Disclaimer: This web page is designed to aid farmers with their marketing and risk management decisions. The risk of loss in trading futures, options, forward contracts, and hedge-to-arrive can be substantial and no warranty is given or implied by the author or any other party. Each farmer must consider whether such marketing strategies are appropriate for his or her situation. This web page does not represent the views of Kansas State University. 
Disclosure:  Dr. Barnaby’s research was the basis for the privately developed Crop Revenue Coverage

Is RMA Continuing to Send My Crop Insurance Premium Dollars to Texas ?[1]

Introduction.  Growers and others who have studied the Risk Management Agency’s (RMA) web page have questioned if their premium dollars are being shifted to other states to cover losses.  The data on the Risk Management Agency’s web page covers the period 1989 through crop year 2002.  As a result, many insured farmers have asked; “are my crop insurance premium dollars being sent to Texas and other high risk states to cover underwriting losses?”. 

Data.  The data in tables 1, 2, and 3 are based on all of the reinsured contracts sold at the “buy- up” level for the period 1989-2002.  The data for the period 1989-2002 was collected from the RMA web page located at http://www.usda.rma.gov.

The CAT contracts were not included in the data.  The objective of this analysis was to answer the question are farmer paid premiums being shifted to other states therefore the CAT contracts were not included because farmers paid no premiums for CAT.  All “buy-up” contracts were included and would include all of the reinsured products, i.e. Crop Revenue Coverage (CRC), Revenue Assurance (RA), Income Protection (IP), Group Revenue Insurance Plan (GRIP), Multi-Peril Crop Insurance (MPCI), and all other coverage’s purchased at the “buy-up” level.

In the following analysis, loss ratios were defined as the summation of total indemnity payments divided by summation of total premiums over the 14-year period.  The loss ratio reported in the tables is not an average of annual loss ratios but the summation of all indemnity payments divided by summation of all premiums for the 14-year period for all products except CAT.  The net gain in dollars to farmers was defined as the difference between the sum of farmer paid premiums and the sum of the indemnity payments collected over this 14-year period.

The loss ratio gives one the performance of the individual state and to be considered actuarially sound the loss ratio should be under one.  This would translate into a farmer paid premium of about 58 cents for every dollar in indemnity payments collected by farmers.  The net gain and the dollars of coverage demonstrate how important the crop insurance program is in some states versus others.  Coverage measures the total amount of protection provided by the insurance program where Iowa ranks first while the net gain measures the total indemnity dollars exceeding farmer paid premiums and Texas ranks first under this criteria.

A 14-year period may not be sufficient time to make any judgments about actuarial soundness especially in low risk states where the frequency of loss is very low.  This approach gives the recent crop history greater weight because in most states participation has increased since 1989.

Top 10 States with Highest Loss Ratio.  In table 1 the states are ranked by loss ratio and the 10 states with the highest loss ratio versus the Kansas loss ratio is presented in figure 1.  The 10 states with the highest loss ratio include Oregon , Connecticut , Utah , Arizona , Massachusetts , Oklahoma , Alabama , South Carolina , Mississippi , and Louisiana (figure 1).

Oregon had the highest loss ratio of $2.20.  However, total indemnity payments amounted to less than $139 million dollars for the state of Oregon .  Texas ranked 11^th and North Dakota ranked 18^th, which are 2 states that are typically identified as states with “high” loss ratios (table 1).  Texas , over this 14-year period, had a loss ratio of $1.52 while North Dakota had a loss ratio of $1.27.  This loss ratio is roughly half of that of Oregon but both Texas and North Dakota have large amounts of participation.  Therefore, these loss ratios have a greater impact on the Risk Management Agency/insurance companies.

Ranked by loss ratios, Kansas came in number 30 out of the 50 states with a loss ratio of $1.05.  This would represent a 5-cent “underwriting loss” for the state of Kansas , however the loss ratio is below the RMA target of $1.07.  There were 19 states that had a loss ratio under $1.00, which is normally considered to be the actuarially sound rate (the expense load to cover agent commissions, insurance company expenses, funding of the RMA are funded under separate budget items).[2] 

Top 10 States with Lowest Loss Ratio.  In table 1 the states are ranked by loss ratio and the 10 states with the lowest loss ratio versus the Kansas loss ratio is presented in figure 2.  The 10 states with the lowest loss ratio include Missouri , Nebraska , Rhode Island , Indiana , Nevada , Iowa , Illinois , Vermont , Alaska , and Hawaii (figure 2).

Missouri ranked 41^st and Nebraska ranked 42^nd with a loss ratio of 71 cents.  Indiana ranked 44^th with a loss ratio of 57 cents and Iowa ranked 46^th with a loss ratio of 56 cents followed by Illinois with a loss ratio of 46 cents.  The states with the lowest loss ratio were Alaska and Hawaii but there is very little participation in those two states (table 1, figure 2). 

Top 10 States with Highest Net Dollar Gain by Farmers by State.  The states are ranked by the amount of total dollars gained by farmers over the 14 year period is presented in table 2.  The gain is defined as the difference between total indemnity payments collected and the total of farmer paid premiums.  This measurement identifies the greatest benefit to the individual states and identifies where crop insurance has been more heavily accepted.  The 10 states with the highest farmer net dollar gain include Texas , North Dakota , Georgia , Kansas , South Dakota , North Carolina , Oklahoma , Montana , California , and Alabama (figure 3).

Texas ranks first with a net dollar gain by farmers of $2.5 billion dollars followed by North Dakota with $1.1 billion dollars (table 2, figure 3).  Kansas ranks fourth with a net gain of $509 million dollars.  South Dakota was the only corn belt state to break the top 10, ranking number five with a net gain of $500 million dollars.  California was a “surprise” number 9 with a net gain of $275 million dollars.     

Top 10 States with Lowest Net Dollar Gain by Farmers by State.  The 10 States with the lowest net dollar gain by farmers versus the net dollar gain by Kansas farmers is presented in figure 4.  The 10 states with the lowest farmer net dollar gain include Delaware, New Hampshire, Nevada, Rhode Island, Alaska, Vermont, Hawaii, Indiana, Iowa and Illinois (figure 4).

Illinois ranked 50^th with a $251 million dollar loss, i.e. farmers paid $251 million dollars more in premiums then were collected in indemnity payments by farmers in the state of Illinois.  Farmers in Iowa also paid more in premiums than indemnity payments collected.

Top 10 States with the Highest Dollars of Coverage by State.  Another measurement of insurance is the risk protection provided. The states are ranked by the total dollars of coverage provided to farmers over the 14-year period is presented in table 3.  The total dollars of coverage is the sum of the coverages provided in the entire buy up contracts sold in the state.  The total dollars of coverage is the maximum indemnity payment that could be paid under the crop insurance contract.  While an individual farmer can and do collect the full coverage because of a zero yield, there is no chance that the dollars of coverage would equal indemnity payments at the state level because that would require a zero state yield.  The 10 states with the highest dollar amount of protection include Iowa, Minnesota, Illinois, Nebraska, Texas, North Dakota, Kansas, California, South Dakota and North Carolina (figure 5).

Iowa ranked first with a total coverage of $36 billion dollars over this 14-year period (table 3, figure 5).  Minnesota ranks second with $25 billion dollars of coverage followed by Illinois at $22 billion dollars.  Surprisingly, Illinois farmers have purchased a considerable amount of coverage while at the same time collecting lower than expected indemnity payments.  Kansas ranked seventh with a total of $12.5 billion dollars of aggregate coverage purchased over this 14-year period. 

Top 10 States with the Lowest Dollars of Coverage by State.  The 10 states with the lowest aggregate dollars of coverage by state versus the dollars of coverage purchased by Kansas farmers is presented in figure 6.  The 10 states with the lowest dollar amount of protection include Delaware, Connecticut, West Virginia, Utah, New Jersey, Vermont, New Hampshire, Nevada, Rhode Island and Alaska (figure 6).

Connecticut ranked 42^nd in aggregate dollars of coverage but 2^nd in loss ratio at $2.14.  While Illinois ranked 3^rd in aggregate dollars of coverage but was 47^th in loss ratio of $0.46.  This would suggest that underrated crop insurance contracts do not necessarily increase participation.  Rhode Island and Alaska ranked 49^th and 50^th based on the aggregate dollars of coverage. 

Are Farmer Paid Premiums Sent to Other States to Cover Underwriting Losses?  When farmers ask the question “are my premium dollars being sent to other states to pay losses?” the answer clearly is no for most states.  However, those 19 states with loss ratios under $1.00 have shifted tax revenues to the higher risk states.  Illinois , Iowa , and Indiana farmers would have the best argument that their premium dollars have been used to pay losses in higher risk states.  However, one must remember 14 years is still a very short time horizon to be measuring loss ratios.  This is especially true in a state where one expects a low frequency of claim, like Illinois .  A single loss year in a state with a low frequency of claims will take several years to recover the underwriting loss.

In order to test the theory that farmer paid premiums exceeding indemnity payments are generating higher loss ratios and those states with high loss ratios are declining because of increased rates combined with new underwriting rules, the same analysis was completed for years 1998 through 2002.

During this 5 year period from 1998-2002 Kansas did meet the RMA “actuarial” soundness test of $1.07 target because the loss ratio was under $0.98 when the USDA share of the premium was included.  During this 5 year period the total premium paid in (includes both farmer paid premiums plus government paid premiums) RMA/insurance companies paid out $0.98 for every dollar in premiums.  Kansas farmers paid about 58 cents in premiums and the balance was paid by RMA.

Data.  The data in tables 4 and 5 are based on all of the reinsured contracts sold at the “buy- up” level for the period 1998-2002.  The data for the 5 year period was collected from the RMA web page located at http://www.usda.rma.gov.  The CAT contracts were not included in the data either.

Top 10 States with Highest Loss Ratio for the Past 5 Years.  In table 4 the states are ranked by loss ratio and the 10 states with the highest loss ratio versus the Kansas loss ratio is presented in figure 7.  The 10 states with the highest loss ratio include Oregon , Connecticut , Massachusetts , Montana , Utah , Arizona , Mississippi , New Hampshire , South Carolina , and Texas (figure 7).

The 5 year Oregon loss ratio was $2.72 and was higher than the 14 year loss ratio of $2.20.  Texas ranked 11^th in the 14 year data set but was 10^th in the 5 year data set and the 5 year loss ratio increased!  North Dakota ranked 18^th, increased to 14^th in the 5 year data set and the loss ratio increased from $1.27 to $1.36 (tables 1 and 4). 

Top 10 States with Lowest 5 Year Loss Ratio.  In table 4 the states are ranked by loss ratio and the 10 states with the lowest loss ratio versus the Kansas loss ratio is presented in figure 8.  The 10 states with the lowest loss ratio include Hawaii , Wisconsin , Minnesota , Idaho , Alaska , Indiana , Iowa , Nevada , Illinois , and Vermont (figure 8).

Wisconsin ranked 42^nd and Minnesota ranked 43^rd with a loss ratio of 55 and 53 cents respectively.  Indiana ranked 46^th with a loss ratio of 43 cents and Iowa ranked 47^th with a loss ratio of 41 cents.  Illinois generated a loss ratio of 31 cents.  The state with the lowest loss ratio was Vermont but there is very little participation in that state (table 4, figure 8). 

Top 10 States with Highest 5 Year Net Dollar Gain by Farmers by State.  The states are ranked by the amount of total dollars gained by farmers over the 5 year period is presented in table 5.  The gain is defined as the difference between total indemnity payments collected and the total of farmer paid premiums.  This measurement identifies the greatest benefit to the individual states and identifies where crop insurance has been more heavily accepted.  The 10 states with the highest farmer 5 year net dollar gain include Texas , North Dakota , Kansas , Montana , South Dakota , Georgia , California , Oklahoma , Mississippi , and North Carolina (figure 9).

Texas ranks first with a net dollar gain by farmers of $1.5 billion dollars followed by North Dakota with $723 million dollars (table 5, figure 9).  Kansas ranks third with a net gain of $281 million dollars combined with an “actuarially” sound loss ratio of $0.98.  South Dakota was the only corn belt state to break the top 10, ranking number five with a net gain of $270 million dollars.  California was a “surprise” number 7 with a net gain of $198 million dollars.  California and South Dakota had an “actuarially” sound 5 year loss ratio of $1.00.     

Top 10 States with Lowest Net Dollar Gain by Farmers by State.  The 10 States with the lowest net dollar gain by farmers versus the net dollar gain by Kansas farmers is presented in figure 10.  The 10 states with the lowest farmer net dollar gain include Hawaii, Rhode Island, Alaska, Nevada, Vermont, Idaho, Minnesota, Indiana, Iowa and Illinois (figure 10).

Illinois ranked 50^th with a $215 million dollar loss, i.e. farmers paid $215 million dollars more in premiums then were collected in indemnity payments by farmers in the state of Illinois over the 5 years from 1998 to 2002.  Farmers in Rhode Island also paid in more premiums than indemnity payments collected, but unlike Illinois participation was very low.

Results.  If rates and underwriting are improving as some “experts” have argued then one would expect the loss ratio in high risk states to be lower for the most recent 5 year period than they were for the 14 year period.

Figure 11 shows the 14 year loss ratio followed by the 5 year loss ratio.  Many of the 5 year loss ratios in states with loss ratios over $1.00 increased.  While 5 year loss ratios decreased in states where the loss ratios were under 75 cents and in some cases farmer paid premiums exceed indemnity payments.

Figure 12 shows the change in the loss ratio comparing 14 year versus 5 year loss ratios.  Oregon and Montana showed large increases in underwriting losses during the recent 5 years versus the longer run 14 year loss ratio.  Texas and North Dakota also showed an increase in underwriting losses for the most recent 5 year period.  If rates and underwriting were improving one would have expected the opposite result.

By contrast Minnesota , Indiana , Iowa , and Illinois showed an increase in underwriting gains for the most recent 5 years.  However, over the 14 year and the 5 year period, Iowa , Indiana , and Illinois farmers paid more in premiums than they collected in indemnity payments.  The result is those states collected none of the net subsidy over both the 14 year and the 5 year periods.  In fact, the gap between farmer paid premiums and indemnity payments is widening as measured by the most recent 5 years when one would have expected the opposite result (figure 12).

The other measure is the 14 year versus 5 year net dollar gain by farmers.  One would expect that 14 years would generate more dollar gain than 5 years, so this measure was converted to average annual net dollar gain.  For example, Texas had an average net gain over the 14 year period of $175 million per year versus nearly a 300 million annual average dollar gain over the past 5 years (figure 13).  This is the direct result of the loss ratio not improving and the increased amount of coverage purchased in Texas .

By contrast the average Iowa farmer paid premiums exceed indemnities by $16 million over the 14 year period.  The 5 year average Iowa farmer paid premiums exceeded indemnity payments by $41 million.  The same is true for Illinois .  Indiana , Iowa , and Illinois farmers had a net premium loss and collected none of the farmer premium subsidy.

Change Rates?  This would suggest rates should be increased in Texas , North Dakota, while reducing rates in Iowa and Illinois .  The data also suggests the rate is about right for Kansas .

However, even within states there may be differences between irrigated versus dryland, or wheat versus corn.  Therefore, one would not want to do an “across the board” rate change. 

The 14 year USA loss ratio was $1.05 and the 5 year loss ratio was $0.97.  These loss ratios would be considered actuarially sound for the entire book, but that loss ratio historically has not been evenly distributed by state.  Indiana , Iowa , and Illinois would have the strongest argument they are  “sending” premiums to high risk states to cover losses.  These states have very little irrigation and are mostly corn and soybeans, so there is little chance the crop mix is a factor.

The one problem when considering rates is that low risk states have “low” rates combined with a low frequency of claim.  A single loss year like 1988 or 1993 requires many years with underwriting gains to recover the loss.  However, if rate reductions were provided, most actuaries would likely apply those reductions to Indiana , Iowa , and Illinois .

Most private actuaries would also do a rate evaluation of states with higher loss ratios.  In most cases they would either suggest rate increases or underwriting changes or both.  Many of the states with high loss ratios also have multiple crops (beyond corn and soybeans) that may grow during different time periods and under irrigation.  Those factors would be a part of any actuarial study and it is unlikely that private actuaries would recommend “across the board” rate increases, even in states with high loss ratios.

Summary.  This analysis gives no credit for the risk reduction.  People buy property-casualty insurance where the expected indemnity payout is less than the paid premiums.  The difference between premiums and the indemnity payment is used to pay agent commissions, insurance company expenses, and profits for stockholders.  The government pays all of the expenses plus a premium subsidy that averages about 57% of premiums.

The current rates in Iowa and Illinois would be very close to a private property-casualty rate.  So why does the private sector not offer a private product?  A private product would be very unlikely without government reinsurance to cover the catastrophic risk that would bankrupt most insurance companies, i.e. the one in 500 year drought.  Farmers also receive Farm Service Agency payments that reduce risk and the demand for insurance.  Also, any unsubsidized product would also have to overcome the USDA expense and premium subsidies, a very unlikely result.

Both of these states have a large amount of participation.  Suggesting these farmers are buying risk protection and don’t expect payments that will provide subsidies.

Kansas loss ratio is on target.  Kansas farmers have had the advantage of risk reduction and they have captured the crop insurance subsidies.

Texas and North Dakota farmers continue to capture all of the subsidies and the underwriting loss where indemnities exceed premiums (includes farmer and USDA premiums paid).  These farmers have received an “unintended subsidy” that is covered by taxpayers.

Individual Farmer.  This data is all state aggregated data.  While a whole state may have received more dollars then were paid by farmers, this data will include farmers who have bought crop insurance in those states but received no indemnity payments.

Are Farmer Paid Premiums Sent to Other States to Cover Underwriting Losses?  When farmers ask the question “are my premium dollars being sent to other states to pay losses?” the answer clearly is no for most states.  However, those 19 states with loss ratios under $1.00 have shifted tax revenues to the higher risk states.  Illinois , Iowa , and Indiana farmers would have the best argument that their premium dollars have been used to pay losses in higher risk states.  However, one must remember 14 years is still a very short time horizon to be measuring loss ratios.  This is especially true in a state where one expects a low frequency of claim, like Illinois .  A single loss year in a state with a low frequency of claims will take several years to recover the underwriting loss.

RMA has continued to adjust rates based on experience but the adjustments have been insufficient to improve some state loss ratios.  However, even RMA would probably agree (privately) that Texas and North Dakota are underrated.  RMA is prevented from increasing rates by more than a predetermined percentage.  There may also be some political constraints on rate increases.