The most used crop insurance product

By Gary SchnitkeyNick Paulson, and Krista Swanson, Department of Agricultural and Consumer Economics at University of Illinois and Carl Zulauf, Department of Agricultural, Environmental and Development Economics at Ohio State University

There has been a great deal of innovation in the crop insurance industry since the early 1990s. New products have been introduced, subsidy rates have been increased, and farmers have increased crop insurance use. We summarize trends in crop insurance use for corn, soybeans, and wheat in Illinois with a focus on the multi-peril products that are Federally subsidized and administered through the Risk Management Agency (RMA). In Illinois, over 85% of the corn and soybean acres are insured in recent years. The most popular product is Revenue Protection (RP), a revenue product with a guarantee increase.

Crop Insurance Plans Available for Multi-peril Coverage

In 2011, RMA introduced the COMBO product, which consolidated predecessor plans for providing crop insurance based on farm yields. The COMBO product provides three plans differing in the type of insurance provided:

  1. Revenue Protection (RP) provides revenue insurance that allows the guarantee to increase during years when prices at harvest (i.e., harvest prices) are higher than those used to set guarantees prior to planting (i.e., projected prices).
  2. RP with the harvest price exclusion (RP-HPE) also provides revenue protection, but the guarantee uses projected prices without the possibility of a guarantee increase.
  3. Yield Protection (YP) provides yield protection. If yields fall below a guarantee, YP will make payments.

In addition to the COMBO product, RMA also has products that make payments based on county-level yields. For these insurance products, yields on a farm do not matter. RMA administers area plans through the Area Risk Protection Insurance (ARPI) policy. Three plans of insurance mirror the COMBO plans:

  1. Area Revenue Protection (ARP) provides revenue protection with the possibility for a guarantee increase, similar to RP but using county yields.
  2. ARP with the harvest price exclusion (ARP-HPE) provides revenue protection without the possibility of a guarantee increase, similar to RP-HPE but using county yields.
  3. Area Yield Protection (AYP) provides yield protection similar to YP but using county yields.

In addition, to the COMBO and ARPI policies, Margin Protection (MP) was introduced in 2018. MP is a county-level product that provides margin protection with or without the harvest price exclusion. MP can be combined with RP and RP-HPE. 

Farmers have been offered a variety of crop insurance products and have overwhelmingly settled on RP — revenue coverage with a guarantee increase. In so doing, farmers have largely rejected county-level insurance as a method of providing a base level of protection. Farmers have also rejected revenue insurance without guarantee increases. Similarly, farmers have overwhelmingly moved from yield insurances to revenue insurances.

Moving forward, one can expect farmers to continue to purchase RP. RP is likely preferred over other products for two reasons. First, it offers farm-level protection rather than county-level protection. Not having the risk of a relatively good county-yield while the farm experiences a poor yield is a risk that farmers likely to do not want to incur.  Second, farmers prefer guarantee increases to those insurances without guarantee increases. The guarantee increase is useful in drought years like 2012 when harvest prices are higher than projected prices, resulting in much higher payments than products without a guarantee increase.

New crop insurances have been offered that can be used in conjunction with RP, which provide a higher band of coverage at a county-level. SCO has been available since 2015 but has had little use, possibly because of the PLC farm program requirement. Moreover, the band of coverage from 86% to the maximum RP coverage level of 85% likely has limited value. This year additional products offering county-level coverage will become available. It remains to be seen if farmers desire these products.

For more from FarmDoc Daily, visit farmdocdaily.illinois.edu.

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