Smith, Vincent H.

English

Research Papers in Economics

Contact:
Vince Smith
(406) 994-5615
uaevs@montana.edu
   B R I E F I N G
    Briefing No. 12         November 2001
                                                     Federal Crop and Crop Revenue Insurance Programs:
                                                               Group Risk Plan (GRP) Contracts
                                                            
                                                                 Vincent H. Smith
Agricultural Marketing Policy Center
Linfield Hall
P.O. Box 172920
Montana State University
Bozeman, MT 59717-2920
Tel: (406) 994-3511
Fax: (406) 994-4838
email: ampc@montana.edu
website: www.ampc.montana.edu
Objective
Analysis
for Informed
Decision Making
Federal crop insurance against individual
farm yield losses in the form of  multiple peril
contracts has been available for some crops
since 1938.  Following the 1980 Federal Crop
Insurance Act, the number of crops and the
geographic coverage of the federal crop yield
loss insurance program was greatly expanded. 
Beginning in the late 1980s, in addition to
traditional multiple peril contracts, new policies
were developed based on yield losses at the
county level and offered for a limited number of
crops in a limited number of counties. 
Following the 1994 Crop Insurance Reform
Act, a wider range of federally subsidized
insurance contracts were introduced that
provided protection against revenue losses and 
catastrophic losses.   
Today, producers face a wide array of crop
insurance alternatives including yield based
Actual Production History (APH) insurance
contracts and Revenue Insurance contracts.  Not
all insurance contracts are available for every 
crop in any given county.  In some counties,
Risk Management Agency (RMA) approved
insurance contracts are not available for some
crops.  In these circumstances, producers can
either utilize the Noninsured Disaster
Assistance Program (NAP) or make a request
for actuarial change. 
Yield based APH insurance contracts include
Multiple Peril Crop Insurance (MPCI) and 
Group Risk Plan (GRP) contracts.  Under MPCI
contracts, indemnity payments are triggered by
low yields on an individual producer’s insured
acres.  Under GRP contracts, indemnity
payments are triggered by low county-wide
yields.  
Revenue insurance contracts that provide
indemnities for revenue losses caused by either
low yields, low prices, or both include Group
Revenue Insurance Policy (GRIP) contracts,
Crop Revenue Coverage Contracts (CRC),
Revenue Assurance (RA) contracts, and Income
Protection (IP) contracts.  Under CRC,
RA, and IP revenue insurance contracts,
indemnities are triggered by low revenues
for an individual producer (caused either
by low yields, or low prices, or both). 
Under GRIP contracts, indemnity
payments are triggered by low average
revenue for the crop in the country.
This Briefing describes and discusses the
GRP program in which indemnities are
triggered by average yield losses in the
county rather than on the producer’s
insurable units.
Group Risk Plan (GRP) Contracts
Producers of several major crops such as
wheat and cotton have been able to utilize
federal GRP contracts to insure against
yield loss since the late 1980s.    In fact,
GRP contracts were the second type of
federally subsidized insurance programs
to be made available to producers.
Insurable Areas:
A producer can only purchase a GRP
contract for all acres of a crop produced in
a given county (that is, the producer’s
enterprise unit).
FCIC Expected County Yield
The Federal Crop Insurance Corporation
(FCIC) expected county yield for the crop
year is estimated using historical data. 
The estimation procedures generally take
into account long term trends in yields, the
effects of weather events, and other
factors affecting production. 
Yield Elections
The producer selects the proportion of the
FCIC expected county yield against which
indemnity payments will be triggeredfrom one of five county yield election
levels (70, 75, 80, 85, and 90 percent).
Trigger Yields
The GRP contract trigger yield is the
expected county average yield multiplied
by the producer’s yield election.   If the
actual county yield falls below the trigger
county yield then the producer receives an
indemnity payment.  
Dollar Amount of Protection
For each GRP crop, the producer selects a
dollar amount of protection per acre for the
crop based on the FCIC published
maximum dollar amount of protection for
the crop that can be purchased on a per acre
basis.  The producer can select between 60
percent and 100 percent of the maximum
per acre dollar amount of protection.  
Indemnity Payments
Producers receive indemnities when the
actual county yield is less than the trigger
yield, sometimes called the coverage level, 
elected by the producer.  Assuming that the
producer has a 100 percent ownership share
in the crop, the indemnity payment for each
insured acre is calculated as follows.  
First, a payment calculation factor is
computed for each producer when the
producer’s trigger yield exceeds the actual
country yield.  The payment calculation
factor is defined as follows:
Payment calculation factor    =     (Trigger
Yield   -   Actual County Yield)/ Trigger
Yield      
This payment calculation factor is
multiplied by the producer’s dollar amount
of protection to compute the producer’s per
acre indemnity payment.
Example:
Suppose the producer has a 100 percent
share in 200 acres of a crop in a county in
which the expected county yield for the
corn crop is 100 bushels per acre.  The
FCIC maximum dollar amount of
protection for the crop is $250 per acre.
The producer selects a GRP contract with a
90 percent yield election and a $200 per
acre level of protection (80% of the
maximum amount of dollar protection). 
The actual county yield is 60 bushels per
acre.
1. The producer’s trigger yield:
Trigger Yield =   Yield election x County
expected yield =  90 percent   x 100 bushels per
acre = 90 bushels per acre.
2. The producer’s payment calculation
factor (given the actual county yield of
60 bushels per acre) is:
Payment calculation factor = (Trigger Yield   -  
Actual County Yield)/ Trigger Yield  = (90   -   
60)/90 =  0.333
3. The producer’s per acre indemnity
payment is:
Per Acre Indemnity  =  Payment Calculation
Factor x Dollar Amount of Protection =         
0.333   x   $200 =   $66.67
The producer’s total indemnity payment is the
per acre indemnity payment multiplied by the
number of insured acres or $13,333.33 ($66.67
per acre x 200 acres).
Premium Rates and Premium Payments
Premium rates are defined as specified
percentages for each yield election.  Different
premium rates are charged for each yield
election.   As yield elections increase, premium
rates also increase because the trigger yield
increases and, therefore, the average size of
indemnity payments increases.   The producer’s
elected premium rate is applied to the dollar
amount of protection the producer selects to
calculate the producer’s premium payment.   
Example (continued):
In the producer’s county, suppose that the
premium rate for a 90 percent yield election or
coverage is 7 percent.  The producer’s per acre
premium payment is:
Per Acre Premium Payment  = Premium Rate x
Dollar Amount of Protection = 7 percent  x  
$200 per acre = $14 per acre
The producer’s total premium for all insured
acres under the 90 percent yield election and
$200 amount of protection GRP contract is
$2,800 (200 acres x $14 per acre).  Note that if
the producer selects a larger amount of
protection or a higher yield election, the
premium payment increases.
The premium payment that the producer has to
pay is actually lower than $2,800 because the
federal government provides a per acre subsidy. 
If the per acre subsidy for the producer’s
contract is $5 per acre, the producer will receive
a total subsidy of $1,000 ($5 per acre x
200 acres).  The producer would be
required to pay  total premium of only
$1,800 for the contract, $2,800 less
$1,000.
Premium Subsidies
The premium payments charged to
producers for all federal crop yield and
revenue insurance contracts are lower than
the premium payments that would be
charged if producer premium payments
were required to cover all expected
indemnity payments for crop and revenue
losses.  The federal government provides 
subsidies on all contracts.  The dollar
amounts of the premium subsidies
generally do not increase in proportion to
yield elections.  Producers insuring
against crop losses with lower yield
elections receive subsidies that make up a
larger share of their total premium
payments than producers insuring against
crop losses with higher yield elections.    
Shares
Individuals may not have 100 percent
ownership shares in the crop.  Each
individual with a share in the crop may
insure their own share.   Indemnity
payments for losses and premium
payments are pro-rated by the individual’s
share.
Prevented Planting and Replanting
Indemnity Payments
In some years, producers may need to
replant a crop or be prevented from
planting a crop.   In some circumstances
producer may be indemnified for
replanting costs under an MPCI contract.  
Unless limited by the provisions of the
policy, indemnity payments will also be
made when producers are prevented from
planting during the planting dates
prescribed in the contract because of causes covered by the insurance contract
(such as severe weather or flooding).
Catastrophic Risk Protection
A producer may purchase a Catastrophic
Risk Protection (CAT) GRP.  Under this
contract, in 2002 the producer can
purchase a GRP contract with a 65
percent yield election and a dollar
amount of protection equal to 55 percent
of the maximum dollar amount of
protection. 
The producer must pay an administrative
fee of $100 for each crop in each county
which may be waved for limited resource
farmers.  However, producers are not
required to pay any premiums for this
coverage.
Sign Up Dates
FCIC  identifies unique dates by which
producers must sign up for their GRP
contracts that are specific to each county
for each crop.  
Crops Covered by MPCI and CAT
Contracts 
Crops covered by GRP in at least some
counties include canola, corn, grain
sorghum, soybeans, upland cotton, rice,
wheat, and barley, in addition to other
crops.
Reporting of Acreage and Crop
Damage
Each crop year, producers with GRP
contracts are required to submit an
acreage report by unit for each insured
crop. 
  Support for the preparation and delivery of materials in this publication was provided by the Montana Agricultural Experiment Station, the MSU Extension
Service, the Federal Crop Insurance Corporation through the Risk Management Agency, and the Cooperative State Research, Education and Extension
Service of the United States Department of Agriculture.
The programs of the MSU Extension Service are available to all people regardless of race, creed, sex, disability or national origin. 
Issued in furtherance of cooperative extension work in agriculture and home economics, acts of May 8 and June 30, 1914., in cooperative
with the U.S. Department of Agriculture, David A. Bryant, Vice Provost and Director, Extension Service, Montana State University,
Bozeman, MT 59717.

Federal Crop and Crop Revenue Insurance Programs: Group Risk Plan (GRP) Contracts

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