Crop insurance loss experience, ratings changes, and impacts on participants

Abstract

Purpose

The purpose of this paper is to provide empirical information about the past loss experience in major US crop insurance programs, and documents the impacts of ratings changes through time on the premiums and exposure to participants. The losses are also examined within the structure of the current SRA to identify impacts on insurance companies and the government by fund designation.

Design/methodology/approach

- The study uses RMA Summary of Business data and methods consistent with the use of loss-cost ratemaking to analyze loss performance across years with different starting prices and volatilities. Additionally, the RMA premium quoting system was replicated across years with the ability to adjust only one feature at a time to isolate the impacts of changes in individual rating elements from changes in market conditions. Tabulations are provided in map and table form to present the loss ratios through time, in aggregate across time, and within each of the possible funds in which exposures are held. Additionally, the tools developed allow a direct tabulation of the farmer-level premium impacts of individual changes in the policy premium system, and of changing conditions over time.

Findings

Corn and soybeans represent dominant shares of aggregate policy premiums and liability, and also are the crops that underwent the greatest degree of revision in rates over the recent past both due to rate study implications, and to loss rate experience. Despite commonly made arguments that payments associated with the drought of 2012 “more than wiped out all historic gains,” it appears that insurance worked very much as intended and that the loss ratios through time are within reasonable ranges of targets. Fund designation, and the separation under the most recent SRA of Group 1 and Group 2 states substantially dampened the loss sharing and ability to capture gains by private companies, and leads to fairly low rates of return on a pure fund-loss sharing basis for insurance companies. Finally, despite the extreme losses of 2012, the aggregate performance of corn relative to the remainder of the program exhibits lower than average loss rates both in aggregate and on a scale-adjusted basis.

Practical implications

The study provides an important means to isolate and assess implications of rate changes, and to associate causes of losses with rate charges. Additionally, the structure of the SRA, and possible future versions of the SRA are informed by both the aggregate, and the normalized performance results provided. And, the relative performance of major row, crops even with recent extreme losses, appears appropriate or positive to insurance companies after considering the impacts of the SRA on company exposure. In total, the evidence points toward appropriate movement toward target overall loss ratios in the US crop insurance program.

Originality/value

This paper provides an extensive empirical evaluation of ratings for major crop insurance policies and provides a unique means to decompose sources of changes in premiums and rates across locations and through time. It also provides an evaluation of the performance of crop insurance post-SRA in a manner that allows both totals and scale-adjusted performance to be assessed.

Citation

J. Sherrick, B., D. Schnitkey, G. and D. Woodward, J. (2014), "Crop insurance loss experience, ratings changes, and impacts on participants", Agricultural Finance Review, Vol. 74 No. 4, pp. 443-463. https://doi.org/10.1108/AFR-09-2014-0027