Crop revenue insurance has swept across corn and soybean country since debuting 10 years ago. According to the Risk Management Agency (RMA), more than 75% of insured corn and soybean acres are covered by some form of revenue insurance.
There's no question farmers have become convinced of the value of crop revenue insurance products. However, in the past few years the product of choice seems to depend upon which side of the Mississippi a farm is located.
East of the river, farmers opt more for group insurance products, like Group Risk Income Protection (GRIP). But in the west the overwhelming choice is multi-peril coverage, such as Revenue Assurance (RA) and Crop Revenue Coverage (CRC).
For example, nearly 37% of Illinois insured corn acres and more than half of premiums went to GRIP in 2006. Meanwhile, only 7% of Iowa insured acres were covered by GRIP, while 54% of acres were covered by RA. In states further north and west the differences are even more striking.
GRIP was introduced in 1999 in both Iowa and Illinois, so why has it caught on so widely in one state, but not the other?
The difference in crop revenue insurance product use prompts a number of questions, so The Corn And Soybean Digest turned to experts in each state for answers.
GRIP is relatively new and not yet widely understood, says University of Illinois professor Gary Schnitkey. Outside of Illinois, Iowa and Indiana, most farmers have only had access to GRIP since 2004.
In the “I” states, much of the difference in adoption can be directly attributed to marketing, says Bruce Babcock, Director of the Center for Agricultural and Rural Development at Iowa State University. Several companies have heavily promoted GRIP in Indiana and Illinois, but that promotion has been less evident in Iowa.
Schnitkey says companies stand to make more on a per-acre basis by aggressively selling CRC and RA, but he believes they're being aggressive and getting more acres by using the GRIP products.
In addition, under GRIP, farmers tend to buy more coverage, so there's more premium collected and potentially more commission for the agent.
According to Bob Dewey of Country Insurance and Financial Services, education has been key to getting farmers interested in GRIP in Illinois. However, what's kept farmers interested in GRIP, he says, “is its record of higher loss payouts for many counties.”
Babcock says that a measure of premiums collected to premiums paid shows that CRC and RA have not matched up well compared to GRIP in recent years.
Schnitkey agrees, “Loss ratios for RA and CRC are very low in the ‘I’ states, so farmers are in essence paying more for those products. The same is not true for GRIP.”
A large reason why GRIP has been a better value in many areas, experts say, is because it has a higher subsidy.
Another reason more premium is returned under GRIP is because it has a built-in yield advantage, Schnitkey says. The yield guarantee for GRIP is based on a trend yield, while products that use Actual Production History (APH) are based on several years of data.
With new hybrids and improved production techniques, yields have trended higher for years. In addition, this trend-yield calculation isn't thrown off by one or two poor production years as will happen with APH yields.
Babcock believes GRIP acres will increase substantially this year, especially for corn, but farmers may be in for sticker shock on all crop insurance products. He explains that corn prices 40% above last year translate into a 40% increase in premiums.
Still, Schnitkey and others believe farmers should not scale back coverage to save dollars. By using revenue insurance farmers will be able to lock in revenue not seen in many years. “With these high prices you can lock in a good profit if you don't reduce coverage,” he adds. For example, if corn is $3.20/bu., and a farmer uses 85% coverage with RA or CRC, he's guaranteed $2.72/bu.
To illustrate the revenues GRIP may create with high prices and expected county yield, Babcock relates an example of how revenue on corn acreage could reach more than $1,000/acre:
- Expected county yield = 173.4 bu./acre
- CBOT corn price = $3.50/bu.
- Expected county revenue = $606.90/acre
- Maximum selected insurance liability (150% of expected revenue) = $910.35
A farmer buys GRIP with the harvest revenue option and drought hits. County yields fall to 45 bu./acre, and prices soar to $5.50/bu.
At 90% coverage, this equals a loss of 71.1%. Liability jumps to 1.5 (150%) x 173.4 bu/acre × $5.50/bu = $1,430.55/acre and a final indemnity to the farmer of $1,018.05/acre.
(NOTE: In this example the farmer would realize an additional $247.50/acre by selling the 45-bu. crop. However, there also may be losses if forward contracting had been done.)
Farmer-Agent: A Vision For Crop Insurance
In 2001, Rob Heyen had just written a $20,000 check for crop insurance for his farm, but when he left his agent's office he still wasn't sure of the value of what he had just purchased.
“Crop insurance is my only input that guarantees me revenue, and I was throwing a dart in the dark,” he says, explaining how he selected the type of coverage for his farm. Later that year, the fourth-generation farmer decided to pursue an agent's license of his own.
Since then his insurance agency has grown rapidly. He attributes his success to a philosophy that when farmers sell to farmers they can better relate to the client. He now has 12 subagents. He sold some of the first Group Risk Income Protection (GRIP) policies for corn in Nebraska; and his clients are in eight states.
Though Heyen is located in Nebraska, which has minimal acres covered by GRIP, he believes in the future of this type of crop insurance. All of his 900 acres of corn and soybeans are covered by GRIP, which he refers to as “area coverage.”
“I like the idea of basing my protection upon what happens to the crops in my area,” he says. He explains that GRIP has low overhead due to low adjusting costs and to the virtual elimination of waste, fraud and abuse. “This returns more premium dollars to the producer,” he adds.
Heyen sells many Crop Revenue Coverage and Revenue Assurance policies as well, and he says there's no question these are good products. Still, he believes the best deal for farmers and the government in the future may be with products like GRIP and relatively new whole-farm products like Adusted Gross Revenue (AGR) Lite.
“I wouldn't mind seeing area coverage products be the subsidized tool (government-backed), and then let private companies come out with individual products to cover specific concerns (such as hail, prevented planting and replanting insurance),” he says.
A sidebar to this discussion may be AGR-Lite, Heyen adds. AGR-Lite could act as an umbrella policy, protecting against farm-specific losses, while the GRIP policies serve as the primary income coverage for each crop.
For more information about Heyen and his agency, access his Web site at www.Cropinsurancesolutions.com.
Is GRIP Right For Your Operation?
Rob Heyen, a farmer and insurance agent near Milford, NE, expects GRIP to catch on rapidly in other states in short order. Still, there are a number of factors that will influence final purchase decisions.
Bob Dewey, Country Insurance and Financial Services, recommends University of Illinois Web site tools (www.farmdoc.uiuc.edu) that help farmers review each insurance program based on individual county results. This site covers scenarios for states other than Illinois.
Here's a list of GRIP facts and tips from insurance experts and the Risk Management Agency.
GRIP is less susceptible to waste, fraud and abuse than other insurance products, so it has the highest trigger level available — 90%. Also, farmers can select an amount of insurance up to 150% of expected county revenue.
55% of the GRIP premium is subsidized at the 90% level vs. a 38% subsidy for RA at 85% coverage.
GRIP often won't cover for events that cause isolated losses, such as hail or prevented planting. This may rule out GRIP for some operations.
There is no claims adjustment process under GRIP as there is under an individual policy.
High coverage levels can mean high premiums. Still, experts advise a high coverage level is necessary with GRIP to make up for yield differences between individual operations and the county average.
GRIP works best in counties with low yield variability; with farmers who have operations throughout a county; and with farms that track or typically exceed the county average.
It's possible to suffer a significant loss and receive no payment under GRIP. It's also true that a payment may occur even with no loss.
Increasing yields have raised many GRIP county averages. As a result, farmers who cash rent new ground may consider GRIP instead of waiting for individual program APH yield development.