Crop Insurance Today Third Quarter 2022 - 5

C r o p I n s u r a n c e
today
By Dr. Harun Bulut, NCIS
Introduction
Over the last decade, there have been
considerable developments in the space of
area-based or parametric (index-based) Federal
crop insurance products. As a result, the
respective market shares of area-based and
index-based products approached five percent
and 10 percent of the standard book of
Table 1
AREA-BASED PLANS OF INSURANCE
ARPI
SCO
ECO
STAX
MP
Premium Volume by Area or Index Based Products in 2021
PREMIUM (million $s)
Area Risk Protection Insurance
Supplemental Coverage Option
Enhanced Coverage Option
Stacked Income Protection
Margin Protection
Total for the Area-Based Products
As a Share of the Standard Book of Business
INDEX-BASED PLANS OF INSURANCE
HIP-WI
PRF-RI
Total for the Index-Based Products
As a Share of the Standard Book of Business
AREA-BASED LIVESTOCK PLAN OF INSURANCE
DRP
Dairy Revenue Protection
As a Share of the Livestock Book of Business
Hurricane Insurance Protection: Wind Index
Pasture, Rangeland, Forage: Rainfall Index
58.7
234.2
221.4
85.9
68.5
668.70
4.88%
PREMIUM (million $s)
191.0
1,084.0
1,275.0
9.30%
PREMIUM (million $s)
398.6
69.6%
Note. The standard book of business premium stood at $13,714.9 million, while the livestock book of business premium was $572.7 million in 2021.
Data is current as of February 22, 2022.
business (multi-peril crop insurance, MPCI)
premium in 2021. This article provides a brief
review of these products in association with the
overall book of business-which has been predominantly
individual coverage. The objective
of the article is to clarify the roles of area or
index-based plans within the Federal crop insurance
portfolio.
The State of the
Area or Index Based
Insurance Plans
The full list of specific products that fall under
either the area or index-based plan categories,
along with their premiums in 2021, are presented
in Table 1. Area-based plans are viewed as conceptually
distinct from index-based products: the
former measure production (a direct measure)
while the latter measure some exogenous factors
that influence production (an indirect measure).
This approach somewhat differs from the literature
in that both categories are treated as index
products: one based on the yield and the other on
the weather (Barnett 2004).
The traditional suite of area plans (commonly
known as Area Risk Protection Insurance, ARPI,
plans) triggers at the county level, protecting
against shortfalls in the expected yield or revenue.
Farmers have the option of scaling the county-level
liability up or down to align with their
risk management needs. These products are designed
to work separately from individual plans,
and farmers must choose between the two types
of plans. The premium volume associated with
ARPI plans stood at $58.7 million in 2021.
The 2014 Farm Bill introduced additional
1 This article was presented at the 2022 Annual Meeting of the SCC-76 " Economics and Management of Risks
in Agriculture and Natural Resources " Research Group, Kansas City, MO, April 7-9, 2022. For more information,
visit https://www.agriskgroup.org/. The author acknowledges useful comments from Tom Zacharias, Troy Brady,
Jessica Trites Rolle, Dean Strasser, Tim Witt, and Matt South. The usual disclaimer applies.
2 The 2014 Farm Bill's requirement that producers who elected Agriculture Risk Coverage (ARC) program, which
is a free farm program at the county level, are ineligible for SCO might have influenced farmers' initial uptake
of SCO. SCO is available if the other farm program Price Loss Coverage (PLC), which also comes as free, is
elected. Under the 2018 Farm Bill, starting with the 2021 program year, farmers can switch between ARC and PLC
rather than committing to either program over the life of the farm bill as required in the 2014 Farm Bill. With this
additional flexibility, farmers may consider SCO whenever PLC arises as a better fit for their situations.
area-based supplemental revenue products: Supplemental
Coverage Option (SCO) and Stacked
Income Protection (STAX). In contrast to ARPI,
SCO supplements underlying individual crop
insurance policies and its coverage depends on
the underlying crop insurance plan and coverage.
SCO has a high subsidy rate of 65 percent,
which exceeds the subsidy rates on the highest
individual plan coverage levels. SCO saw a modest
uptake, claiming $234.2 million in premium
in 2021.2
Similarly, Stacked Income Protection
(STAX) was introduced for cotton producers
5
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Crop Insurance Today Third Quarter 2022

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