RISK MANAGEMENT AGENCY
United States Department of Agriculture
Federal Crop Insurance Program
Financial Management Training U. S. Department of Agriculture June 10, 2008
Margo E. Erny Chief Financial Officer USDA Risk Management Agency Federal Crop Insurance Corporation
Federal Crop Insurance
• Program Overview • Program Growth – Participation, Loss Ratio, Premium • Crop Insurance Delivery • Government Reinsurance • Priorities and Recent Activities • New Farm Bill
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Program Overview
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How U.S. Crop Insurance Works
• Annual enrollment prior to planting • Coverage based on
– Recent yield history – Price forecasts – Futures contracts
• Multiple-peril insurance, revenue and index based plans • Premium rates based on coverage and risk • Indemnity paid if index is triggered or the yield and/or revenue at end of season is below guarantee
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The Birth of Federal Crop Insurance
The Agricultural Adjustment Act of 1938
"It is the purpose of this title to promote the national welfare by improving the economic stability of agriculture through a sound system of crop insurance and providing the means for research and experience helpful in devising and establishing such insurance."
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Federal Crop Insurance Corporation (FCIC)
• • FCIC is USDA’s crop insurance company The management of the FCIC is vested in a Board of Directors (Board)
The Board consists of: • • • • • Undersecretary of Farm and Foreign Agriculture Service (FFAS) - Dr. Mark Keenum USDA Chief Economist - Joseph Glauber FCIC Manager (non-voting) - Eldon Gould FCIC Associate Manager (non-voting) – James Callan Four farmers, one of whom grows specialty crops
– – – – Frank Bedford Jones, Jr. Timothy M. Kelleher Luis Monterde Curt Sindergard
• •
An individual involved in insurance (often an agent), Willard Dean (Bill) Classen An individual knowledgeable about reinsurance or regulation, Mike Pickens
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Risk Management Agency
• RMA is the USDA agency that supervises and administers the day to day activities of FCIC • RMA’s key functions
– – – – – Underwriting – policy design and maintenance Program rules and regulations Premium rates and crop price elections Data collection, auditing, and management Payment of reinsured companies’ reinsured losses and Administrative and Operating (A&O) expenses – Auditing and oversight of finances and market-behavior
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Program Growth Participation, Loss Ratio, Premium
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Program Growth Participation By Crop
2007 Crop Ranking by Liability Crop Corn Soybeans Wheat Nursery (FG&C) Cotton FL Fruit Trees Liability ($ Mil.) $31,256 $11,440 $5,364 $4,019 $1,990 $1,175 % of Total 46.8% 17.1% 8.0% 6.0% 3.0% 1.8%
Potatoes
Grain Sorghum All Others Total
$842
$760 $9,983 $66,830
1.3%
1.1% 14.9% 100.0%
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Program Growth FCIC Loss Experience, 1981-2007
3.00 2.50 2.00 1.50 1.00 0.50 0.00
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
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2007
Program Growth Total Premium by Crop, 2007
Others Corn Wheat (Maize)
Soybeans
Total premium = $6.56 billion.
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Crop Insurance Delivery
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How Crop Insurance Is Delivered
• Policies sold and serviced by private insurance companies
– Insurance agents paid sales commissions by company – Loss adjusters employed by company
• Administrative and operating subsidy paid to companies
– Because premium reflects risk only, no overhead costs – Based on total premium sold by company – Rate varies by type of insurance
• Government provides first level of reinsurance
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Subsidy Paid to Companies for Crop Insurance Delivery
1400 1200 50% 40% 30% 20% 10% 0%
19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07
1000 800 600 400 200 0
19 95
A & O Subsidy
Percent of Premium
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Percent of Premium
Million Dollars
Government Reinsurance
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Standard Reinsurance Agreement
• Annual agreement specifying risk sharing between companies and government
– Also specifies administrative and operating subsidy rates – Last negotiated - 2005
• Companies designate crop insurance policies to reinsurance funds
– Different level of risk in each fund
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Priorities and Recent Activities
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FCIC Board and RMA Priorities
– Prioritize and monitor product development initiatives – Balance program initiatives with agency IT capacity – Simplify and streamline where practical & appropriate – Combat and prevent fraud, waste and abuse through technology and strategic compliance initiatives
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Recent Activities
• New Products
– – – – – Apiculture (Vegetative and Rainfall) Biotech Yield Endorsement LGM Dairy Processing Pumpkins GRP Sugarcane Declining Yield Proposal Status – LRP Lamb
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New Farm Bill
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Crop Insurance Provisions in the Farm Bill
• A&O reduced by 2.3 percentage points with 50% snap back in states with a loss ratio over 1.2 • CAT fees raised to $300 • Target loss ratio reduced from 1.075 to 1.0 • Renegotiation of SRA by 2011 reinsurance year • Authorizes funding for IT and data mining
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Summary
• Variety of insurance plans and coverage levels • Premium subsidies--insurance participation • Private sector delivery of crop insurance
– Administrative and operating subsidies – Reinsurance
• Approval of new products and technologies • Program expansion
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For More Information
Margo E. Erny (202) 720-4877 margo.erny@rma.usda.gov
RMA website: www.rma.usda.gov
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