Delta Crop Insurance Solutions

Supplemental Coverage Option and Enhanced Coverage Option—commonly called SCO and ECO—allow farmers to add county-based protection above their individual crop-insurance coverage. These endorsements are designed to cover part of the deductible left by an underlying policy such as Revenue Protection or Yield Protection. They can provide valuable additional protection, but they work differently from an individual farm policy. The most important distinction is simple: Your underlying policy is based primarily on what happens on your insured unit. SCO and ECO are based primarily on what happens across the county or other designated area. That means a farmer can have a loss on the farm without receiving an SCO or ECO payment. It is also possible for SCO or ECO to pay when the individual farm does not have a loss. Delta Crop Insurance helps farmers in Eastern Arkansas and Western Mississippi compare these options, understand the county-based trigger and determine whether the additional coverage fits the operation’s risk-management plan. What Is SCO? Supplemental Coverage Option provides county-based coverage between the upper SCO trigger and the coverage level selected on the underlying crop-insurance policy. Under the updated coverage structure, SCO can generally extend from 90% of expected county yield or revenue down to the producer’s individual coverage level. For example, a producer with a 75% Revenue Protection policy may be able to use SCO to cover the band between 90% and 75%. That creates a 15-percentage-point SCO coverage band: **90% SCO trigger − 75% underlying coverage = 15% SCO coverage band** SCO does not eliminate the entire deductible. With a 75% underlying policy and SCO extending to 90%, the producer generally retains the top 10% of expected crop value. What Is ECO? Enhanced Coverage Option provides a higher band of county-based protection above SCO. Under the updated structure, ECO generally covers the band between 95% and 90% of expected county yield or revenue. This creates a five-percentage-point ECO coverage band: **95% ECO trigger − 90% bottom of ECO band = 5% ECO coverage band** ECO begins paying when the county result falls below 95% of its expected level. The full ECO payment is reached when the county result falls to 90% or lower. A producer does not have to purchase SCO to buy ECO. However, purchasing both endorsements can provide a more continuous layer of county-based protection above the underlying individual policy. How the Coverage Layers Work Assume a producer selects an individual Revenue Protection policy at the 75% coverage level and adds both SCO and ECO. The protection layers would generally look like this: - **100% to 95%:** Producer’s uninsured deductible - **95% to 90%:** ECO county-based coverage - **90% to 75%:** SCO county-based coverage - **Below 75%:** Individual Revenue Protection coverage These layers do not all use the same loss calculation. The underlying Revenue Protection policy is based on the producer’s insured unit. SCO and ECO use county or area results published by the Risk Management Agency. Current SCO and ECO Changes Recent federal crop-insurance changes increased the premium subsidy for SCO and ECO to 80%. This means the federal government pays 80% of the total premium for the endorsement, while the producer pays the remaining portion. The 80% subsidy does not mean that 80% of a loss is covered. It refers only to how the endorsement’s premium is divided between the federal government and the producer. RMA is also incorporating an increase in SCO’s maximum coverage level from 86% to 90%. Under the updated structure, ECO covers the band between 95% and 90%. The effective crop year can depend on the crop’s contract change date. Coverage bands, availability and effective dates should be confirmed for the specific crop, county and crop year before making a coverage decision. SCO may now generally be purchased regardless of the producer’s Agriculture Risk Coverage election with the Farm Service Agency. Previously, ARC participation could prevent SCO coverage on the same crop and farm. SCO and ECO Must Have an Underlying Policy SCO and ECO are endorsements. They cannot normally be purchased as independent policies. They must be attached to an eligible underlying policy, such as: - Revenue Protection - Revenue Protection with Harvest Price Exclusion - Yield Protection - Actual Production History coverage for certain crops - Other eligible plans identified in the actuarial documents The endorsement generally follows the type of protection provided by the underlying policy. When the underlying policy is Revenue Protection SCO or ECO generally provides county-based revenue protection. County revenue is determined using county yields and applicable projected and harvest prices. When the underlying policy is Yield Protection SCO or ECO generally provides county-based yield protection. The payment is based on whether the final county yield falls below the applicable county yield trigger. A producer should understand whether the endorsement is providing yield or revenue protection before comparing premium costs. Individual Coverage Versus County Coverage An individual policy examines production or revenue on the insured unit. SCO and ECO examine the results for the county or other designated area. Consider a farmer whose operation experiences isolated hail damage. The farm’s production could fall sharply while the rest of the county produces a normal crop. The individual policy may pay because the insured unit suffered a covered loss. SCO and ECO may not pay because the county did not fall below the area-based trigger. The opposite can also happen. A farmer could produce an above-average crop while the county experiences a widespread loss. SCO or ECO may pay even though the individual policy does not. This difference is commonly called **basis risk**—the risk that the farm’s experience will not match the county’s experience. What Determines the Amount of SCO and ECO Protection? The dollar amount of protection is based partly on the expected crop value associated with the underlying policy. Important factors include: - Approved yield - Projected price - Underlying coverage level - Insured acreage - Producer’s ownership share - Crop, type and practice - Selected SCO or ECO coverage percentage - Applicable projected or harvest price - County expected yield - County final yield The producer can generally select a coverage percentage below 100%. Reducing the percentage lowers both the amount of protection and the producer-paid premium. How SCO Protection Is Calculated Under the updated structure, the simplified SCO coverage band is: **90% − Underlying policy coverage level = SCO coverage range** The maximum SCO protection is then generally calculated as: **Expected crop value × SCO coverage range × Coverage percentage = SCO protection** For example, if the expected crop value is $800 per acre and the underlying coverage level is 75%: **90% − 75% = 15% SCO coverage range** At a 100% coverage percentage: **$800 × 15% × 100% = $120 of SCO protection per acre** This $120 is the maximum SCO payment per acre before applying acres, ownership share and any other policy adjustments. How ECO Protection Is Calculated Under the updated structure, ECO generally covers the band between 95% and 90%. The simplified ECO coverage range is: **95% − 90% = 5% ECO coverage range** The maximum ECO protection is generally calculated as: **Expected crop value × ECO coverage range × Coverage percentage = ECO protection** Using an expected crop value of $800 per acre: **$800 × 5% × 100% = $40 of ECO protection per acre** This $40 is the maximum ECO payment per acre before applying acreage, ownership share and other adjustments. How SCO and ECO Losses Are Figured SCO and ECO use a payment factor to determine how much of the endorsement’s protection will be paid. The payment factor measures how far the final county result has fallen through the insured coverage band. A simplified payment-factor calculation is: **Loss below the trigger ÷ Coverage band = Payment factor** The payment factor cannot exceed 100%. The indemnity is then calculated as: **Maximum endorsement protection × Payment factor = Indemnity** For revenue-based coverage, the calculation uses expected and final county revenue. For yield-based coverage, it uses expected and final county yield. Combined SCO and ECO Example Assume a soybean producer has: - Expected crop value: $800 per acre - Underlying Revenue Protection level: 75% - ECO trigger: 95% - SCO trigger: 90% - SCO and ECO coverage percentage: 100% - Insured acreage: 100 acres - Producer’s share: 100% Assume the final county revenue is 84% of expected county revenue. Step 1: Calculate the expected county revenue result **$800 expected crop value × 84% = $672 final county revenue per acre** The county finished at 84% of its expected revenue. ECO Calculation Step 2: Calculate the ECO coverage band **95% − 90% = 5% ECO coverage band** Step 3: Calculate the maximum ECO protection **$800 × 5% = $40 per acre** Step 4: Determine how far the county fell below the ECO trigger The ECO trigger is 95%, but the county finished at 84%. **95% − 84% = 11-percentage-point county loss below the ECO trigger** The county loss moved completely through the five-percentage-point ECO band. Therefore, the ECO payment factor is limited to 100%. Step 5: Calculate the ECO indemnity **$40 maximum ECO protection × 100% payment factor = $40 per acre** For 100 acres: **$40 × 100 acres = $4,000 ECO indemnity** In this example, ECO pays its full amount because the county result fell below the bottom of the ECO band. SCO Calculation Step 6: Calculate the SCO coverage band The producer has a 75% underlying policy, and SCO begins at 90%. **90% − 75% = 15% SCO coverage band** Step 7: Calculate the maximum SCO protection **$800 × 15% = $120 per acre** Step 8: Determine how far the county fell below the SCO trigger The SCO trigger is 90%, and the county finished at 84%. **90% − 84% = 6-percentage-point county loss below the SCO trigger** The county moved six percentage points into the 15-percentage-point SCO band. Step 9: Calculate the SCO payment factor **6% county loss ÷ 15% SCO coverage band = 40% payment factor** Step 10: Calculate the SCO indemnity **$120 maximum SCO protection × 40% payment factor = $48 per acre** For 100 acres: **$48 × 100 acres = $4,800 SCO indemnity** Total SCO and ECO Payment The simplified combined payment would be: - ECO indemnity: $4,000 - SCO indemnity: $4,800 - Total county-based indemnity: $8,800 That equals: **$88 per acre across 100 insured acres** This payment would be determined separately from any payment under the producer’s individual Revenue Protection policy. The underlying policy could also pay, or it could pay nothing, depending on the insured unit’s actual production and revenue. What if the County Finished at 92%? If the county result were 92% of expected revenue: - ECO could produce a partial payment because the result fell below the 95% ECO trigger. - SCO would not pay because the county result did not fall below the 90% SCO trigger. - The underlying individual policy would still be evaluated separately. This illustrates how each layer begins paying at a different point. Harvest-Price Considerations When SCO or ECO is attached to Revenue Protection, the calculation generally uses the revenue structure of the underlying policy. The expected county revenue may increase when the applicable harvest price is higher than the projected price. Final county revenue is generally determined using the final county yield and applicable harvest price. A higher harvest price can therefore increase the amount of protection, but it can also increase the value assigned to the county’s actual production. The exact result depends on the interaction between county yield and price. When attached to Yield Protection, the endorsement operates as county-based yield coverage and uses the applicable yield-protection calculation rather than providing protection against a price decline. When Are SCO and ECO Payments Made? SCO and ECO payments are generally not finalized immediately after harvest. RMA must first calculate and publish the final county yield or revenue. That process relies on county production information and can take several months. In many cases, the final county information is not available until the year following harvest. Producers should not rely on an SCO or ECO payment to provide immediate cash flow during harvest. Advantages of SCO and ECO Potential advantages include: - Additional protection above the individual policy - Coverage for part of the underlying deductible - Protection against widespread county losses - Ability to select yield or revenue coverage through the underlying policy - An 80% federal premium subsidy under current rules - Ability to select less than 100% of the available protection - Potential payment without an individual-policy loss - Compatibility with certain FSA program elections under current rules Limitations to Consider Potential limitations include: - Payments are based on county results rather than the farm’s actual results - An individual farm loss may not trigger a payment - Good production elsewhere in the county can reduce or eliminate a payment - Final county information may not be available until well after harvest - Coverage is not available for every crop, county, type or practice - Other endorsements or area-based policies may restrict eligibility - Added premium is required even though the county trigger may not be reached - Historical county performance may not closely match a particular farm Is SCO or ECO Right for Your Farm? SCO and ECO should be evaluated using both farm-level and county-level information. A useful comparison should consider: - Underlying coverage level - Approved yield - Expected crop value - SCO and ECO premium - Historical county yields - Relationship between farm yields and county yields - Irrigated and non-irrigated practices - Geographic concentration of acreage - Operating expenses - Debt and cash-flow needs - Ability to wait for a county-based payment - Other available supplemental products A farm whose yields tend to move closely with the county may receive more consistent protection from SCO and ECO than a farm whose results regularly differ from the county. The goal is not simply to purchase the highest available coverage. The goal is to understand what risk is being transferred, what risk remains with the producer and whether the additional premium provides enough meaningful protection. **Contact Delta Crop Insurance to request an SCO and ECO comparison for your operation.** *This information is provided for general educational purposes and does not change or replace the terms of any crop-insurance policy, endorsement, crop provisions, actuarial documents or Special Provisions. Coverage bands, availability, premium subsidies, effective dates and policy requirements may vary by crop, county, practice and crop year.*