Federal Crop Insurance Programs:
Historic Performance, Contemporary Issues
prepared by:
Gary Schnitkey, Bruce Sherrick, Bob Hauser, Paul Ellinger
Agricultural and Consumer Economics
University of Illinois at Urbana-Champaign
August 2006
iFAR
integrated Financial Analytics and Research, LLP
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●
Outline:

Executive summary:





Background:




iFarm and farmdoc crop insurance evaluation tools (online)
Subsidy structure, pool structure, SRA, etc.
Operating elements of Federal crop insurance programs
Loss ratio data and distribution:


Corn and Soybeans have experienced lower per acre payments
than other major crops
Loss ratios below targets
Significant geographic concentrations
Non-uniform effective subsidization by crop, region.
Premiums and payments by crop and region
Summary and implications: What does it mean and
where to from here
Background…..
Loss Ratios

Loss Ratio = Insurance Payment / Total Premium

A loss ratio of 1.00 indicates that payments to
farmers equal total premiums. A loss ratio less than
1.0 indicates that payments are less than total
premiums. A loss ratio of greater than 1.0 indicates
that payments are greater than total premiums.

Crop insurance companies share gain/losses with
Federal government depending on loss ratio and
fund selection by company for assignment of risk.

Overall, loss ratios have averaged .92 since 1995.
Premium and Risk Subsidies
Premiums (costs of
insurance products)
are federally
subsidized. Subsidy
rates are set in the
Agricultural Risk
Protection Act of
2000. Subsidy rates
vary by coverage level
and type of insurance.
Risk Subsidies as a Percent of Total
Premium
Coverage
Level
Farm
Products
Group
Products
CAT
100%
50%
67%
55%
64%
60%
64%
65%
59%
70%
59%
64%
75%
55%
64%
80%
48%
59%
85%
48%
59%
90%
55%
Farm products include APH, CRC, IP
and RA. Group are GRP and GRIP
Farmers’ positions

Farmers should make money on crop insurance
given a 1.0 total loss ratio.

Example, Total premium is $1 and insurance
payment is $1, giving a loss ratio of 1 ($1
payment / $1 premium). If the risk subsidy is
59%. The farmer pays $.41. In this case,
farmer makes $.59.

Farmers will not make money when loss ratios
are around .6 or less. The .6 benchmark depends
on the risk subsidy.
Mythbusters

Often suggested that the Midwest is
subsidizing other areas.

A better explanation may be that
crop insurance companies make
higher profits in the Midwest than in
other areas.

Corn, soybeans are key to crop
insurance companies’ profitability
Loss Ratios and Related
Data
Source data unless otherwise indicated: www.rma.usda.gov/data/sob.html
Total Premiums, U.S., 1995 to 2005
4.5
4.0
$ (billion)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
95
96
97
98
99
00
Year
01
02
03
04
05
Corn and Soybeans Premiums as Percent of
Total Premiums, 1995 to 2005
40
35
Corn
Percent
30
25
20
15
Soybeans
10
5
0
95
96
97
98
99
00
Year
01
02
03
04
05
Total Premiums, U.S., 2005
Crop
Corn
Soybeans
Wheat
Cotton
Fruits and vegetables
Other grains
Other
Potatoes
Nursery
Grain sorghum
Peanuts
Sugar Beets
Tobacco
AGR
Total
Total Premiums
1,266,003,668
873,110,128
576,970,245
329,547,491
325,154,705
142,446,688
106,124,408
69,957,018
68,839,802
67,280,532
41,323,094
39,870,013
30,586,571
11,420,788
3,948,635,151
Percent
32%
22%
15%
8%
8%
4%
3%
2%
2%
2%
1%
1%
1%
0%
100%
Per Year Insurance Payments less Farmer-Paid
Premiums, Crops, 1995 – 2005
Crop
$ per Acre
Soybeans
Corn
Other
Wheat
Other grains
Grain sorghum
Sugar Beets
Cotton
Fruits and vegetables
Peanuts
Potatoes
Tobacco
2.76
3.03
3.70
5.35
6.38
8.99
14.18
17.92
22.81
25.71
30.36
204.54
Note: “Payments less
farmer-paid premiums”
expressed in dollars and
may not reflect similar
shares of the value of
the crop produced.
* Excludes Nursery and AGR policies
Source data unless otherwise indicated: www.rma.usda.gov/data/sob.html
Premiums, Payments, Loss Ratios by
Crop, 1995 to 2005 by Crop
Crop
Corn
Soybeans
Fruits and vegetables
Potatoes
Nursery
Other
Sugar Beets
Wheat
Cotton
Other grains
AGR
Peanuts
Grain sorghum
Tobacco
Total
Premium
$8,663,068,283
5,346,885,430
2,363,727,988
579,603,620
397,721,162
623,116,677
327,746,499
4,332,281,302
3,615,786,256
1,169,217,061
51,628,184
440,911,913
709,136,368
397,367,562
Payments Minus
Farmer-Paid Loss
Premium Ratio
$1,868,752,682
1,574,312,770
1,260,696,951
298,487,944
296,313,435
422,581,615
183,133,449
2,862,620,024
2,606,177,757
847,677,316
42,224,905
373,437,276
678,471,495
660,806,811
0.68
0.74
0.85
0.90
0.90
1.02
1.02
1.10
1.11
1.14
1.25
1.32
1.38
2.14
Premiums, Payments, Loss Ratios for
Corn, 1995 to 2005 by State
State
Crop
Iowa
Illinois
Nebraska
Minnesota
South Dakota
Indiana
Kansas
Missouri
Wisconsin
Ohio
Texas
North Dakota
Other States
Total
Premium
$1,448,224,763
1,112,582,499
1,041,003,003
956,678,670
647,838,398
571,216,269
376,994,307
355,437,717
322,198,732
280,030,309
258,957,963
205,455,384
1,086,450,269
Payments Minus
Farmer-Paid
Premium
-$237,339,250
39,438,013
251,353,058
-156,600,667
310,133,430
98,977,828
234,847,588
123,974,556
115,862,611
160,756,829
224,916,098
140,497,352
561,935,236
Loss
Ratio
0.35
0.54
0.72
0.30
0.93
0.69
1.08
0.75
0.78
1.05
1.27
1.09
0.77
Loss Ratios, Corn, 1995 to 2005
Per Acre Payments Minus Farmer Paid
Premiums, Corn,1995 to 2005
Premiums, Payments, Loss Ratios for
Soybeans, 1995 to 2005 by State
State
Crop
Iowa
Minnesota
Illinois
South Dakota
Nebraska
Missouri
Indiana
North Dakota
Ohio
Kansas
Arkansas
Other States
Total
Premium
Payments Minus
Farmer-Paid
Premium
Loss
Ratio
$734,129,900
692,727,222
544,945,252
425,908,028
398,055,628
360,987,432
342,122,391
252,966,927
251,105,969
238,957,882
197,656,695
907,322,104
$90,818,490
173,977,222
13,107,933
173,291,222
64,627,926
88,904,932
28,819,289
152,304,945
80,294,133
137,042,756
66,884,917
504,239,005
0.63
0.75
0.48
0.59
0.65
0.62
0.58
1.04
0.79
1.02
0.57
1.05
Loss Ratios, Soybeans, 1995 to 2005
Per Acre Payments Minus Farmer Paid
Premiums, Soybeans,1995 to 2005
Premiums, Payments, and Loss Ratios,
1995 to 2005, Lowest Loss Ratio States
State
Iowa
Hawaii
Illinois
Rhode Island
Minnesota
Washington
New Jersey
Idaho
Arkansas
Indiana
California
Missouri
Nebraska
Total
Premium
Payments Minus
Farmer-Paid
Premium
Loss
Ratio
2,325,009,452
11,419,346
1,753,472,247
547,753
2,234,286,431
327,675,063
24,596,004
274,238,219
491,397,111
972,379,336
1,417,778,958
819,199,650
1,797,487,026
-189,660,612
1,587,513
72,908,130
195,039
330,891,172
85,639,176
12,066,670
58,740,520
200,522,251
141,513,060
509,339,542
244,750,257
428,877,848
0.44
0.45
0.52
0.59
0.62
0.63
0.63
0.64
0.64
0.65
0.66
0.67
0.73
Loss Ratios, All Policies, 1995 to 2005
Per Acre Payments Minus Farmer Paid
Premiums, All Crops, 1995 to 2005
Some Preliminary
Summaries and Implications
Summary and Implications

Corn and soybeans have lower loss ratios
than other crops - lower effective
subsidization rates as a result.

There is upward bias in premium rates
for corn relative to those that are
consistent with intended loss ratios.
Geography also plays a role.

The bias has not mitigated through time.
Where to from here?

Seek to determine why corn has a low loss
ratio.

Likely due to actuarial methods, not
politics.

Changing insurance product shares (i.e.,
movement toward group policies) also
important to consider
Where to from here?

Possible factors for analysis:

Good weather in corn producing areas

Bias in methods for crops with increasing
trend-yields or “Trend Acceleration”
(would require re-rating at some level)

Bias in methods for crops with lower
variability

Bias in methods due to low participation
in early years, changing products
Seek to determine why corn has a low loss ratio….
Impacts of the Rules for
Calculating APH on the
Performance of APH Insurance
Current Rules and Extreme values:

Small sample statistics sensitive to extremes
(could be several consecutive years of poor
yields, or one or more years of good yields)

RMA noted that it is “the most frequent and
consistent concern heard from producers”

There is an incentive to selectively report yields,
alter participation patterns

Sample moments are dependent in small samples
Current Rules and Trend issues:




RMA rules ignore trend
Example:
Expected Yield
120
Skees and Reed argue
APH 10
104
that “either RMA must
APH 4
113
attempt to adjust APH
yields for trends or they
must reduce their rates to
reflect actual level of
coverage provided when
trends are not adjusted.”
Trend = 3
Average bias =
trend*(n+1)/2
Cov.
Level
Guarantee
0.75
90
0.75
78
0.75
85
Current Rules: Sample Variability
(APH 4,7, and 10-year samples from same sim-farm)
APH Sampling Dist by length
80
70
60
St.Dev
50
4 year
40
7 year
10 year
30
20
10
0
75
95
115
135
Mean
155
175
195
Yield distributions for various APH base periods and “true”
0.02
TRUE
True - 0.85
0.018
4 Y APH
Idem4Y-APH -0.85
7 Y APH
0.016
0.014
Idem 7Y APH -0.85
10 Y APH
Idem 10Y APH -0.85
Prob
0.012
0.01
0.008
0.006
0.004
0.002
0
1
51
101
151
201
Yield
Probabilities
Coverage Level
0.55
0.6
0.65
0.7
0.75
0.8
0.85
10 Y APH * Coverage Level
75
82
89
96
102
109
116
10 Y
1%
2%
3%
6%
9%
13%
19%
7Y
1%
2%
3%
5%
7%
11%
17%
4Y
1%
1%
2%
4%
6%
10%
14%
TRUE
0%
1%
1%
3%
4%
7%
10%
Yield distributions for various APH base periods and “true”
0.02
TRUE
True - 0.85
0.018
4 Y APH
Idem4Y-APH -0.85
7 Y APH
0.016
0.014
Idem 7Y APH -0.85
10 Y APH
Idem 10Y APH -0.85
Prob
0.012
0.01
0.008
0.006
0.004
0.002
0
1
51
101
151
201
Yield
Bushels
Coverage Level
0.55
0.6
0.65
0.7
0.75
0.8
0.85
Probability under True
0%
1%
1%
3%
4%
7%
10%
10 Y
66
72
79
85
92
98
105
7Y
68
74
81
88
94
101
108
4Y
70
77
83
90
97
103
110
TRUE
75
82
89
96
102
109
116
Jo Daviess
3.10
StephensonWinnebagoBoone McHenry
-0.30
9.40
5.90
12.80
Carroll
-11.20
Illinois
Ogle
-0.20
Whiteside
-0.80
De Kalb
7.10
Lee
-1.60
Mercer
-5.20
HendersonWarren
-0.60
-7.30
Hancock McDonough
-13.00
-10.50
Bureau
-5.90
Putnam
Stark
-11.40
Marshall
-9.40
-9.10
Du Page
Cook
La Salle
2.90
Grundy
-2.70
Will
1.70
Kankakee
-2.90
Livingston
-3.60
Peoria Woodford
Iroquois
Ford
-11.10
-12.70
-7.80
-6.80
Tazewell
McLean
-7.70
-5.50
Fulton
-11.20
Mason
-8.40
Schuyler
-16.30 Cass
Brown
-5.60
-7.10
Adams
-15.00
Menard
-5.30
De Witt
-5.00 Piatt
Logan
-6.10
Champaign Vermilion
3.60
2.00
0.10
Macon
-5.40
Douglas
Edgar
2.00
Moultrie
1.60
Coles
6.60
-2.00
Shelby
6.90
Greene
Clark
Macoupin Montgomery
Cumberland 0.90
-4.50
-5.50
-2.10
4.30
CalhounJersey
Effingham
2.90 -3.20
Jasper Crawford
Fayette
3.40
6.40
7.30
-0.40
Bond
Madison
0.80
Clay
-4.10
Richland Lawrence
1.10
Marion
6.40
3.80
Clinton
1.40
3.20
Saint Clair
Wayne Edwards
Wabash
Washington
1.60
1.60
8.00 4.40
Monroe
Jefferson
4.70
7.60
11.10
Perry
Hamilton White
Randolph
19.70 Franklin
5.80
-1.00
13.80
12.90
Pike
-12.30
iFarm Trend minus RMA
-17.00 to -11.00, 10 10.4%
-11.00 to -5.00, 19 19.8%
-5.00 to 1.00, 23 24.0%
1.00 to 7.00, 29 30.2%
7.00 to 13.00, 11 11.5%
13.00 to 19.00, 1 1.0%
19.00 to 25.00, 3 3.1%
25.00 to 31.00, 0 0.0%
No data
Knox
-11.80
Kane
8.80
Kendall
3.60
Rock Island
-7.80
Henry
-5.20
Lake
20.60
ScottMorgan
-3.60 -2.10
Sangamon
-2.70
Christian
-1.60
Jackson
7.80
Union
5.30
Williamson Saline Gallatin
6.70
5.20
19.50
Hardin
Johnson
Pope
Pulaski Massac
Alexander
11.30
2.70