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Whose Line is it Anyway?

Whose Line is it Anyway?. Federal Crop Insurance Ratemaking and Profitability Projections. Casualty Actuarial Society Seminar on Ratemaking The Tampa Marriott Waterside Tampa, Florida March 7-8, 2002 COM-24. Richard Bill, FCAS Country Insurance & Financial Services. Overview.

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Whose Line is it Anyway?

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  1. Whose Line is it Anyway? Federal Crop Insurance Ratemaking and Profitability Projections Casualty Actuarial Society Seminar on Ratemaking The Tampa Marriott Waterside Tampa, Florida March 7-8, 2002 COM-24 Richard Bill, FCAS Country Insurance & Financial Services

  2. Overview • Perils Insured • Coverage • Federal/Private Partnership • Ratemaking Considerations • Profitability Considerations • Standard Reinsurance Contract (SRA) • Projected Profitability

  3. Perils Insured • Too Dry (Large Area) • Too Wet • Hail • Insects • Prevented Planting • All other Risks except poor farming practices • Price (Revenue products only)

  4. Seven Prerequisites of Insurable Risk#7-”Unlikely to produce loss to a great many insured units at the same time”Mehr & Cammack; Principles of Insurance; 1972

  5. Coverage Provided • The policy Guarantees the yield of the crop or the revenue from the crop • Loss is not one event but is based on crop production (and price for Revenue Ins) at the end of the season

  6. Yield Product Guarantee • Yield Guarantee=Actual Production History (APH) X Coverage Level • Example - 100 Bushels per acre X 75% Coverage Level = 75 Bushels per acre

  7. Revenue product Guarantee • Revenue Guarantee=APH X Anticipated Price Per Bushel X Coverage Level • Example - 100 Bushels per acre X $2 per Bushel X 75% = $150 per acre

  8. Coverage Level • Generally from 50% to 85% • Acts like a deductible • Example – 75% coverage level is really a 25% Deductible. • A 25% loss is needed before any payment is made

  9. Federal/Private Partnership • Began strictly as a Govt Program in 30’s • Small program until Private Industry began participating in the early 80’s • Private Companies took over all delivery in the 90’s • Safety Net for Nation’s Farmers • Intended to replace Free Ad Hoc Disaster Payments

  10. Size of Industry • About 70% of US cropland Insured • $37 Billion of Liability • $3 Billion of Premium • Less than 20 companies participating

  11. Federal Government Role • Programs and Policy language • Rates (All companies charge same rates) • Expense reimbursement to the companies (Expenses are not built into the rate) • Premium subsidies to the Farmers (about 60% in 2001) • Oversight • Provides Reinsurance to Private Companies

  12. Private Industry Role • Provides distribution system through their agents • Issues policies on their paper • Adjusts Claims • Retains risk after Government Reinsurance

  13. Unique Ratemaking Considerations • Paper in the Winter 2000 Forum by Schnapp, Driscoll, Zacharias, and Josephson which describes ratemaking in detail • Loss is not one event but is based on crop production at the end of the season • Long Experience Period Needed • Variability of Loss Ratio • Cyclical Weather patterns

  14. Ratemaking (Cont.) • Losses and Liability are converted to common coverage level • Basic ratemaking unit is County. A Loss Cost per $100 of Liability is Calculated for each County by year • Catastrophe procedure

  15. Ratemaking (Cont.) • A maximum of 60% credibility is assigned to the County Loss Cost • The remainder of the credibility is assigned to “Simple circle Loss Cost “ which is a weighted average of the surrounding Counties Loss Cost • Loading for Unforeseen Losses

  16. Profitability Considerations

  17. Projected Loss Ratios • 1980-2000 Average Loss Ratio was 128% • Loss Ratio in the Federal Budget is 107.5% for 2003 Fiscal Year • Little if any investment income • How do Companies Make Money???

  18. Standard Reinsurance Contract (SRA) • Combination of Stop Loss and Quota Share • Each State stands on its own • Three Categories of Funds with each having three different product types for a total of 9 separate funds • Each of the 9 funds have different reinsurance terms for Stop Loss and Quota Share

  19. 3 Categories of Funds (Companies choose)

  20. 3 Types of Policies

  21. Commercial Fund Stop Loss Cover-All Other Policies (101.6% Max loss Retention)

  22. Stop Loss Premium (Max Profit Ret. 48.9%)

  23. Modeling Profitability • I used Lognormal Distribution for illustration purposes • Most states appear to have Lognormal Distribution with Original Coefficient of Variation of between 50% and 125%

  24. Final Considerations • Profitability varies considerably from state to state • Complex models are available to help decide which funds each policy should be assigned to • Underwriting Gain is reduced because expense reimbursement is inadequate to cover actual expenses

  25. Future-Random Thoughts • Revenue policies may become, by far, the predominate coverage sold • Should a different procedure be used to weight County loss cost with surrounding Counties (see Christopherson and Werland, “Using a Geographic Information System to Identify Territory Boundaries”, 1996 Winter Forum)

  26. Future (Cont.) • The federal budget includes a provision to cap industry underwriting gains at 12.5% without considering the shortfall in expense reimbursement-Would there be an impact on the number of companies participating • Federal Govt. may require that a new SRA be negotiated next year

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