The Potential for Scale and Sustainability in Weather Index Insurance

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CASE STUDY 7
RAINFALL AND VEGETATION INDEX INSURANCE PILOTS IN THE UNITED STATES
Principal stakeholders
The RMA 50 designed and owns the policies, sets premium rates, and administers the
subsidies of premium and delivery expenses. Private insurance companies 51 sell and
service the policies through agents. The Federal Crop Insurance Corporation (FCIC), which
is operated and managed by RMA, provides reinsurance to the insurance companies.
Delivery channels
For marketing purposes, and to make PRF-RI and PRF-VI more accessible to producers,
they were first introduced as part of the existing Group Risk Plan (GRP), but have now been
separated from it. 52
PRF-RI and PRF-VI insurance policies are sold to producers by crop insurance agents.
The vast majority of agents own their own company or work with a large multi-state crop
insurance agency. Agents are generally independent of the insurance companies that bear
the risk and that are authorized to issue policies. These companies sell all crop insurance
to farmers, not only GRP insurance. They bid for the insurance business of agents through
the commission rates they offer.
The crop insurance companies receive subsidies based on the amount of insurance they
sell, and they receive subsidized reinsurance. Crop insurance companies routinely
purchase private reinsurance for their entire crop insurance book of business, which
includes all index insurance policies.
Product information
Weather data and infrastructure
The rainfall index used by PRF-RI is based on weather data collected and maintained
by the National Oceanic and Atmospheric Administration’s Climate Prediction Center
(NOAA-CPC). 53 The rainfall index reflects a spatially smoothed prediction based on a grid
that reflects nearby weather station estimates.
As mentioned previously, the PRF-RI crop year begins on 1 February and operates on
a two-month index interval. The PRF-VI crop year begins on 1 April and operates on
a three-month index interval, with producers choosing at least one three-month interval.
The intervals represent mini-insurance periods.
50 www.rma.usda.gov/.
51 List of private insurance companies, www3.rma.usda.gov/tools/agents/companies/.
52 Group Risk Plan insurance is a risk-management tool to insure against widespread loss of production. This plan
is based on expected yield in the county, rather than on individual farm yield. The GRP was developed on the
assumption that when an entire county’s crop yield is low, most farmers in that county will also have low yields.
GRP coverage is available for many primary crops in major production areas throughout the country. Producers
choose one coverage level for each crop and county combination. They then select the dollar amount of
protection per acre and one of the five coverage levels (70, 75, 80, 85 or 90 per cent) of the FCIC expected
county yield. Indemnities are paid when yield for the county, determined by the National Agricultural Statistics
Service, falls below the ‘trigger’ yield. The expected county yield is multiplied by the selected coverage level.
Indemnity payments are made about six months after harvest of the crop, www.rma.usda.gov/policies/.
53 www.cpc.noaa.gov/index.php.