Crop Insurance Today Third Quarter 2021 - 27

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with the ill effects of climate change and extreme
weather events.
Congressman Glenn " GT " Thompson (R-Pa.),
the top Republican on the committee, summed it
up this way: " Rather than wait for an act of Congress,
farmers need reliable assistance that only
a standing program can provide and there is no
better example of a program that responds quickly
when needed than crop insurance. "
Congresswoman Angie Craig (D-Minn.) also
noted in her testimony before the subcommittee
that conversations with her constituents had
made it clear that " risk management tools like
crop insurance are more important than ever.
Federal crop insurance has been a success story
because it's actuarially sound and consistently
works for farmers. "
6. Is current risk sharing optimal?
Risk sharing is a fundamental element of the
Federal crop insurance program. Descriptively,
the current risk-sharing arrangements are set out
contractually at several levels: a) the Standard
Reinsurance Agreement (SRA), the risk sharing
arrangement between the Approved Insurance
Providers (AIPs) and U.S. Department of Agriculture;
b) the actual crop insurance policy between
the farmer and the AIP; c) the contractual
arrangements between the crop insurance agents
and the AIPs; and d) the reinsurance treaties between
the re-insurers and the AIPs.
The AIPs bear a portion of the risk, farmers
shoulder a portion of the loss through their deductibles,
and the government provides both premium
support and reinsurance. Two advantages
of the current system are: 1) risk sharing reduces
taxpayer exposure; and 2) risk sharing incentivizes
program stakeholders to minimize losses.
Is the current system optimal? Perhaps the
better question is whether alternative risk sharing
arrangements benefit one set of stakeholders
without negatively impacting someone else?
Over time, the legal and regulatory structure of
the program has enabled stakeholders to reassess
and recalibrate the degree of risk held by a particular
program participant. The key takeaway here
is that the system can adapt, and risk sharing can
be successfully modified to reflect changing economic
and political environments.
7. What is the role of area versus individual
plans?
Over the last decade, there have been considerable
developments in area-based and/or
parametric (index-based) products. The market
shares of area-based and index-based products
represented nearly 5% and 10% of MPCI (standard
book of business) premium respectively in
2021. The traditional suite of area plans (commonly
known as Area Risk Protection Insurance
or ARPI, plans) triggers at the county level and
are designed to work separately from individual
plans. The 2014 Farm Bill introduced two new
area-based supplemental revenue products: Supplemental
Coverage Option (SCO) and Stacked
Income Protection (STAX). SCO supplements
underlying individual crop insurance policies
and its coverage depends on the underlying
crop insurance plan and coverage. To date, SCO
has experienced modest uptake. Similarly, the
Stacked Income Protection (STAX), the other
area-based supplemental program, was introduced
for cotton. STAX has also seen limited
uptake. Most recently, the Enhanced Coverage
Option (ECO) products were introduced. These
are again area-based supplemental products, protecting
a portion from 90 percent or 95 percent,
down to 86 percent of the deductible with the
underlying base plan of insurance. ECO products
were developed privately. Lastly, Margin Protection
(MP) products protect against profit margin
losses and were first introduced in 2017 for corn
and 2018 for soybeans. MP products were again
privately developed and can be used as a standalone
coverage or in conjunction with the underlying
individual coverage.
As for the parametric insurance, the Hurricane
Insurance Protection - Wind Index (HIPWI)
Endorsement was introduced in 2020. HIPWI
is a single peril insurance product that covers
only named hurricanes. HIP-WI is sold primarily
in the Southeastern U.S. where adoption of individual
coverage plans has been relatively low. The
Pasture, Rangeland, Forage Rainfall Index (PRFRI)
product was introduced in 2007 and has expanded
in recent years.
It appears that area-based and/or index-based
products will continue to coexist with individual
plans in the future. If risk minimization is to
be a policy objective, these products should be
designed to ensure that farmers' choices of individual
coverage are not distorted, but rather work
as complementary to individual plans and fill the
remaining gaps in insurance coverage.
8. Should the safety net be incentivized?
It is reasonably safe to conclude that the
modern-day crop insurance program is largely
incentive based. The purchase of crop insurance
is incentivized by offering farmers premium support.
Sales of crop insurance are incentivized by
agents' commissions. When companies share in
the risk of the policy, it incentivizes them to pay
claims accurately, thereby reducing the potential
for program fraud, waste, and abuse.
Perhaps one of the better examples of the effectiveness
of incentives in crop insurance is the
ability of the insurance companies to compete
and expeditiously service claims. Two examples
come to mind. During the 2011 drought, Texas
farmers whose crops were lost had been paid
$121 million in indemnities by mid-July 2011. By
CROPINSURANCE TODAY®
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Crop Insurance Today Third Quarter 2021

Table of Contents for the Digital Edition of Crop Insurance Today Third Quarter 2021
