Crop Insurance Marketing is Service Competition
January 9th, 2007 by David Graves
There has been no shortage of competition in the marketplace among the companies approved by the Department of Agriculture to sell and service crop insurance policies. These companies are known as Approved Insurance Providers (AIP). However, the competition is based on service to farmers. The Risk Management Agency (RMA) of the Department of Agriculture determines premium rates and competition among AIPs is about being of service to farmers in their purchase and use of federal crop insurance as a risk management tool. Competition has not been about price and price-related factors, including discounts, rebates and dividends, for a very good reason—price is a market-based term and the market did not give birth to the modern crop insurance program. The modern crop insurance program is a creation of Congress, making it a federal program with public policy goals and objectives. The non-price competition feature is a major contributor to the fulfillment of these goals and objectives. This feature also serves an important role in building farmer confidence in the value and objectivity of the private sector delivery system.
Your comments are welcome.
Travis Says
The Federal Crop Insurance Program is working very well in rural America. I see there is competition, but I would like to know who has the liability if indemnities have to be paid out. Is the money coming out of the crop insurance company’s back pocket or is it the Federal Crop Insurance Corporation’s money. What percentage is it if both have liability. Would appreciate some explanation if you could. Thanks!
Jan 14th, 2007 at 1:09 pm
David Graves Says
The federal government and the private sector share risk in the liabilities of the Federal Crop Insurance Program. The risk is shared under the terms and conditions set forth in the Standard Reinsurance Agreement (SRA) that all companies must sign to become an Approved Insurance Provider(AIP)for the program. There are separate SRAs governing crop and livestock liabilities.
Risk sharing between companies and the federal govenment is calculated using fairly complex formulas to account for all of the differences that can exist between companies, including amount of capital and risk profile. Thus, the sharing of risk with the federal government can and usually does vary by company. Generally, at the national level, companies are retaining around 80% of the program’s premiums and associated liabilities. For example, in 2006, companies retained 78.9% of premium and 84% of liability. The Risk Management Agency(RMA)of the Department of Agriculture (USDA), which manages the Federal Crop Insurance Program, provides a report generator on its website that will show how much is shared by year and by state.
The sharing of indemnity payments is further filtered through operation of risk management pools (currently there are three: assigned risk, developmental, and commercial) to determine the ultimate sharing of losses for a given year. Generally, sharing of risk is aggregated at the state and company level because not all companies operate in every state. The pools and the formulas for risk sharing can be found in the SRA.
Indemnity payments are paid to insureds by the AIPs (the insurance companies)and the Federal Crop Insurance Corporation(FCIC)(the government) reimburses a portion of these payments based on the risk sharing formulas. Therefore, the money that an insured receives as an indemnity is actually a combination of both Federal and private and the percentages vary by year and state depending on the severity and level of losses in a particular year.
I hope this information is helpful.
Jan 18th, 2007 at 11:07 am