January 26, 2004
GROUP CROP INSURANCE PLANS
A new group crop insurance product
was introduced in 2004, bringing the total number of group products
to three. These three are:
Group Risk Plan (GRP) - GRP is a yield insurance that makes payments
when county yield falls below a county trigger yield.
Group Risk Income Plan without a harvest revenue option (GRIP-NoHR)
- GRIP-NoHR is a revenue insurance that makes payments when county
revenue falls below county trigger revenue. The trigger revenue
is known during the spring and, unlike GRIP-NoHR, will not change
during a year. This insurance has been available in Illinois since
Group Risk Income Plan with a harvest revenue option (GRIP-HR)
- GRIP-HR is a revenue insurance that makes payments when county
revenue falls below county trigger revenue. Unlike GRIP-NoHR, the
trigger revenue can increase if prices are higher during the fall
than in the spring. This product was released for use in 2004.
Unlike crop insurance products that insure individual farm yields
or revenues, such as Actual Production History (APH), Crop Revenue
Coverage (CRC), Income Protection (IP), and Revenue Assurance (RA),
the group plans make payments based on county yields or county revenues.
This document describes these group products. General guidance on
their use also is provided.
Description of Group Products
An example for corn in McLean County, Illinois representing 2004
is used to describe and illustrate the group products (see Figure
The expected county yield is set by the Risk Management Agency
(RMA) each year for each crop. McLean County's expected yield for
2004 is 156.4 bu. (see Figure 1).
The expected price is set by
averaging settlement prices for the last five trading days in February
on Chicago Board of Trade (CBOT) futures contracts. The December
contract on corn and the November contract on soybeans is used in
price determination. This fact sheet was written in January 2004.
Hence, the 2004 expected price is not known. The $2.60 price represents
the trading level of December contract towards the end of January.
(Note that the expected price's determination period differs from
the period on farm-level revenue products (i.e., CRC, IP, RA). These
products average settlement prices for the entire month of February
rather than the last five days for GRIP. Therefore, the expected
price for GRIP and the farm-level products can differ.)
Expected revenue equals the expected yield times the expected price.
The $407 for the McLean county example results from multiplying
the expected county yield (156.4) times the expected price ($2.60).
Because the expected price is not known prior to the end of February,
expected revenue also is not known before the end of February.
The coverage level is selected by the farmer when signing up for
policy. Coverage levels can range from 70% and 90% in five percent
increments. The example uses the highest coverage level of 90%.
Trigger Yields and Revenues
Trigger yields and revenues determine when insurance policies make
payments. Each product has a different trigger calculation (see
GRP makes payments when county
yield falls below a trigger yield. The trigger yield equals the
expected yield times the coverage level. For the McLean County example,
the trigger yield is 140.8 (156.4 expected yield x .90 coverage
GRIP-NoHR makes payments when county revenue falls below trigger
revenue. The trigger revenue equals the expected revenue (expected
yield x expected price) times the coverage level. For the McLean
County example, the trigger revenue is $366 (156.4 expected yield
x $2.60 expected price x .90 coverage level).
GRIP-HR also makes payments when county revenue falls below trigger
revenue. Under GRIP-HR, however, trigger revenue is calculated using
the higher of the expected price or the harvest price (Harvest price
is further described in the "Indemnity Payments" section).
The minimum GRP-HR trigger revenue is known after the expected price
is announced and equals the GRP-NoHR trigger revenue. For the McLean
County example, the minimum trigger revenue is $366 (156.4 expected
yield x $2.60 expected price x .90 coverage level). Under GRP-HR,
trigger revenue can increase if the harvest price is greater than
the expected price.
Beside the coverage level, a protection level must be selected
when purchasing a group policy. The protection level is a per acre
dollar value that influences payments and premiums. A higher protection
level has higher indemnity payments, when they occur, and higher
premiums than a lower protection level. Changes in the protection
level have a proportional effect on payments and premiums. A protection
level that is 10% lower than another production level will have
10% lower indemnity payments and premiums than the higher protection
Figure 3 shows estimates of the maximum protection levels for the
2004 McLean County example. The GRP maximum is $516. The RMA sets
this maximum by multiplying the expected county yield times a GRP
price ($2.20 in 2004) times 1.5. The estimated GRIP maximum is $558
and is determined by multiplying the expected yield times the expected
price times 1.5. The GRIP maximum protection level is not known
until early March because the expected price is not determined until
Farmers can choose between 100% of the maximum protection level
down to 60% of the maximum. This range allows farmers to choose
a protection level that matches their farms needs. In theory, farms
with higher yields should choose higher protection levels than farms
with lower protection levels. In practice, the amount of premium
a farmer wishes to pay likely determines the protection level.
Figure 4 shows the methods for calculating indemnity payments for
the three alternatives.
Under GRP, the protection level is multiplied by the percent yield
shortfall to arrive at the indemnity payment. The percent yield
shortfall equals yield below the trigger yield divided by the trigger
yield. The McLean County example has a 156.4 bushel yield and, at
a 90% coverage level, a trigger yield of 140.8 (156.4 x .90). If
the actual county yield is 100 bu., the percent yield shortfall
is .3261 (e.g. (148.4 - 100) / 148.4). Given a $516 protection level,
the indemnity payment in this case is $168.26 ($516 protection level
x .3261 yield shortfall).
Indemnity payments for GRIP-NoHR are calculated in a similar manner
to those for GRP, except that county revenue is used rather than
county yields in the indemnity calculation. County revenue for determining
indemnity payments equals actual county yield times the harvest
price. The harvest price for corn equals the average of the settlement
prices of the December CBOT corn contract during the month of November.
The harvest prices for soybeans equals the average of the settlement
prices of the November CBOT soybean contract during the month of
The trigger revenue for GRIP-NoHR for the McLean County example
is $366 ($407 county revenue x .90 coverage level). If county revenue
is $300, which would result if county yield is 150 bu. and harvest
price is $2.00 per bushel, the percent revenue shortfall is .1803
(($366 trigger revenue - $300 county revenue) / $366 trigger revenue).
Given a $558 protection level, the indemnity payment is $100.60
($558 protection level x .1803 percent yield shortfall).
GRIP-HR indemnity payments can differ from GRIP-NoHR indemnity
payments because of two provisions:
1. Trigger revenue can differ under the two policies. Trigger revenue
under GRIP-HR equals the expected yield x the higher of the expected
or harvest price x the coverage level. GRIP-NoHR does not have the
"higher of" provision.
2. GRP-HR includes a "factor". The factor equals the
higher of 1 or the harvest price divided by the expected price.
If the expected price is $2.60 and the harvest price is $2.70, the
factor is 1.038 (2.70 / 2.60). If the expected price is $2.60 and
the harvest price is $2.00, the factor is 1 because 1 is higher
than the harvest price divided by the expected price ($2.00 / $2.60
GRIP-NoHR and GRIP-HR will have the same indemnity payments when
the harvest price is below the expected price. GRIP-HR can have
higher payments than the harvest price is above the expected price.
Suppose the harvest price is $3.00 per bu. and the actual McLean
county yield is 130 bu., causing revenue to be $390 (130 bu yield
x $3.00 harvest price). In this case GRIP-HR has trigger revenue
of $422 (156.4 expected yield x $3.00 harvest price x .90 coverage
level), causing the revenue shortfall to be .0758 (($422 trigger
revenue - $390 county revenue) / $422 trigger revenue). The factor
is 1.1538 ($3.00 price / $2.60 expected price). This gives an indemnity
payment or $48.80 per acre ($558 protection level x .0758 yield
shortfall x 1.1538 factor). GRIP-NoHR does not make an indemnity
payment in this example. GRIP-NoHR has trigger revenue of $366,
significantly lower than GRIP-HR trigger revenue. The actual county
revenue of $390 is above the trigger revenue, resulting in no indemnity
Premiums and Payments from the Group Products
A 2004 Group Crop Insurance Plan Calculator has been developed
and is available for download from the crop insurance section of
farmdoc. This Calculator shows estimated per acre premiums from
the group products. In addition, the Calculator shows average payments
from the insurance products. An example of its output is shown in
In the yellow input section, entries of the county, crop, protection
level, expected price, and volatility are made. The volatility influences
the premiums of the GRIP products and will not be set by RMA until
the beginning of March. The program comes with volatility defaults
form 2003. Based on these input, the Calculator shows the expected
yield, GRP maximum protection level, and GRIP maximum protection
The Calculator shows a panel giving "Estimated Producer Premiums
Per Acre." These premiums are estimated because the expected
price and volatility entries will not be known for certain until
the beginning of March. In all cases, GRIP-HR has significantly
higher premiums than GRIP-NoHR and GRP. At the 90% production level,
for example, GRIP-HR has a per acre indemnity payment of $17.61
compared to a $11.08 premium for GRIP-NoHR.
Figure 5. Output from the 2004 Group Crop Insurance Plan Calculator.
The Calculator shows a panel listing "Per Acre Average Payments
Over the Last 31 Years." These are average payments calculated
using data from 1972 through 2002. This historical data are adjusted
and stated in terms of today's yields and today prices. The adjusted
payments can be viewed by clicking on the "Payment" button.
Because the data are adjusted to today's terms, the estimated payments
do not exactly equal historical payments. These averages provide
a feel for the likely payments over time from the insurance products
if history repeats itself. Obviously, history does not have to repeat
itself. Note that GRIP-HR has high expected producer payments. At
the 90% coverage level, the expected payment for GRIP-HR is $39.95.
"Net positions" reported by the Calculator equal average
payments minus the producer premiums. Positive values indicate that
the indemnity payments, averaged over time, likely will exceed premiums
paid. In the McLean County example, all group products have positive
values. GRIP-HR has significantly higher values than GRIP-NoHR and
Risk Reductions Associated with Group Products
Complete risk analysis have not been completed for GRIP-HR. More
complete evaluations have been conducted for GRP and GRIP-NoHR and
are available from the IFarm Crop Insurance Evaluator available
in the crop insurance section of farmdoc. These results show that
GRP and GRIP-NoHR have significant less risk reductions than do
individual farm products (APH, CRC, IP, and RA). GRIP-HR likely
will have similar results to GRP and GRIP-NoHR. In addition, the
group products do not have replant provisions that are available
under the individual farm products.
A soon to be released Crop Insurance and Marketing Model will quantify
the risks and returns of alternative crop insurance and marketing
strategies. This model will allow analysis of the risk reductions
associated with all available group products including GRIP-HR.
The model will be available for download in the FAST section of
Choice Between the Products
Group products tend to have positive net positions, meaning that
over time GRIP-HR likely will return more in indemnity payments
that are paid in premiums. Moreover, group products tend to have
higher net positions than do individual products. In fact, most
individual products have negative net positions. However, group
products tend to have lower risk reductions than are associated
with individual farm products. Choice between group and farm-level
products provides farmers with a classic risk-return tradeoff. Group
products offer higher returns and higher risks than farm-level products.
As a result, group products are recommended for farmers who have
the financial strength to withstand one year of poor crop revenues.
GRIP-HR has significantly higher net positions than GRP and GRIP-NoHR.
This result is based on 2003 volatilities. Volatilities for 2004
may be significantly higher than for 2003, causing relative net
positions to change. Re-evaluation should be completed after announcement
of 2004 volatilities in early March.
Given the net positions shown above, GRIP-HR is an attractive alternative.
A general rule of thumb is that GRP pays in low yielding years and
GRIP-NoHR pays in years of lower prices. GRIP-HR combines the best
features of both GRP and GRIP-NoHR. This comes at a cost of a significantly
If a group product is to be purchased, GRIP-HR deserves serious
consideration. As with all group products, purchases at the 90%
coverage level seem warranted. If premium cost is a concern, select
a protection level that matches the desired premium, realizing that
indemnity payments are reduced with lower protection levels.
This document describes group insurance products. There are three
group products available for use in Illinois:
1. Group Risk Plan - yield insurance,
2. Group Risk Income Plan without the harvest price option - revenue
insurance whose guarantee will not increase if the harvest price
is above the expected price, and
3. Group Risk Income Plan with the harvest price option - revenue
insurance whose guaranteewill increase when the harvest price is
above the expected price.
Net positions of the group products tend to positive. However risk
reductions are less from group products than from farm-level products.
Group products should be used by farms in financial strong positions
who can withstand one year of poor incomes. GRIP-HR is an attractive
alternative among the group products.
Prepared by: Gary
Schnitkey, Department of Agricultural and Consumer
Economics, University of Illinois at Urbana-Champaign.
Released: January 2004