4 pp., 1 tableThe Income Protection program insures producers against lost income from reductions in yield or price. Examples guide the reader through the process of selecting coverage according to different pricing scenarios

Barnaby, G. A. Art

Outlaw, Joe

Stokes, Kenneth

Waller, Mark L.

Texas A&amp;M Repository

Income Protection (IP) InsuranceKenneth Stokes, G.A. “Art” Barnaby, Mark Waller and Joe Outlaw*The Income Protection (IP) program insures the producer against lost incomefrom reductions in yield or price. This policy pays when the harvested andappraised production to count, multiplied by the harvest price, are below the IPguarantee. The IP plan uses the Multiple Peril Crop Insurance (MPCI) policy for yields,loss adjustments, and other underwriting procedures. IP prices are based on theaverage of the daily futures market closing prices for the insured crop prior to thesales closing date and during harvest. IP uses the Group Risk Plan’s (GRP) countyyield index to adjust IP premium rates. The insurance is provided for an enter-prise unit that includes all acreage of the insured crop in the county in which theinsured has an interest. By combining MPCI and GRP components, IP forms astraightforward product for the protection of a percentage of revenue.      Crop Coverage: IP is a pilot crop insurance program available only for grain sorghum in allTexas counties and wheat in selected Kansas counties. How IP Works?The IP dollar guarantee per acre is calculated by multiplying the approved APHyield times the projected price times the selected coverage level. The approvedAPH yield is calculated at the enterprise level (all acreage of the crop in the coun-ty) using APH rules. The projected price is determined from the commodityfutures market contract prior to planting (as defined in the insurance policy).Coverage levels range from 50 to 75 percent for the IP policy.  Producers may elect the catastrophic protection level and pay no premium,only the $60 administrative fee. For 1999 and subsequent crop years, catastrophicrisk protection equals 27.5 percent of the approved yield times 100 percent of theprojected price.An insured’s total guaranteed dollar amount of protection is the net acres of theinsured crop (acres times share) in the county multiplied by the IP dollar guaran-tee per acre. Indemnities are due when the insured’s share of productionto count (harvested and appraised yields), multiplied by the harvestprice (as defined in the insurance policy), is less than the IP guar-antee. If the yield loss is offset by a price increase, or vice versa,no indemnity payment is made.  IP Projected and Harvest PricesIP’s projected price and harvest price for grain sorghum are 90 percent of the average of the daily futures market closingprices (Chicago Board of Trade) for corn contracts for a monthprior to planting and harvest, respectively. The actual CBOT con-tract and the projected and harvest price period depends upon thecounty’s sales closing date. RiskManagement Education™L-5299(RM4-9.0)5-99*Professor and Extension Economist, The Texas A&M University System; Extension Agricultural Economist,Kansas State University Agricultural Experiment Station and Cooperative Extension Service; Professor andExtension Economist, The Texas A&M University System; Assistant Professor and Extension Economist, TheTexas A&M University System.EXAMPLE 1: Harvest price is higher thanthe projected price, with a 57 percent pro-duction lossApproved APH yield = 70 bushels per acreCoverage level = 65%Share = 100%Projected price = $2.20 per bushelHarvest price = $3.00 per bushelProduction to count = 30 bushels per acreCrop value = Production to count x harvest price = $90.00 Revenue guarantee = Approved APH yield x coverage level x projected price x share = $100.10Revenue guarantee ($100.10) - crop value ($90.00) = IP indemnity ($10.10)In example 1, the large yield loss is partiallyoffset by the increased price at harvest. Theresulting crop value of $90 is still less than therevenue guarantee by $10.10, so an indemnitypayment is made to the producers.EXAMPLE 2: Harvest price is lower thanthe projected price, with a 34 percent pro-duction lossApproved APH yield = 70 bushels per acreCoverage level = 65%Share = 100%Projected price = $2.20 per bushelHarvest price = $1.35 per bushelProduction to count = 46 bushels per acreCrop value = Production to count x harvest price = $62.10Revenue guarantee = Approved APH yield x coverage level x projected price x share = $100.10Revenue guarantee ($100.10) - Crop value (62.10) = IP indemnity ($38.00)In example 2, a large drop in price combineswith a small production loss to produce a calcu-lated crop value of $62.10 and an IP indemnitypayment of $38 per acre.  Excluded EventsExclusions are the same as for the MPCI poli-cy. Coverage is not available for high-risk land. Rating and Producer SubsidyThe rating method for the Income Protectionprogram reflects historic yield variation andvariation in gross income caused by yield andprice movements during the crop year. The rat-ing model includes the correlation of nationalprices and county yields. Income Protection pre-mium rates are based upon the individual yielddata reported, the relationship of each of thoseyields to the county average for that year, andthe projected price level. Policyholders selecting coverage of 65 percentor more will receive a premium subsidy equal to75 percent of the premium for the 50 percentIncome Protection coverage. Insureds selectingless than 65 percent coverage will receive a sub-sidy equal to 60 percent of the premium for 50percent coverage. Because the subsidy is basedon the value of the 50 percent IncomeProtection premium, individual premium subsi-dies may be more or less than would be paid forAPH. On the average, the premium subsidy isexpected to be about the same as for APH.Important Facts   Farmers have accepted the Crop RevenueCoverage (CRC) concept more than the IncomeProtection plan. The IP plan guarantees rev-enues, as opposed to the yields backed by theCAT and MPCI. However, IP contains no featurefor increasing revenue coverage if pricesincrease, nor does it have provisions for basic oroptional units. These features make IP cheaperthan CRC, but mean that it is more difficult touse the insurance to protect forward contracts.One reason for the lower premium is theassumption of a negative price yield correlation,which, if perfectly negatively correlated, wouldmean there would never be a claim under IP.Only when the yield reaches zero does the IPplan outperform MPCI under these conditions.Sales CBOT corn Projected Harvestclosing date futures contract price period price periodJanuary 15 September December Aug 15 - Sept 14February 15 September January Aug 15 - Sept 14March 15 December February November1.5M, Reprint ECOPartial funding support has been provided by the Texas Wheat Producers Board, Texas Corn Producers Board,and the Texas Farm Bureau.Issued in furtherance of Cooperative Extension Work in Agriculture and Home Economics, Acts of Congress of May 8, 1914, as amended, andJune 30, 1914, in cooperation with the United States Department of Agriculture. Chester P. Fehlis, Deputy Director, Texas Agricultural ExtensionService, The Texas A&M University System.Educational programs of the Texas AgriLife Extension Service are open to all people without regard to race, color, sex, disability, religion, age, or national origin.Produced by AgriLife Communications and Marketing, The Texas A&M University SystemExtension publications can be found on the Web at: http://AgriLifeBookstore.org.Visit Texas AgriLife Extension Service at http://AgriLifeExtension.tamu.edu.

Income Protection (IP) Insurance

Texas A&M University

Income Protection (IP) Insurance
Kenneth Stokes, G.A. “Art” Barnaby, Mark Waller and Joe Outlaw*
The Income Protection (IP) program insures the producer against lost income
from reductions in yield or price. This policy pays when the harvested and
appraised production to count, multiplied by the harvest price, are below the IP
guarantee. 
The IP plan uses the Multiple Peril Crop Insurance (MPCI) policy for yields,
loss adjustments, and other underwriting procedures. IP prices are based on the
average of the daily futures market closing prices for the insured crop prior to the
sales closing date and during harvest. IP uses the Group Risk Plan’s (GRP) county
yield index to adjust IP premium rates. The insurance is provided for an enter-
prise unit that includes all acreage of the insured crop in the county in which the
insured has an interest. By combining MPCI and GRP components, IP forms a
straightforward product for the protection of a percentage of revenue.      
Crop Coverage: 
IP is a pilot crop insurance program available only for grain sorghum in all
Texas counties and wheat in selected Kansas counties. 
How IP Works?
The IP dollar guarantee per acre is calculated by multiplying the approved APH
yield times the projected price times the selected coverage level. The approved
APH yield is calculated at the enterprise level (all acreage of the crop in the coun-
ty) using APH rules. The projected price is determined from the commodity
futures market contract prior to planting (as defined in the insurance policy).
Coverage levels range from 50 to 75 percent for the IP policy.  
Producers may elect the catastrophic protection level and pay no premium,
only the $60 administrative fee. For 1999 and subsequent crop years, catastrophic
risk protection equals 27.5 percent of the approved yield times 100 percent of the
projected price.
An insured’s total guaranteed dollar amount of protection is the net acres of the
insured crop (acres times share) in the county multiplied by the IP dollar guaran-
tee per acre. Indemnities are due when the insured’s share of production
to count (harvested and appraised yields), multiplied by the harvest
price (as defined in the insurance policy), is less than the IP guar-
antee. If the yield loss is offset by a price increase, or vice versa,
no indemnity payment is made.  
IP Projected and Harvest Prices
IP’s projected price and harvest price for grain sorghum are 
90 percent of the average of the daily futures market closing
prices (Chicago Board of Trade) for corn contracts for a month
prior to planting and harvest, respectively. The actual CBOT con-
tract and the projected and harvest price period depends upon the
county’s sales closing date. 
Ri
sk
Ma
nagement Education
™
L-5299
(RM4-9.0)
5-99
*Professor and Extension Economist, The Texas A&M University System; Extension Agricultural Economist,
Kansas State University Agricultural Experiment Station and Cooperative Extension Service; Professor and
Extension Economist, The Texas A&M University System; Assistant Professor and Extension Economist, The
Texas A&M University System.
EXAMPLE 1: Harvest price is higher than
the projected price, with a 57 percent pro-
duction loss
Approved APH yield = 70 bushels per acre
Coverage level = 65%
Share = 100%
Projected price = $2.20 per bushel
Harvest price = $3.00 per bushel
Production to count = 30 bushels per acre
Crop value = Production to count x 
harvest price = $90.00 
Revenue guarantee = Approved APH yield 
x coverage level x 
projected price x share 
= $100.10
Revenue guarantee ($100.10) - crop value 
($90.00) = IP indemnity ($10.10)
In example 1, the large yield loss is partially
offset by the increased price at harvest. The
resulting crop value of $90 is still less than the
revenue guarantee by $10.10, so an indemnity
payment is made to the producers.
EXAMPLE 2: Harvest price is lower than
the projected price, with a 34 percent pro-
duction loss
Approved APH yield = 70 bushels per acre
Coverage level = 65%
Share = 100%
Projected price = $2.20 per bushel
Harvest price = $1.35 per bushel
Production to count = 46 bushels per acre
Crop value = Production to count x 
harvest price = $62.10
Revenue guarantee = Approved APH yield 
x coverage level x 
projected price x 
share = $100.10
Revenue guarantee ($100.10) - Crop value 
(62.10) = IP indemnity ($38.00)
In example 2, a large drop in price combines
with a small production loss to produce a calcu-
lated crop value of $62.10 and an IP indemnity
payment of $38 per acre.  
Excluded Events
Exclusions are the same as for the MPCI poli-
cy. Coverage is not available for high-risk land. 
Rating and Producer Subsidy
The rating method for the Income Protection
program reflects historic yield variation and
variation in gross income caused by yield and
price movements during the crop year. The rat-
ing model includes the correlation of national
prices and county yields. Income Protection pre-
mium rates are based upon the individual yield
data reported, the relationship of each of those
yields to the county average for that year, and
the projected price level. 
Policyholders selecting coverage of 65 percent
or more will receive a premium subsidy equal to
75 percent of the premium for the 50 percent
Income Protection coverage. Insureds selecting
less than 65 percent coverage will receive a sub-
sidy equal to 60 percent of the premium for 50
percent coverage. Because the subsidy is based
on the value of the 50 percent Income
Protection premium, individual premium subsi-
dies may be more or less than would be paid for
APH. On the average, the premium subsidy is
expected to be about the same as for APH.
Important Facts   
Farmers have accepted the Crop Revenue
Coverage (CRC) concept more than the Income
Protection plan. The IP plan guarantees rev-
enues, as opposed to the yields backed by the
CAT and MPCI. However, IP contains no feature
for increasing revenue coverage if prices
increase, nor does it have provisions for basic or
optional units. These features make IP cheaper
than CRC, but mean that it is more difficult to
use the insurance to protect forward contracts.
One reason for the lower premium is the
assumption of a negative price yield correlation,
which, if perfectly negatively correlated, would
mean there would never be a claim under IP.
Only when the yield reaches zero does the IP
plan outperform MPCI under these conditions.
Sales CBOT corn Projected Harvest
closing date futures contract price period price period
January 15 September December Aug 15 - Sept 14
February 15 September January Aug 15 - Sept 14
March 15 December February November
1.5M, Reprint ECO
Partial funding support has been provided by the Texas Wheat Producers Board, Texas Corn Producers Board,
and the Texas Farm Bureau.
Issued in furtherance of Cooperative Extension Work in Agriculture and Home Economics, Acts of Congress of May 8, 1914, as amended, and
June 30, 1914, in cooperation with the United States Department of Agriculture. Chester P. Fehlis, Deputy Director, Texas Agricultural Extension
Service, The Texas A&M University System.
Educational programs of the Texas AgriLife Extension Service are open to all people without regard to race, color, sex, 
disability, religion, age, or national origin.
Produced by AgriLife Communications and Marketing, The Texas A&M University System
Extension publications can be found on the Web at: http://AgriLifeBookstore.org.
Visit Texas AgriLife Extension Service at http://AgriLifeExtension.tamu.edu.


English

https://oaktrust.library.tamu.edu/bitstream/1969.1/86819/1/pdf_1084.pdf

Income Protection (IP) Insurance

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Texas A&M Repository

Texas A&M University

Income Protection (IP) Insurance

Abstract

Similar works

Full text

Available Versions

Texas A&amp;M Repository

Texas A&M University

Texas A&M Repository