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.

A Kansas Farmer Thinks Crop Insurance Rates Are Already Too High![1]

Dear Art,

Your original message states (posted on AgManager.info at: http://www.agmanager.info/crops/insurance/risk_mgt/rm_pdf03/abcihistusa.pdf ) that total net indemnity paid (gross indemnity minus premium but excluding subsidy) favors the TX and KS farmers to the detriment of the IL and IA farmers.  Our Western Kansas crop insurance rates are already too high! 

Dear Kansas Grower,

Thanks for the question and I will try to respond to each of your comments.

The indemnity payments in Texas exceeded farmer paid premiums by $3 billion while farmer paid premiums exceed indemnity payments in Illinois by $90 million over the period 1989 through 2003.   However, there is not enough information in the analysis to support any rate changes but probably raises questions.  One problem when considering rates in low risk states are those “low” rates are 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.  The data in the analysis does not include the 1988 crop year but does include 1993. 

In the high risk areas there have been rate and underwriting rules changes; for example, summer fallow practice has been re-added on Oregon wheat, limits have been placed on how much can be collected from a second failed crop on the same acre, etc.  In addition one would need to separate out the irrigation practice from this aggregate data.  One would also need to answer the question on the length of time necessary to determine actuarially soundness.  For example, it is possible the disaster for Illinois has yet to occur but will over time.

The loss ratio for the entire USA insurance pool over this 15 year period was 1.00.  This would meet the actuarially soundness test that was required by Congress because the expenses were funded from a separate appropriation.

Your paper is misleading and one sided because:

(i) The crop insurers have a different set of companies for high risk and low risk areas thus managing their risk better with the re-insurer;

Insurance companies would likely have the same private reinsures on high risk states as they do on low risk states.  What is different is the RMA reinsurance agreement allows companies to place an insurance policy in the commercial, developmental, or assigned risk pools.  Subject to RMA state limits, insurance companies place most of their business for states with high loss ratios in the assigned risk pool and most of their business from the states with low loss ratios in the commercial pool.  From this data it is not possible to tell how much of the underwriting losses were paid by government versus insurance\re-insurance companies.  One can also not tell who captured the underwriting gains.

(ii) The premiums for high risk areas are substantially higher then in the low risk areas;

You are correct.  Central Kansas wheat rates are much lower than Western Kansas wheat rates.  So are private hail rates.  Private hail insurance rates on Central Kansas wheat is about $3-$5 versus Western Kansas rates of $10-$18 per one hundred dollars of coverage.

(iii) Premiums for farmer with a higher claim history are docked higher premiums;

You are correct the rates are higher as the APH falls due to claims.  Those farmers without claims that have higher APH’s play lower rates but many farmers probably don’t realize they are getting a discount.  Years ago, RMA did give a good experience discount but then they decided to build the discount into the rate.

(iv) The Federal subsidies in TX are substantially higher than in IL .

You are correct.  The total Illinois subsidy was $666 million for 1989 through 2003 versus $1.6 billion for Texas.  The total Kansas subsidy was $680 million over this 15 year period.  The subsidy rate was set by Congress and is a function of the number of acres insured, value of crops insured, and the insurance coverage levels selected by farmers.  Farmers are supposed to capture the subsidy over time.  If farmers just captured the subsidy, then Texas would still rank first because there are a lot of insured acres in Texas.

The only fair way is "self-insurance with subsidies paid directly to farmers".  

A farmer savings plan has been proposed as a public policy alternative to crop insurance.

ART