Crop Insurance & the 2012 Farm Bill
Kent Lanclos
United StatesDepartment of Agriculture
Risk Management Agency
AAEA Annual MeetingJuly 26, 2011
Pittsburgh, PA
Program Participation
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
50
100
150
200
250
300
Insured Acres
Million
Kent LanclosRisk Management Agency
2
Program Participation
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
$0$10$20$30$40$50$60$70$80$90
$100
Liability by Plan Type
Series5 Other Group Revenue
Billion
Kent LanclosRisk Management Agency
3
4
ProgramParticipation
Crop Plan Ins Acres
Crop Plan Ins Acres
Crop Plan Ins Acres
Corn
Group 3.01
Soybeans
Group 2.31
Rice
Group 0.00
APH 11.02 APH 10.60 APH 1.72
Rev 59.47 Rev 52.49 Rev 1.03
Total 73.56 Total 65.40 Total 2.75
Partic. 84% Partic. 85% Partic. 76%
% BUP 94% % BUP 93% % BUP 57%
Cotton
Group 0.02
Wheat
Group 0.11
APH 2.99 APH 10.65
Rev 7.19 Rev 35.28
Total 10.19 Total 46.04
Partic. 95% Partic. 86%
% BUP 86% % BUP 93%
Kent LanclosRisk Management Agency
5
PremiumRates
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
0.00
0.50
1.00
1.50
2.00
2.50
3.00 Program Loss ExperienceAnnual Loss Ratio 75-93 Loss Ratio
Kent LanclosRisk Management Agency
Premium Rates
6
RMA’s general approach to premium rating is appropriate Consistent with actuarial principles
Review posted on RMA’s Website
RMA’s rating methodology, and supporting documentation also available
No legislation required
Rating Methodology Review
Kent LanclosRisk Management Agency
PremiumRates
7
Adjusting historical loss experience to reflect Current T/P mix Unit structure Alternative weighting of years
Work underway by contractor Does not impact price component of revenue
rates
Rating Methodology Review
Kent LanclosRisk Management Agency
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
0
25
50
75
100
125
150
175
200Illinois Corn Yields
Actual Yield
Yie
ld (
Bu
/Acre
)Yield
Trends
Kent LanclosRisk Management Agency
YieldTrends
9
Impact of Yield Drag
Year Actual Yield
2001 150
2002 133
2003 162
2004 178
2005 141
2006 161
2007 173
2008 155
2009 171
2010 176
Effect on Guarantee, 75% CL*
2011 Expected Yield
176
2011 APH 163
2011 ECL** 69%
*CL = coverage level**ECL = effective coverage level
Kent LanclosRisk Management Agency
YieldTrends
10
Addressing Yield Trends
FCIC Board approved 508(h) submission at May 2011 meeting
Proposal by Illinois Corn Marketing Board
Initially for corn & soybeans for 2012
Potential expansion to other crops in 2013
No legislation required
Kent LanclosRisk Management Agency
DecliningYields
11
Current Measures Yield Plug
Replace low yield with 60 percent of the county T-Yield (10-year county average)
Yield Floor APH can not go below 80 percent of T-Yield
Yield Limitation Year-to-year change in APH limited to 10
percent
Kent LanclosRisk Management Agency
DecliningYields
12
Addressing Declining Yields
Alternative yield plug that relies on producer’s own history rather than county averages
Variable percentage tied to number of actual yields
o More actuals => higher percentage
Replace current T-Yields with Personal T-Yield based on insured’s APH
Legislation may be required
Cost/paygo considerationsKent Lanclos
Risk Management Agency
3rd PartyDamage
13
Damage not due to a natural cause
No indemnity payment
Zero production meaning guarantee negatively impacted for next 10 years
Also, premium rate higher because of lower rate yield
Consider options
Kent LanclosRisk Management Agency
Crop Insurance in the South
14
Crop Insurance Participation
Crop South South Midwest Midwest
Insured / Planted
BUP / Insured
Insured / Planted
BUP / Insured
Corn 83% 75% 86% 96%Cotton 96% 71%Rice 75% 47%Soybeans 83% 70% 84% 96%Wheat 70% 65% 89% 97%
South = Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia
Midwest = Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin
Kent LanclosRisk Management Agency
Crop Insurancein the South
15
RMA commissioned two studies of crop insurance participation in the South
Consistent findings of 2 studies No inherent flaw in program/policies such that
“crop insurance doesn’t work in the South” Low participation (particularly BUP) due to
o Misinformation & negative perceptionso High premium rates & other risk management optionso Reliance on disaster assistanceo Not required by lenderso Does not payoff every year
Kent LanclosRisk Management Agency
Crop Insurancein the South
16
Addressing Participation Concerns Priority for RMA, but …
No silver bullets Minimizing fraud, waste and abuse to change
perceptions Premium rates
Re-weight historical loss experience Reduce use of yield floors, cups, disaster
plugs, etc. Education and changing culture is a slow
process
Kent LanclosRisk Management Agency
ProgramCost
17
Reins. Year
A&O+LAE Paid to
AIPs
Premium Subsidy
MiscProgram Gains & Losses
AIP Gains & Losses
Cost of Crop
Insurance Program
(Million Dollars)
2001 $635.87 $1,781.22 $3.23 -$10.99 $346.00 $2,755.33
2002 $625.89 $1,737.94 $0.38 $1,150.42 -$47.31 $3,467.33
2003 $733.66 $2,044.94 $0.37 -$174.68 $377.85 $2,982.15
2004 $889.42 $2,472.26 $4.22 -$893.62 $689.43 $3,161.71
2005 $829.25 $2,334.66 $4.11 -$1,604.41 $914.97 $2,478.58
2006 $958.58 $2,779.01 $0.00 -$1,167.48 $818.85 $3,388.95
2007 $1,332.53 $3,812.23 $0.00 -$3,082.33 $1,572.47 $3,634.89
2008 $2,009.25 $5,678.56 $0.00 -$1,112.57 $1,095.14 $7,670.38
2009 $1,618.51 $5,424.16 $0.00 -$3,732.14 $2,297.77 $5,608.30
2010 $1,367.74 $4,708.61 $0.00 -$3,409.89 $1,930.38 $4,596.84Kent Lanclos
Risk Management Agency
ProgramCost
18
The new SRA achieved $6 billion in scored savings over 10 years At current prices, savings would be significantly
larger Future program costs
Lower premium rates => higher participation & coverage levels, but lower premium subsidies and company underwriting gains
CBO scoring assumes loss ratio of 1.0 Future loss experience may be less favorable
than recent pastKent Lanclos
Risk Management Agency
ProgramCost
19
Conundrum, if you will For FSA programs (counter-cyclical payment,
marketing loans), higher prices mean reduced spending
For crop insurance, higher prices mean higher more spending for premium subsidies and underwriting gains
Kent LanclosRisk Management Agency