HD21 - The Availability and Affordability of Diversification Crop Insurance
Executive Summary: The State Corporation Commission's Bureau of Insurance (Bureau) was requested by the 1992 General Assembly, pursuant to House Joint Resolution No. 70, to study the availability and affordability of diversification crop insurance. The study resolution stated that increased knowledge of the availability and affordability of multiple peril crop insurance might assist farmers obtaining this type of protection for their crops. The Bureau was asked to consider private company policies reinsured by the Federal Crop Insurance Corporation (FCIC) as well as government policies sold directly through the FCIC. The Bureau sent surveys to the insurance companies that had premiums written in Virginia for multiple peril crop insurance during 1991. Surveys were also sent to the Federal Crop Insurance Corporation, the U.S. Agricultural Stabilization and Conservation Service (ASCS), the Virginia Department of Agriculture and Consumer Service, and several agents' associations and crop insurance service organizations. Multiple peril (multi-peril) crop insurance can be written directly through the FCIC or through policies which are written by private insurers and reinsured by the FCIC. Coverage under a multi-peril policy is generally written on an "all-risk" basis, meaning that coverage is provided for all risks except those specifically excluded. Rates and coverages are the same whether directly insured or reinsured by the FCIC. However, rates and coverages vary by crop. Under the FCIC program, coverage is only available for certain crops in select counties. Insurance is not provided on any agricultural commodity in any county in which the income from the commodity constitutes an unimportant part of the total agricultural income of the county. The FCIC has specific guidelines to determine whether a crop may be insured under the program. These are as follows: (1) Significant grower interest -- there must be an indication that producers are interested in growing the crop; (2) Economic significance -- demonstration of the economic importance of the crop is required; (3) Actuarial data sufficiency -- sufficient historical yield data must be available on the crop's production to determine adequate rates; and (4) Acceptable risk profile -- this reduces the risk of the federal government bearing the costs for unavoidable crop failures. The FCIC has recently created a research unit to study the expansion of the crop program to include more crops and counties under the program. Most of the companies that write multi-peril crop insurance in Virginia stated that they would be supportive of such an expansion if adequate premium volume were generated and adequate rates were charged to ensure the actuarial soundness of the program. About half of the survey respondents indicated that the availability of multi-peril crop insurance would be improved if the federal program covered more crops. However, the ASCS reported that the availability of multi-peril coverage does not directly impact a farmer's decision to diversify since most diversification is done on a small scale. One respondent indicated that the affordability of coverage for additional crops insured or reinsured by the FCIC would depend on the rates developed for a particular county and crop. Others said affordability would not necessarily improve if new crops were added to the program. The availability of multi-peril insurance coverage for crops which are currently insurable under the federal program does not appear to be a problem for farmers in Virginia. Most companies that write multi-peril crop insurance in Virginia indicated they insure all crops for which coverage is available under the federal program, and unless there is a history of payment problems, farmers are not refused coverage. The affordability of coverage under the current FCIC program does not appear to be a problem either. The rates for crops covered under the FCIC program are subsidized by as much as 30 percent and are considered affordable by most growers according to the Virginia Department of Agriculture and Consumer Services. According to the survey respondents, one of the biggest problems with the FCIC's insurance program appears to be the complexity of the administrative procedures involved in obtaining the insurance rather than the availability or affordability of the insurance. Another problem cited on the surveys was that many farmers are reluctant to participate in the program because disaster relief measures are often enacted by Congress on an ad hoc basis. It was also suggested that the program lacks accountability. A study conducted by the U.S. General Accounting Office (GAO) in 1991 stated that excessive losses were being paid which could lead to morale hazards (i.e., circumstances which increase the likelihood of loss due to indifference on the part of the insured). One survey respondent suggested that the program tends to encourage adverse selection because farmers with good loss experience often choose not to participate. The Virginia Department of Agriculture and Consumer Services stated that the expansion of the FCIC crop insurance program would encourage greater crop diversification which, in turn, would improve the economy of Virginia. If the farmers of Virginia feel that, in order to encourage further crop diversification, the federal program should be expanded to provide coverage for crops not currently insured by the FCIC, a request should be made on their behalf by the Virginia Department of Agriculture and Consumer Services with the necessary data to support the need for program expansion. The Commonwealth of Virginia may also wish to consider the possibility of establishing a state-funded program to subsidize farmers who purchase privately insured crop-hail policies for crops which cannot be insured by the FCIC. Such a program could be set up to promote crop diversification by providing a subsidy to farmers who grow crops which are considered important to the economy of Virginia. |
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