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Crop Insurance Overview of Primary Market in US

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June 6-7, 2005. Crop Insurance Overview of Primary Market in US. Susan Witcraft Minneapolis. U.S. Crop Insurance Three Classes of Business. MPCI (Multiple Peril Crop Insurance) Government supported program.

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u s crop insurance three classes of business
U.S. Crop InsuranceThree Classes of Business

MPCI (Multiple Peril Crop Insurance)

  • Government supported program.
  • Rates, policy forms, underwriting guidelines and loss adjusting procedures are all established by the Federal Crop Insurance Corporation (FCIC).
  • FCIC offers attractive inuring reinsurance protections.
  • The Policy is “Yield” or “Revenue” based covering “All Perils”.

Crop Hail

  • Traditional crop insurance that has been around since the early 1900’s.
  • Policy covers only Hail and Allied Coverages.
  • Policy structured as a “percentage of insured value” basis.

Named Peril

  • Single peril coverage on specific crops or MPCI Add On / Deductible Protection.
slide6

MPCI Industry OverviewDefinitions of Coverage Types

“Buy Up”

This is a production or yield based policy. This traditional type coverage utilizes a farmer’s deductible level and individual Actual Production History (APH – 6- to 10-year average yield) to determine coverage. The farmer chooses a coverage level (ranging from 50% - 90%) and price election when buying a policy.

Catastrophe

This is also a production or yield based policy. This coverage was introduced by the FCIC in 1995 after the 1993 MPCI loss as a further “subsidy” to the market. The policy offers 50% coverage at 60% of the MPCI price election.

mpci industry overview definitions of coverage types

Individual Farmer APH

Year APH

1993 80

1994 125

1995 150

1996 150

1997 145

1998 140

1999 130

2000 120

2001 60

2002 100

Average APH 120

MPCI Industry OverviewDefinitions of Coverage Types

“Buy-Up” Insurance Example (Iowa Corn)

2003 Purchased Policy

MPCI Level 70%

Price Election 2.40

Amount of Insurance: $201.60

2003 Payout

2003 Actual Production: 75

Payout: 120 (APH) * 70% (Coverage Level) = 84

84 - 75 (2003 Yield) = 9 bushel loss per acre

9 * $2.40 (price election) = $21.60 Insurance loss

payment per acre

slide8

Industry OverviewDefinitions of MPCI Coverage Types

Revenue (CRC or RA)

This is a revenue protection policy. This coverage was first introduced to the market in 1996 for corn and soybeans in the states of Iowa and Nebraska. The FCIC has expanded this coverage for other crops and in nearly all states. The revenue coverage guarantee is determined using the farmers APH and Chicago Board of Trade (CBOT) commodity prices.

CRC Insurance Example

CRC Policy Wording Definitions

Minimum Guarantee - APH multiplied by the Base Price multiplied by the coverage level elected.

Harvest Guarantee - APH multiplied by the Harvest Price multiplied by the coverage level elected.

Final Guarantee - Greater of the Minimum or Harvest Guarantee.

Assumptions

APH = 150 CBOT Price = $2.50 Coverage Level = 70% Minimum Guarantee = $262.50

slide9

Industry OverviewDefinitions of MPCI Coverage Types

CRC Insurance Example

Example 1 - “2002 Type Scenario” - Yield  CBOT price 

Actual Minimum Harvest Harvest Final Actual $ Loss

Yield Guarantee Price Guarantee Guarantee Revenue* Per Acre

80 $262.50 $2.75 $288.75 $288.75 $220.00 $68.75

Example 2 - “2001 Type Scenario in Nebraska” - Yield  CBOT price 

Actual Minimum Harvest Harvest Final Actual $ Loss

Yield Guarantee Price Guarantee Guarantee Revenue* Per Acre

80 $262.50 $2.25 $236.25 $262.50 $180.00 $82.50

* Current Yield multiplied by Harvest Price

slide10

Industry OverviewDefinitions of MPCI Coverage Types

CRC Insurance Example

Example 3 - “1994 Type Scenario” - Yield  CBOT price 

Actual Minimum Harvest Harvest Final Actual $ Loss

Yield Guarantee Price Guarantee Guarantee Revenue* Per Acre

175 $262.50 $2.25 $236.25 $262.50 $393.75 $0

Example 4 - Yield  CBOT price 

Actual Minimum Harvest Harvest Final Actual $ Loss

Yield Guarantee Price Guarantee Guarantee Revenue* Per Acre

175 $262.50 $2.75 $288.75 $288.75 $481.25 $0

* Current Yield multiplied by Harvest Price

slide11

MPCIHistorical Perspective – “Late 1990’s”

  • Crop Insurance Reform and 1996 Farm bill spurred MPCI sales. FCIC ceased to deliver the MPCI product under bill.
  • Increased premium subsidy for farmers in 1999
  • Introduction of Revenue products in 1996.
slide12

MPCI 2004 Industry Gross Premium by State

AK

NH

VT

WA

ME

MT

ND

MA

MN

OR

NY

RI

ID

WI

SD

MI

CT

WY

PA

IA

NJ

NE

OH

NV

IL

IN

DE

UT

WV

VA

CO

MD

CA

KS

MO

KY

NC

TN

OK

AR

SC

AZ

NM

GA

AL

MS

TX

LA

$0 to $25M

FL

$25M to $50M

$50M to $100M

Greater than $100M

HI

mpci standard reinsurance agreement sra
MPCIStandard Reinsurance Agreement (SRA)
  • SRA - a Contract between the Government (FCIC) and the private insurance company.
  • Proportional and non proportional reinsurances available.
  • The SRA allows ceding companies to cede or designate each crop contract (policy) to one of the following seven funds:
    • Assigned Risk
    • Developmental – Cat
    • Developmental – Buy-up
    • Developmental – Revenue
    • Commercial – Cat
    • Commercial – Buy-up
    • Commercial – Revenue
  • Ceding companies utilize historical experience, market knowledge and underwriting models to determine the business they wish to retain and the undesirable business they wish to cede to the FCIC.
slide14

Standard Reinsurance Agreement Proportional Reinsurance – A

  • Assigned Risk Fund
    • Company’s less desirable business - “Social Fund”.
    • FCIC sets cession limits by state, based on loss history.
    • 75%-85% of the business is proportionately ceded to FCIC.
  • Developmental Fund
    • Accommodates business where “uncertainty” exists or where Assigned Risk limits are exceeded.
    • Up to 65% of gross premiums can be ceded to FCIC.
  • Commercial Fund
    • Accommodates a Company’s most profitable business.
    • Highest profit potential and highest risk potential.
    • Up to 50% of gross premiums can be ceded to FCIC.
slide16

Standard Reinsurance AgreementNon Proportional Reinsurance

Maximum Net Loss By State

Maximum Net Gains By State

standard reinsurance agreement proportional reinsurance b
Standard Reinsurance AgreementProportional Reinsurance – B
  • FCIC assumes a 5% share of the total gain or loss of a Company’s book of business.
  • Provision first introduced for the 2005 crop season.
  • Due to the profitable nature of the business, this provision is the Government’s way of reducing their cost to service and manage the MPCI Program.
sra net u w gain calculation examples

Developmental Buy-up

Assigned Risk

Commercial Buy-up

Total

(1) 100% Retained

(2) 35% Retained

SRANet U/W Gain Calculation Examples

“After Proportional Cessions”

Net

Net

Net

Premium

Net Loss

Premium

Net Loss

Premium

Net Loss

Net Premium

Net Loss

(000's)

(000's)

Net LR

(000's)

(000's)

Net LR

(000's)

(000's)

Net LR

(000's)

(000's)

Net LR

State

MN

$50

$80

160%

$0

$0

0%

$1,800

$900

50%

$1,850

$980

53%

(1)

IA

$25

$25

100%

$200

$130

65%

$1,700

$1,105

65%

$1,925

$1,260

65%

(1)

CA

$65

$65

100%

$500

$1,100

220%

$3,000

$3,000

100%

$3,565

$4,165

117%

(1)

TX

$450

$990

220%

$700

$700

100%

$2,000

$1,300

65%

$3,150

$2,990

95%

(2)

74%

Total

$590

$1,160

197%

$1,400

$1,930

138%

$8,500

$6,305

$10,490

$9,395

90%

Overall Loss Ratio Goes Down with Proportional Cessions

sra net u w gain calculation examples21
SRANet U/W Gain Calculation Examples

“After Non-Proportional Cessions”

Developmental Buy-up

Assigned Risk

Commercial Buy-up

Total

Net

U/W

Net

U/W

Net

U/W

U/W

Premium

Gain/Loss

Premium

Gain/Loss

Premium

Gain/Loss

Net Premium

Gain/Loss

(000's)

(000's)

Net L/R

(000's)

(000's)

Net L/R

(000's)

(000's)

Net L/R

(000's)

(000's)

Net L/R

State

MN

$50

($2)

103%

$0

$0

100%

$1,800

$781

57%

$1,850

$780

58%

IA

$25

$0

100%

$200

$42

79%

$1,700

$559

67%

$1,925

$601

69%

CA

$65

$0

100%

$500

($135)

127%

$3,000

$0

100%

$3,565

($135)

104%

TX

$450

($24)

105%

$700

$0

100%

$2,000

$658

67%

$3,150

$634

80%

Total

$590

($26)

104%

$1,400

($93)

113%

$8,500

$1,999

24%

$10,490

$1,880

82%

Total U/W Gain

18%

Overall Loss Ratio Goes Down Further with Non-Proportional Cessions

slide23

MPCIExpenses

FCIC A&O Reimbursement Summary

  • Continued reduction in the A&O has put many companies in an operational deficit position between 2 -10% of Net Retained Premiums.
mpci cash flow example

Iowa

Farmer

Insurance

Company / MGA / Agent

FCIC

FCIC

Insurance

Company

Guy Carpenter / Reinsurer

MPCI Cash Flow Example

Needs to purchase MPCI Policy to protect Corn by no later than March 15th for crops planted in Summer of previous season through Spring of current season

  • Escrow Account
  • In thename of FCIC to fund claim payment requests
  • FCIC funds account within 3 days of receiving certified claim
  • Insurance Company funds their own claim payment account from escrow to pay the Farmer

Losses

  • Operating Account
  • Premium Collections from Insured
  • Monthly settlements with FCIC
    • A & O Expense Reimbursement
    • Premium Due FCIC
  • Funds most of the transactions like payments for agent commissions, LAE, etc.
  • Settlement on 3/31 of following year of U/W gain/loss from FCIC

Premium

Reinsurance contract runs from 1/1 to 12/31 of current year and protects U/W after SRA for crops planted through 3/15 of current year. Single premium/loss transaction within 30 days after settlement with FCIC

slide26

Industry GrowthHistorical Perspective

Crop Hail Industry Historical Premium

  • Prior to the advent of the Multi-Peril Crop Insurance, Farmers managed their agricultural risk through Crop Hail coverages and various disaster relief programs.
  • With the increased popularity of CRC coverages, and higher MPCI subsidies to the Farmer, Crop Hail insurance products started to decline as a risk management tool.
  • With the profitability of MPCI business, ceding companies targeted growth in the MPCI class by offering agents more competitive hail products.
slide27

Crop Hail 2004 Industry Premium by State

NH

VT

WA

ME

MT

ND

MA

MN

OR

NY

RI

ID

WI

SD

MI

CT

WY

PA

IA

NJ

NE

OH

NV

IL

IN

DE

UT

WV

VA

CO

MD

CA

KS

MO

KY

NC

TN

OK

AR

SC

AZ

NM

GA

AL

MS

TX

LA

$0 to $1M

FL

$1M to $5M

$5M to $10M

Greater than $10M

slide28

YearPremiumLoss Ratio

YearPremiumLoss Ratio

1988 362,842,000 36%

1989 374,948,000 55%

1990 410,681,000 77%

1991 412,480,000 61%

1992 423,054,000 110%

1993 486,958,000 81%

1994 515,819,000 87%

1995 531,409,000 58%

  • 1996 630,965,000 72%
  • 1997 594,026,000 57%
  • 1998 576,464,000 83%
  • 1999 508,108,000 76%
  • 2000 468,405,000 68%
  • 2001 433,743,000 69%
  • 405,003,000 70%
  • 422,216,000 56%
  • 2004 427,694,000 57%

Crop Hail Historical Industry Premium and Loss Ratios