Monday, March 04, 2013

Crop Insurance and Organics

Sustainable AGriculture highlighted RMA's dropping of the 5 percent surcharge for organic insurance, which seems to have been counterbalanced by their acceptance of OIG recommendations on transitional yields and loss adjustment for organic crops.

This OIG report finds that FCIC/RMA has been offering "transitional yields" (the crop yields assigned to a farm for years when there's no actual production history availabe) for organically grown crops which are too high.  For example, if the transitional yield is 125 bushels an acre for organically grown corn, and the true yield is 11...  Congress has pushed the expansion of crop insurance to organic crops, RMA has responded, but had a contractor evaluate the experience. Excerpts:

The contractor recommended that transitional yields be lowered by 35 percent for insurance plans that use APH yields as the basis for the production guarantee in order to better reflect experience data and lower loss ratios. RMA acknowledges that transitional yields for organic crops are generally too high, but has not implemented the recommendation because it considers the production data currently available to be too “thin” to support a methodology for setting separate transitional yields for organic crops.

We found that insured producers for 35 of 48 organic crop policies with losses did not have production histories supporting that they could grow the insured crops to reach the yields used to determine the production guarantee or amount of insurance.16 This occurred because RMA directs AIPs to apply transitional yields and underwriting standards established for crops produced using conventional farming practices to crops produced using organic farming practices. As a result, at least $952,000 of $2.56 million in indemnities that RMA underwrote were excessive. In addition, insured producers with organic crops experienced a programwide loss ratio of 105 percent.17 In contrast, insureds with conventional crops experienced a loss ratio of only 67 percent.

OIG also found the loss adjusters did not follow procedures for adjusting organic crops.·
Twenty-two stated that the AIPs do not require them to obtain and/or review the organic plan and inspection report.
Seven said that the loss adjustment requirements for adjusting crops produced using organic farming practices were no different than for crops produced using conventional farming practices.
Five stated that the agent and underwriter collected the organic plan and inspection report.
Five loss adjusters gave varying reasons for not obtaining and reviewing the organic plans and inspection reports.
 Bottom line: Organic crops can't actually match conventional cropping in yields, at least not on available data.  It will take years to build the data and the loss adjusting experience to do a good job on organics.

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