How the Program Works
The Crop Insurance Contract
A crop insurance contract is a commitment between insured farmers and their insurance providers. Either party has the right to cancel or terminate the contract at the end of each crop year. Unless the contract is canceled, it is normally automatically renewed the next year.
Under the contract, the insured farmer agrees to insure all the eligible acreage of a crop planted in a particular county. This choice is made county by county and crop by crop. All eligible acreage must be insured to reduce the potential for adverse selection against the insurance provider. Adverse selection generally exists whenever the insured person has better knowledge of the relative riskiness of a particular situation than the insurance provider does.
The insurance provider agrees to indemnify (that is, to protect) the insured farmer against losses that occur during the crop year. In most cases, the insurance covers loss of yield exceeding a deductible amount. Losses must be due to unavoidable perils beyond the farmer's control.
Over the last few years, products that combine yield and price coverage have been introduced. These products cover loss in value due to a change in market price during the insurance period, in addition to the perils covered by the standard loss of yield coverage.
Crop insurance policies also typically indemnify the insured person for other adverse events, such as the inability to plant or excessive loss of quality due to adverse weather. The nature and scope of this "helper" coverage vary depending on the crop. This is because of the differences in crops individual natures.
Publication of Policies
Crop insurance contracts developed by FCIC are published in the Code of Federal Regulations (CFR). Policies may also be developed by commercial, private sector insurance providers. If approved by FCIC, privately developed policies may replace or supplement the policies developed by FCIC. However, these policies are not published as regulations. Instead, a notice of availability is published in the CFR.
Government and Private Sector Roles
FCIC's mission is to encourage the sale of crop insurance—through licensed private agents and brokers—to the maximum extent possible. FCIC also provides reinsurance (subsidy) to approved commercial insurers which insure agricultural commodities using FCIC-approved acceptable plans. Since 1998, the private insurance companies reinsured by FCIC have sold and serviced all Multiple Peril Crop Insurance authorized under the Federal Crop Insurance Act.
Since there is both public and private sector involvement in the crop insurance program, these relationships result:
- A contract of insurance exists between insured farmers and their commercial insurance providers.
- Premium rates and insurance terms and conditions are established by FCIC for the products it develops, or established with FCIC approval for products developed by insurance providers.
- Reinsurance agreements (cooperative financial assistance arrangements) exist between FCIC and the commercial insurance providers.
The Yearly Insurance Cycle
RMA and insurance industry activities follow a timetable known as the insurance cycle. The cycle begins when RMA releases information about insurance products for the next crop year, and ends with changes to the program for the following year.