In the United States, multiple peril yield and revenue insurance products are offered through the Federal Crop Insurance Program (FCIP), a public/private partnership between the federal government and various private sector insurance companies. tte program seeks to address both social welfare and economic efficiency objectives. With regard to social welfare, private companies selling federal crop insurance policies may not refuse to sell to any eligible farmer, regardless of past loss history. At the same time, the program aims to be actuarially sound. Policies are available for over one hundred commodities but in 2004 just four crops-corn, soybeans, wheat, and cotton-accounted for approximately 79 percent of the USS4 billion in total premiums. Excluding pasture, rangeland, and forage, approximately
72 percent of the national crop acreage is currently insured under the FCIP. About
73 percent of total premiums are for revenue insurance policies, while 25 percent are for yield insurance policies.
Most FCIP policies trigger indemnities at the farm, or even sub-farm, level. Yield insurance offers are based on a rolling four-to-ten-year average yield, known as the actual production history (APH) yield, tte federal government provides farmers with a base catastrophic yield insurance policy, free of any premium costs. Farmers may then choose to purchase, at federally subsidized prices, additional insurance coverage beyond the catastrophic level, ttis additional coverage, often called "buy-up" coverage, may be either yield or revenue insurance. Farm-level revenue insurance offers are based on the product of the APH yield and a price index that reflects national price movements for the particular commodity. For some crops and regions, defined along county barriers, area yield and/or area revenue buy-up insurance policies are offered through FCIP. On a per acre insured basis, area-level insurance products tend to be less expensive than farm-level insurance products, ttus, in 2004, area yield and area revenue policies accounted for 7.4 percent of total acreage insured but less than 3 percent of total premiums.
tte U.S. government also provides a reinsurance mechanism that allows insurance companies to determine (within certain bounds) which policies they will retain and which they will cede to the government, ttis arrangement is referred to as the standard reinsurance agreement (SRA). tte SRA is quite complex, with both quota share reinsurance and stop losses by state and insurance pools; however, in essence, it allows the private insurance companies to adversely select against the government, ttis is considered necessary since the companies do not establish premium rates or underwriting guidelines but are required to sell policies to all eligible farmers, tte federal costs associated with the U.S. program have four components.
1) Federal premium subsidies range from 100 percent of total premium for catastrophic (CAT) policies to 38 percent of premium for buy-up policies at the highest coverage levels. Across all FCIP products and coverage levels, the average premium subsidy in 2004 was 59 percent of total premiums.
2) tte federal government reimburses administrative and operating expenses for private insurance companies that sell and service FCIP policies, ttis reimbursement is approximately 22 percent of total premiums.
3) tte SRA has an embedded federal subsidy with an expected value of about 14 percent of total premiums.
4) tte program, by law, can be considered actuarially sound at a loss ratio of 1.075. ttis implies an additional federal subsidy of 7.5 percent of total premiums. On average, the federal government pays approximately 70 percent of the total cost for the FCIP - farmer-paid premiums accounting for the remaining 30 percent. While the direct farmer subsidyvaries by coverage level, the United States has consistently passed legislation increasing the subsidy level to farmers for crop and revenue insurance products, tte rate of subsidy is one component that has influenced the growth in overall premium, tte growth in premium subsidy is greater than the growth in farmer-paid premiums, tte rate of subsidy increased in 1995 and 2001.
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