Crop Insurance Today Third Quarter 2022 - 7

Targeting
Specific Perils
in a recent study (Stigler and Lobell 2020). It is
not known whether area plans or index plans are
more prone to this bias. Perception issues may
arise because of other producers impacting area
plan results versus the purely weather-related
factors in index plans. Area plans may be better
at tracking a producer's production in counties
where both types of plans are available.
The participants in area plan programs have
been required to report their acreage and production
data since 2011. The 2018 Farm Bill encouraged
the use of Risk Management Agency
(RMA) data instead of National Agricultural
Statistics Service (NASS) data for the ARC program.
As such, transaction costs with area plans
increased relative to individual plans. From a
farmer's point of view, there is no operational
advantage of selecting an ARPI policy as far as
production or acreage reporting is concerned.
For PRF-RI, farmers only need to report acreage
data as production is difficult to measure. In
the case of HIP-WI, the production and acreage
data are already reported with the underlying
individual policy. This approach provides a
small advantage in that if a county loss triggers
but the underlying individual coverage does
not, farmers don't need to file a notice of loss
and no loss adjustment is needed.
What is a Proper Role
for Area or Index
Based Plans?
Some theoretical perspectives can be helpful
in evaluating the policy implications of some of
the new product introductions. A theoretical
study of farmers' optimal coverage choices (Bulut,
Collins, and Zacharias 2012) shows that once
area plans are underpriced (i.e., subsidized more)
relative to individual plans, producers would
start to substitute a portion of individual coverage
with area coverage, but that would amount
to distorting the optimal choice as to risk minimization
(via risk transfer). A version of this
can be seen at play with the introduction of SCO
or STAX. The policy intent appeared to induce
higher participation in regions where producers
typically purchase lower coverage levels. A simulation-based
study of farmers' optimal coverage
choices (Bulut and Collins 2014) finds that
SCO or STAX typically reduces demand for crop
insurance coverage at higher coverage levels.
When the area coverage for supplemental products
overlaps with those for individual coverage,
farmers are left with trading higher subsidy rates
6 The state-regulated private Crop-Hail products (such as standard hail policy, companion plan, and production plan)
are also used towards protecting the deductible with the underlying MPCI coverage (Bulut 2020). These products
protect against damages primarily due to hail and various other named perils such as wind.
7
A caveat here is that ECO and HIP-WI cannot be purchased on the same crop in the same crop year.
for SCO or STAX (at high coverage levels) against
better risk reduction that comes with individual
plans. The concern is whether supplemental area
plans set farmers up for " buyer's remorse. " In catastrophic
years, producers may find themselves
surprised with larger revenue losses than expected,
and that could also lead farmers to criticize
crop insurance, ironically not for a program failure,
but as a result of their own choice.
Similarly, in the case of HIP-WI, by offering
a single peril insurance product, RMA's intent
appears to be to cover a major peril that farmers
care about the most at a price that is relatively
cheaper than individual MPCI coverage options.
This solution was intended for the Southeastern
region where lower coverage levels for individual
plans had been the predominant choice. HIP-WI
may be utilized even when it overlaps with available
individual coverage, but the producer paid
premium per dollar of incremental liability for
HIP-WI is cheaper, although some behavioral
factors might favor the HIP-WI option.
It is possible for some area or index-based
plans to cover deductibles beyond the maximum
coverage levels that individual plans can cover.6
As ECO and HIP-WI are available for 31 and 70
crops, respectively, they have some potential for
such coverage.7
A producer can protect up to 95
percent of the expected crop value, after combining
the 85 percent individual coverage with ECO
(while the gap in coverage between 85 percent
and 86 percent can be filled by SCO) or HIP-WI.
One thing to note is that ECO coverage com7
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Crop Insurance Today Third Quarter 2022

Table of Contents for the Digital Edition of Crop Insurance Today Third Quarter 2022