Crop Revenue Insurance Indemnities – What Types of Loss Are Being Covered?

Individual farm crop revenue insurance covers losses from low yield, prevented planting, and low price.  We assess the relative role of these three types of loss by examining the indemnities paid by revenue insurance to the 2011-2021 crops of corn, upland cotton, sorghum, soybeans, and wheat.

Yield loss, prevent plant, and price loss, respectively, accounted for 70%, 16%, and 14% of indemnities paid to these crops as a group.  Crop revenue insurance is thus predominately yield loss insurance.  Potential implications for crop insurance policy in light of recent disaster assistance legislation are discussed.

Background

Individual farm crop revenue insurance products are Revenue Protection (RP) and Revenue Protection – Harvest Price Exclusion (RP-HPE).  RP contains the Harvest Price Option (HPO) while RP-HPE does not have HPO.  HPO results in the insured liability being calculated using the higher of the projected or harvest insurance price.  RP and RP-HPE accounted for 91% of all indemnities paid to corn, upland cotton, sorghum, soybeans, and wheat over the 2011-2021 crop years, the years when RP and RP-HPE have been offered to farmers.

Procedures and Data

The “Cause of Loss” files maintained by RMA contain total and prevent plant indemnities paid by crop insurance product.  For a given crop insurance product, subtracting prevent plant indemnities from total indemnities gives non-prevent plant indemnities.  Non-prevent plant indemnities were divided into indemnities from yield loss and price loss as follows:

1. If insurance price increases, all indemnities are due to yield loss. Since the higher harvest price is used to value both the insured liability and the value of production at harvest, there is no price loss.  An indemnity can thus be collected only if yield loss exceeds the deductible.
2. If insurance price declines, indemnities may be due to price or yield loss. The “Cause of Loss” files do not report indemnities by yield loss and price loss.  They must be estimated.
3. Yield loss indemnities from steps 1 and 2 were summed together.

Because of step 2, the calculations provide only an indication of indemnities due to price and yield loss.  The share due to these two losses is thus less precise than the share due to prevent plant.

Indemnities by Loss Type

Yield loss accounted for well over half of revenue insurance indemnities for each crop, ranging from 64% (corn) to 83% (sorghum) (see Figure 1).  The share due to price loss ranged from 11% (sorghum, soybeans, wheat) to 17% (corn) while the share due to prevent plant ranged from 4% (upland cotton) to 20% (soybeans).  Price loss share varied the least as the shares for yield loss and prevent plant were inversely related.  For example, corn and soybeans have the smallest yield loss share and largest prevent plant share.

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Summary Observations

The current individual farm crop revenue insurance products are predominately yield loss insurance.  Yield loss accounted for 70% of all indemnities paid by revenue insurance to corn, upland cotton, sorghum, soybeans, and wheat over the years the current revenue products have been offered.

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More broadly, the current individual farm crop revenue insurance products are production loss insurance.  Yield loss plus prevent plant accounted for 86% of revenue indemnities to the five crops.

Yield loss and prevent plant were two of the losses addressed by the two most recent disaster assistance programs.  From this perspective, crop revenue insurance can also be viewed as largely being a standing disaster assistance program.

The increase in assistance for prevent plant and disaster assistance provided by Congress in the two recent disaster assistance programs suggests that Congress may view crop insurance as providing inadequate coverage of yield loss and prevent plant.

Increasing yield loss and prevent plant coverage requires budgetary funds.  Sources of funds are new budget authority or reassignment of existing budget authority.  The latter could involve focusing crop insurance on production losses.  This focus would free up the 14% share of premium subsidies now devoted to covering price loss to fund a higher subsidy for yield loss and prevent plant.

Consideration of such a reassignment of existing budget authority would in essence ask farmers if they prefer assistance for price loss or increased assistance for yield loss and production loss.

Carl Zulauf, Krista Swanson, Gary Schnitkey, and Nick Paulson