A Description of Multiple Peril Crop Insurance - Cont.

Unlike standard Property and Casualty contracts, MPCI coverage is not triggered by an event. Instead, the indemnity payment is determined after the crop is harvested. The producer's actual production is multiplied by the Base Price, adjusted by the Price Election percentage, to determine the value of the crop. This value is compared to the Liability under the contract. If the value of the crop is less than the Liability, the producer is paid the difference.

The standard MPCI policy insures the producer for a loss of yield, not a loss of revenue. The policy includes no protection against the risk that the market price at harvest will be different from the Base Price established at the start of the growing season. If the market price is lower than the Base Price, the producer's total revenue will be less than was anticipated at the start of the growing season. The producer can obtain protection from crop price changes during the growing season through a variety of mechanisms, including forward contracts, futures, and options. A recent innovation is the development of revenue contracts which extend the standard MPCI coverage to include market price protection. For the producer, the simplicity of purchasing protection against fluctuations in crop prices as part of the MPCI coverage has proven to be very popular, with more than 13% of all crop insurance premium arising from revenue coverages in just the third year since their inception. The design and rating of revenue contracts is an interesting subject which is beyond the scope of this discussion.