2002 Case Study on CRC

Revenue insurance was a success for wheat,
but can the same results be expected in 2003?

By Betsy Jensen

Here’s an actual case study on the workings of Crop Revenue Coverage in 2002.

A farmer in Roseau County, Minn., met with his agent last spring and decided to buy CRC at the 60% level. With a wheat APH of 33 bu/acre, this farmer was guaranteed 19.6 bu per acre. The spring price for CRC was $3.18, so this farm was guaranteed $62.96 per acre.  The farm unit had 195 acres, so his total revenue guarantee for the farm was $12,278. 

A deluge of early summer rain resulted in major crop problems for farmers in Roseau County, and this farmer was no exception.  He averaged just over 6 bu/ac, and the rise in wheat prices made the lack of bushels even more painful.  Fortunately, his CRC policy helped to ease the pain. 

Since prices had risen, so had his total revenue guarantee.  His CRC policy was now guaranteeing him $4.04 per bu, or $15,598 total revenue. His guarantee jumped by over $3,000, and that money can be used to pay the elevator when you cannot deliver on your spring wheat contracts because you don’t have the bushels.  If he had taken Multi-Peril crop insurance, he would not have had that extra $3,000. His total indemnity was over $10,700, which isn’t a total replacement for the crop loss, but did help make the loss a little more bearable.

Revenue insurance (including CRC and Revenue Assurance, RA) products worked well in 2002 for wheat, but could the same results be expected in 2003? 

Many farmers are reluctant to purchase revenue insurance because it’s more expensive than multi-peril, but premiums may not vary by much this year, plus we’ll have different price elections.

The 2003 price election for wheat MPCI is $3.15, but it appears that the price election for revenue insurance will be over $3.50, and that’s the minimum. If prices rally into the fall, the price election could be higher. Last year the spring price elections for MPCI and the revenue products were almost identical, so it was more difficult to spend the extra money on the revenue insurance.

Mike Douglas, Nelson Insurance Agency in Stephen, Minn., suggests that wheat producers first look at RA-HPO at 70% or higher. If you’re looking for coverage at 65% or below, then CRC is usually better.  “Higher coverage levels are much better buys since Congress increased the subsidies a few years ago,” says Douglas.   

Keep in mind that to get the most bang for your buck, you need to combine revenue insurance production with spring sales.  If grain prices are higher in the spring compared to next fall, then your spring grain sales will look great.  If grain prices are higher in the fall, then your crop insurance will provide better coverage.

The best advice for crop insurance is to make sure you’re working with an agent who understands all the policies and knows your operation. There are many different options available.  Things are difficult enough when you have a crop disaster.  Don’t pour salt into your wounds by figuring out too late that you purchased the wrong crop insurance.

Market Will Determine Success of Buying Crop Insurance Online

By Tracy Sayler

Ultimately, it will be the marketplace that will determine whether crop producers will choose less service in favor of buying crop insurance over the Internet at a reduced price, according to Art Barnaby, extension ag economist at Kansas State University.

The Federal Crop Insurance Act passed by Congress several years ago allowed providers the ability to offer crop insurance over the Internet at discounted premiums, under a provision called the Premium Discount Plan (PDP).

This year, Crop1 Insurance is being offered to farmers over the web. Crop1 markets and administers crop insurance on behalf of Converium Insurance Company, a member company of the Zurich North America Group. It can be found on the Web at www.crop1ins.com , or through an affiliate based in Fargo, N.D., www.farmersinsurancepool.com .

PDP was approved as a pilot in 7 of the 12 states that Crop1 writes insurance. The PDP plan is approved for Kansas, Iowa, Illinois, Indiana, Minnesota, Nebraska, and North Dakota. The premium discounts apply to corn, soybeans, wheat, sugar beets, and grain sorghum. The premium discounts apply to all of the reinsured products that include MPCI-APH, CRC, RA, GRP, and GRIP.  Crop1 also writes insurance in Colorado, South Dakota, Missouri, Wisconsin , and Ohio. However, no premium discount is currently offered in those states.

Barnaby, regarded as the “father” of Crop Revenue Coverage as a crop insurance concept, has analyzed the possible ramifications of crop insurance sold over the Internet.

PDP will discount the crop insurance premiums charged to growers, and that discount will range from just over 5% to about 11%. The discount will vary because the government subsidizes different coverage levels at different percentages; thus, premium discounts will vary by coverage level. Barnaby says that in Kansas, most of the insurance contracts sold are either revenue insurance or MPCI-APH at 70 or 75 percent coverage levels. The premium discount at 70% coverage is 8.54%, and at 75% coverage the farmer paid premium discount would be 7.78%.

He says it is reasonable to expect some growers will elect to buy discounted crop insurance on the Internet and bypass their local crop insurance agent. The most likely Internet customers are very large farms, where a discount would add up to more dollars than in a discount for a small farm.  Still, some large growers have indicated that they would not want to switch insurance providers because they like their current loss adjuster. In their view, an incorrect loss adjustment could cost a larger grower a lot more dollars than what was saved with discounted crop insurance. (This is a perception by some growers. Barnaby stresses that he does not suggest Crop1 won’t do a good job in loss adjusting).

Growers who are purchasing GRP or GRIP are more likely to buy crop insurance purchases over the Internet and be satisfied, says Barnaby.  The GRP contracts are based only on county level yield losses and there is no farm level loss adjustment, no units, and no practices to be considered. These features would thus make GRP or GRIP easy to buy over the Internet.

Internet purchases of MPCI and revenue insurance products may be a more difficult decision, says Barnaby, as growers will be entering data for their farms via the Internet and will need to keep track of crop insurances rules and regulations.

Growers who think they have been treated fairly on claims are least likely to switch companies, he says. “There is not supposed to be any difference in loss adjusting but growers have heard the ‘coffee shop’ stories about ‘unfair’ loss adjustment. Therefore, growers may wait to see how early Crop1 buyers’ losses are adjusted.”

The introduction of PDP will at the very least cause growers to ask their crop insurance agent to justify the services that are being provided versus the Internet, he says. One could also envision that growers may have a larger choice in delivery systems as a result of this change, Barnaby says, similar to what has occurred in the banking industry once the market sorts out all of these competing offers. He says other companies will likely watch Crop1 to judge its level of success before they decide to sell discounted crop insurance on the Internet.

Barnaby’s complete analysis can be found on the Internet at www.agecon.ksu.edu/risk . Click on either the PDF or HTML link “CI Premium Discount & NASS Prices for Government Pymts.”

What if it’s too dry to plant?

Prevented plant (PP) coverage may come into play under extremely dry conditions. According to the RMA’s Regional Service Office in Billings, PP from drought is defined as “insufficient soil moisture for germination of seed and progress toward crop maturity.” 

Affected producers will need to demonstrate valid reasons for prevented plant, and every company will have its own rules on which it makes final PP determinations, based in part by verifiable weather data.

MPCI and RA includes 60% of the purchased guarantee as standard PP coverage. Growers can “buy up” and purchase 65% or 70% of the guarantee as a prevented planting guarantee. Growers needed to purchase the higher prevented planting guarantee before the end of sign-up, which is March 15.

Growers should evaluate PP coverage offered by MPCI compared to revenue products such as RA and Crop Revenue Coverage (CRC), which is offered for a number of primary field crops.  A higher price election for MPCI may result in a larger PP payment than a revenue product with a lower price election.

KSU’s Art Barnaby points out that in order to be eligible for PP payments, growers will need to meet the 20/20 rule.  This means growers would need to have the lesser of 20% of the insurance unit prevented from planting or 20 acres.  It also has to be clear that the grower was prevented from planting and simply did not make the choice not to plant.  If the surrounding area is planted but an individual grower failed to plant, that grower may not be eligible for a PP payment.  “It really depends on why the grower did not plant the crop,” he says. 

Barnaby also points out that there is a limit on the number of years a grower can claim PP payments on the same acre.  Growers should check with their agents to determine the underwriting rules that affect their situation.