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