competition.

Modeling changes in the U.S. demand for crop insurance during the 1990s

The crop insurance purchase decision for a group of Kansas farmers is analyzed using farm‐level data from the 1990s, a period that experienced many changes in the federal crop insurance program. Results indicate a reduction in the elasticity of the demand for crop insurance with respect to premium rates by the end of the decade. The reduction in demand elasticity corresponded with a considerable increase in government subsidies by the end of the 1990s. This result may also reflect the attractiveness of new revenue insurance products which may have made producers less sensitive to premium changes.

Crop insurance, disaster assistance, and the role of the federal government in providing catastrophic risk protection

Since 1980, the principal form of crop loss assistance in the United States has been provided through the Federal Crop Insurance Program. The Federal Crop Insurance Act of 1980 was intended to replace disaster programs with a subsidized insurance program that farmers could depend on in the event of crop losses. Crop insurance was seen as preferable to disaster assistance because it was less costly and hence could be provided to more producers, was less likely to encourage moral hazard, and less likely to encourage producers to plant crops on marginal lands. Despite substantial growth in the program, the crop insurance program has failed to replace other disaster programs as the sole form of assistance. Over the past 20 years, producers received an estimated $15 billion in supplemental disaster payments in addition to $22 billion in crop insurance indemnities.

Problems with Market Insurance in Agriculture

Crop and revenue insurance programs have become an increasingly significant component of U.S. agricultural policy in the last several years. A myriad of insurance programs are currently available to producers and many more are under development. These programs have been shaped by a series of legislative actions intended to increase participation by increasing program benefits and expanding the coverage of programs. The 2000 Agricultural Risk Protection Act (ARPA) is the latest development in the ever-expanding crop insurance program. The Act provides $8.2 billion for expanding participation through increased premium subsidies and for development of new insurance programs. Although it is tempting to consider the U.S. federal crop insurance program within the context of private insurance markets, it is important to recognize that the program is an important vehicle for transferring economic benefits from the treasury to the farm sector. Over the 1981-99 period, for each dollar paid in by a farmer, an average of $1.88 was received back in indemnity payments.' Few private insurance programs operate under such conditions, at least for very long. Any comparison to private insurance markets, as is our task in this article, must at the outset recognize that the U.S. crop insurance program is first and foremost a government program intended to convey economic benefits to a particular segment of the economy--the U.S. farm sector.

The Bad Harvest: Crop Insurance Reform has Become a Good Idea Gone Awry

Many agriculture policy analysts have argued that partially subsidized crop insurance would be a more efficient and equitable way to protect farmers from disaster than ad hoc aid. Those arguments led to major crop insurance legislation in 1980, 1994, and 2000, as well as other significant reforms in several farm bills over the past twenty years. But the current federal crop insurance program is expensive, complex, and inefficient. The process has been captured by a set of stakeholders who have helped compound the scope, costs, and inefficiency of what at one time was a good idea. Benefits from the program are bid into land prices, creating barriers to entry for young farmers. And the subsidies have had unintended and perverse consequences on insurance company behavior. The current program favors the highest risk farmers and regions and has become so heavily subsidized that it may be even more inefficient and inequitable than ad hoc assistance.

The U.S. Federal Crop Insurance Program

The US. Federal Crop Insurance Program has evolved from a government‐run yield insurance program for wheat farmers to a public‐private partnership that provides a variety of yield and revenue insurance products to producers of over 100 different crops. US. policy‐makers continue to struggle with defining an appropriate role for the federal government in helping crop farmers manage revenue risk. New approaches using area‐yield or weather‐based options may hold promise for the future

Premium Rate Determination in the Federal Crop Insurance Program: What Do Averages Have to Say about Risk?

This article reviews actuarial procedures used to calculate premium rates in the federal crop insurance program. Average yields are used as an important indicator of risk under current rating practices. The strength and validity of this relationship is examined using historical yield data drawn from a large sample of Kansas farms. The results indicate that assumed relationships between average yields and yield variation are tenuous and imply that rating procedures that rely on average yields may induce adverse selection.

Area‐Yield Crop Insurance Reconsidered

AbstractOne of the more promising proposals for reforming the federal crop insurance program calls for both premium rates and indemnities to be based not on the producer's individual yield but rather on the aggregate yield of a surrounding area. Area‐yield crop insurance can provide more effective yield‐loss coverage than individually tailored insurance, without most of the adverse selection and moral hazard problems that have historically undermined the actuarial performance of the federal crop insurance program.

Risk Management Strategies to Reduce Net Income Variability for Farmers

AbstractThe most useful and practical strategy available for reducing variability of net farm income is ascertained. Of the many risk management tools presently available, five of the most commonly used are simultaneously incorporated in an empirically tested model. Quadratic programming provides the basis for decisionmaking in risk management wherein expected utility is assumed to be a function of the mean and variance of net income. Results demonstrate that farmers can reduce production and price risks when a combination strategy including a diversified crop production plan and participation in the futures market and the Federal Crop Insurance Program (FCIP) is implemented.

Risk Management and Risk Preferences in Agriculture: Discussion

These papers indicate that the process of individual decision making under risk is at least conceptually clear. When faced with risky situations, farmers choose risk management strategies based on their appropriate risk preferences. Unfortunately public decision making about agricultural risk management is not this well developed. Issues concern both what public risk management programs are needed for agriculture and the likely impacts of such programs. The papers presented here contain a number of intriguing implications about public risk management issues in agriculture, even though they do not directly address these issues. I will focus my remarks on these implications instead of making a detailed review or criticism of the papers. Agricultural risk is a factor in two important groups of policy issues. One concerns Federal Crop Insurance and disaster payments. At the Western Agricultural Economics Association (WAEA) meetings last year, I discussed the issues concerning the government's role in providing disaster assistance to farmers (Miller and Trock). The U.S. Congress still is debating this question and appears moving toward a greatly expanded federal crop insurance program with some public subsidy to reduce farmer premiums. Answers to questions concerning both farmer needs for this assistance and its structural impacts are critically important if rational economic decisions are to be made on this program. A second group of policy issues that are related to risk concern the structure of agriculture. Here the policy debate is not cast in terms of risk; it concerns family farms, the structure of agriculture, and the impact of policy on this structure. But risk may be one of the key mechanisms that links policy and structural change. The current U.S. farm pro-