Crop Insurance Today Third Quarter 2022 - 6

with an 80 percent subsidy rate. STAX also saw
a limited uptake: the premium volume was less
than $100 million in 2021.
Most recently, Enhanced Coverage Option
(ECO) was introduced as an additional area-based
supplemental product, protecting a
portion from 90 percent or 95 percent down to
86 percent of the deductible with the underlying
base plan of insurance. ECO adds another layer
of coverage on top of SCO. ECO products were
developed privately. In its first year of introduction,
the premium volume for ECO products
approached that of SCO products, with both exceeding
$200 million in 2021.
Finally, Margin Protection (MP) products
protect against profit margin losses, beginning
in 2017 for corn and 2018 for soybeans. MP
products were also privately developed and can
be either purchased as stand-alone policies or
in conjunction with the underlying individual
coverage. The premium volume for MP products
stood at $68.5 million in 2021.3
On the livestock side of the business, Dairy
Revenue Protection (DRP), which is based on
state-level milk yields, led the high growth in
that space since its introduction in 2019. The premium
for DRP was near $400 million in 2021,
which represented 69.6 percent of the entire livestock
premium volume. The strength of DRP lies
in tailoring to the price protection needs of producers.
Currently, this product is not available at
the county or individual level.
As for parametric insurance schemes, the
Hurricane Insurance Protection -Wind Index
(HIP-WI) Endorsement was introduced in 2020.
This is an event-based insurance in which hurricane
occurrence is determined based on hurricane
wind speed within a county or adjoining
counties. The premium for this product remained
less than $200 million in 2021-still up 77.8 percent
from the level in 2020.
The other index product, Pasture, Rangeland,
Forage Rainfall Index (PRF-RI), originated in
2007 and has expanded in recent years. The premium
volume had an increasing trend after the
2014 Farm Bill and exceeded $1 billion in 2021.
3
The Factors
Influencing Farmers'
Choices on Area or
Index Products
Farmers assume basis risk in using either type
of products as the farm losses can be positively yet
imperfectly correlated with area losses or implied
losses via changes in the index value, and these
products may have false negatives. For instance,
providing evidence out of California, a recent article
(Keller and Saitone 2022) approximates forage
production via the NDVI (Normalized Difference
Vegetation Index) values and estimates
the probability of a farmer experiencing a loss
and yet PRF-RI not making any payment as 31
percent to 46 percent in the case of single interval
selection. These estimated values are higher than
what is reported (26 percent) in a previous article
(Yu et al. 2019) for three locations in Kansas and
Nebraska. The latter authors also find that basis
risk is derived from non-precipitation-related
factors that affect forage production and thus
having site-specific precipitation measurements
would be of limited value in reducing basis risk.
The Keller and Saitone article shares a similar observation
in that rainfall does not coincide with
abiotic factors influencing forage production in
California. Finally, another article (McLaurin
and Turvey 2011) finds that the relationship between
NDVI values, yield, and weather variables,
such as precipitation or extreme heat, is highly
variable and is dependent on location-specific
characteristics.
Certain features of index products can influence
their growth potential. In the case of
HIP-WI or PRF-RI, the product is based on an
exogenous factor: HIP-WI triggers if sustained
hurricane wind speed exceeds a certain threshold,
while PRF-RI triggers if rainfall index falls
below the historical average.4
Payments can be
made very quickly after the determination. On
the other hand, area plan indemnities cannot
While the premium volume in 2022 was not known at the time of writing, the number of policies sold was up
70 percent from a year earlier, perhaps reflecting the elevated demand for such products in response to high
input prices.
4
be determined until the summer following the
crop year. Index products can also be viewed as
a form of named-peril and can be less expensive
and more specific than multi-peril products. In
the case of HIP-WI, hurricane damages are at the
forefront of perils that farmers face in those regions
where it is offered. In the case of PRF-RI,
the index may be suitable for vast swaths of land
in which traditional loss adjusting can be more
costly and time-consuming. This is in addition
to the yield measurement problems inherent in
rangeland and pasture vegetation (Rowley, Price,
and Kastens 2007; McLaurin and Turvey 2011).
There is also the expectation in the literature that
the expanded remote sensing technology capabilities,
such as drones, hyperspectral sensors,
satellite-based imagery with higher frequency
and resolution, or synthetic aperture radar
(SAR)5
, combined with field level validation can
be used to offer index insurance products that
better track the changes in the phenology of a
forage crop (Keller and Saitone 2022; Rowley,
Price, and Kastens 2007).
One also needs to recall the fact that the PRFVI
(Vegetation Index) product was discontinued
in 2014 because of a lack of interest. Potential
explanations include that farmers may have not
trusted the product in the absence of ground validation,
or the effects through the PRF-VI were
too convoluted for them to discern. In contrast,
PRF-RI (Rainfall Index) represented more than
$1 billion in premium in 2021. Some behavioral
factors may account for the differential uptake
between the two.
When it comes to area plans, there are already
The comparison between such index products and area or individual plans is primarily intended for the HIP-WI as
there are crop-county cases where producers are offered all three options. While PRF-RI is limited to forage crops,
a similar comparison can conceptually extend to other crops as well.
More information about these technologies can be found at
https://gisgeography.com/category/remote-sensing/.
5
6 THIRDQUARTER2022
enterprise units that can be spread over an area,
and therefore, can mimic an area plan, while still
being based on a farmers' own actual production
history (APH). Anecdotal evidence suggests that
producers may prefer responsibility for the outcomes
on their farm (as in individual insurance)
rather than relying on county outcomes. A policy
change in the 2008 Farm Bill reduced the subsidy
rates for the predecessors of the ARPI plan of
insurance, while markedly increasing the subsidy
rates for enterprise units. Since then, the use of
enterprise units experienced an initial jump and
followed by continuous growth (Bulut 2020),
while the market share for ARPI plans has steadily
declined since 2006.
Farmers, as decision-makers, may also be
prone to loss aversion. In that case, the losses
would hurt more than any pleasure from gains of
an equal size, which would amplify the concerns
over basis risk. There is an indication of such bias

https://gisgeography.com/category/remote-sensing/

Crop Insurance Today Third Quarter 2022

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