Crop Insurance:
Reserving Methodologies and Issues
Casualty Loss Reserving Seminar
2014 – San Diego, CA
Presented by: Carl X. Ashenbrenner, FCAS, MAAA
Principal and Consulting Actuary
September 16, 2014
2
Overview of Presentation
Primary Insurance Company Reserving
– Reserving Steps
– Overview of Crop Policies
– Discussion of SRA
– Forecasting Models
Future outlook of US crop insurance and
Implications on Reserving
3
Crop Insurance Reserving Steps
Portfolio Analysis
• Summarize Data By:
• MPCI vs Private
• State / Crop
• SRA Fund
• Insurance Plan
Project Ultimate Losses
• By Major Crop and State
• Split by SRA Fund
• Private/Hail
Project Net Ultimate Losses
• Net of SRA
• Net of Other Reinsurance
Calculate Reserves
• Ultimate Loss Less Paid
• Earned Premium Issue
• AOE (offsetting A&O expense)
• SSAP 78
4
OVERVIEW OF US CROP
INSURANCE POLICIES
PORTFOLIO ANALYSIS
5
Federal vs. Private Crop Insurance
Federal – Premium subsidy to
encourage participation
– Rates administered by RMA,
no rate competition between
AIPs
– Insured on a unit or farm level
basis
– Named peril coverage;
typically only “in the field”
– Designed to be an all
encompassing risk
management tool
– Most payments after harvest
Private/Hail – No subsidy provided
– Rates may be regulated by
states; competition between
AIPs
– Hail typically insured on an
acre basis
– Named perils (hail, fire, freeze,
transport, storage)
– Designed to fill gaps from
MPCI
– Payments made quickly after
peril (although some plans pay
after harvest)
6
Crop Insurance Annual Timeline
2/28 Sign Up Southern Row
Crops
3/15 Major Row Crops
Sign Up
July - August
Fall Planted Grains Harvest
Aug - Sept
Southern Harvest
9/30 Fall Grains Sign
Up
November
Fruit Sign up
Citrus Year Lag
Sep – Nov
Cotton and Corn Belt Harvest
7
MPCI 2013 Gross Premium By Crop
Source: RMA – Summary of Business as of July 15, 2014
CORN , $4.7 , 40%
SOYBEANS , $2.5 , 21%
WHEAT , $2.0 , 17%COTTON , $0.7 , 6%
GRAIN SORGHUM , $0.3 , 2%
PASTURE,RANGELAND,FORAGE , $0.2 , 1%
POTATOES , $0.1 , 1%
APPLES , $0.1 , 1%
BARLEY , $0.1 , 1%
SUNFLOWERS , $0.1 , 0%
All Other, $1.1 , 10%
2013 Gross Premium in $B By Crop
8
MPCI Gross Premium By State
Source: RMA – Summary of Business as of July 15, 2014
9
MPCI 2013 Gross Premium By Plan
Source: RMA – Summary of Business as of July 15, 2014
RP , $9.4 , 80%
APH , $0.8 , 7% YP , $0.7 , 6%
GRIPH , $0.3 , 2%
RAINF , $0.2 , 2%
DOL , $0.1 , 1%
RPHPE , $0.1 , 1%
YDO , $0.1 , 0%
ARH , $0.0 , 0%
TDO , $0.0 , 0%
All Other, $0.1 , 1%
2013 Gross Premium in $B By Insurance Plan
10
DISCUSSION OF MAJOR INSURANCE PLANS
Why is Revenue Protection (RP) most popular plan?
In 2012, estimated at $3.2B (20% of all indemnity and 30%
gross loss ratio) additional payout for RP coverage
High Price Example Low Price Example
Notes YP RP RPE RP RPE
(A) Spring Price given 6.00$ 6.00$ 6.00$ 6.00$ 6.00$
(B) APH given 150 150 150 150 150
(C) Coverage Level given 75% 75% 75% 75% 75%
(D) Liability =(A)x(B)x(C) 675$ 675$ 675$ 675$ 675$
(E) Actual Yield given 50 50 50 50 50
(F) Fall/Harvest Price given 6.00$ 8.00$ 8.00$ 4.00$ 4.00$
(G) Guarantee =(D) or max(A,F)xBxC 675$ 900$ 675$ 675$ 675$
(H) Production to Count =(E)x(F) 300$ 400$ 400$ 200$ 200$
(I) Indemnity =Max {0, (G) - (H) } 375$ 500$ 275$ 475$ 475$
11
MPCI Loss Ratios
Source: RMA – Summary of Business (July 15, 2014); Reinsurance Reports online (August 12, 2014)
40%
60%
80%
100%
120%
140%
160%
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Gross Loss Ratio Net Loss Ratio 2011 SRA Net Loss Ratio
12
DISCUSSION OF THE
STANDARD REINSURANCE
AGREEMENT (SRA)
13
Overview of 2011 (Current) SRA Provisions
Standard Reinsurance Agreement between AIP and FCIC
– SRA applies first before any third party reinsurance
– Includes reinsurance protections and A&O subsidies
AIP places each policy into Assigned Risk or Commercial Fund
– Maximum 75% premium can be placed in AR for each state
– AR cedes quota share 80% to FCIC
– AIP can cede up to 65% QS to FCIC for Commercial Fund by state
UW gain/loss calculated for each AR or CF by state
Underwriting gain/(loss) shared between AIP and FCIC
Additional 6.5% quota share after total UW gain/loss calculated
by fund/state
Encouragement to write in underserved states (Group 3)
14
Current SRA Example SRA Example
Net Underwriting Gain/Loss
per 2011 SRA
Reinsurance Year YYYY
A B C D E F G H
=A*C =B*C =E/D From SRA =(D - G)/D
Net Retained Retained Net Net
Book AIP Net Book Net Book Loss Underwriting Effective
SG State Premium Indemnity Retention Premium Indemnity Ratio Gain/(Loss) Loss Ratio
Commercial Fund
2 Arkansas 90 150 100% 90 150 167% (24.2) 127%
1 Illinois 525 305 100% 525 305 58% 152.3 71%
1 Iowa 580 650 100% 580 650 112% (45.5) 108%
2 Texas 250 140 65% 163 91 56% 61.3 62%
CF Total 1,445 1,245 1,358 1,196 88% 144.0 89%
Assigned Risk Fund
Arkansas 20 75 20% 4 15 375% (0.5) 113%
Illinois 40 25 20% 8 5 63% 0.7 92%
Iowa 20 80 20% 4 16 400% (0.5) 114%
Texas 300 400 20% 60 80 133% (1.5) 103%
AR Total 380 580 76 116 153% (1.9) 102%
Grand Total 1,825 1,825 1,434 1,291 142.1 90%
6.5% QS to FCIC -93 -84 (9.2)
Net to AIP 1,340 1,207 132.8 90%
Net Underwriting Gain/(Loss): 9.9%
15
Current SRA Gross/Net LR Comparison
0%
25%
50%
75%
100%
125%
150%
175%
200%
0%
25
%
50
%
75
%
10
0%
12
5%
15
0%
17
5%
20
0%
22
5%
25
0%
27
5%
30
0%
32
5%
35
0%
37
5%
40
0%
42
5%
45
0%
47
5%
50
0%
52
5%
Loss
Rat
io A
fte
r SR
A =
(G
ross
Pre
miu
m -
UW
Gai
n)
/ G
ross
Pre
miu
m
Gross Loss Ratio
SG1
SG2&3
AR
16
FORECASTING MODELS
17
Revenue Protection Policy Example
Actual Yield
Harvest Price
Revenue to Count
Historical Yield
Max of Spring or Harvest
Price
Coverage Level
Guarantee
If Revenue to Count (RTC) < Guarantee:
Indemnity = Guarantee Less RTC
Indemnity: Function of difference in actual yield to approved (historical) yield and difference in spring versus harvest price
18
0.00
0.50
1.00
1.50
2.00
2.50
3.00
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
Lo
ss R
ati
o
Year
Fitted Historic Loss RatiosRevenue Protection - CRC/RP
Iowa - Soybeans
On-Level Actual Loss Ratio Fitted Loss Ratio
Fitted Loss Ratio = [ A * [ 1 / (PriceΔ X YieldΔ)^B) ] + Low Yield Ind * C ] * [ 1 + MAX(PriceΔ, 0) ]
19
Loss Ratio Forecasting Model Issues
• State, District, County
• Availability of Information
Summary Level
• Prevented Planting
• Replant
• Policy and Rating Changes Adjust For:
• Relative Loss Ratios
• Area Risk (will be more common due to SCO coverage)
Other Crops and
Plans
20
NASS CORN YIELDS ROLLING 10 YEAR AVE
0
20
40
60
80
100
120
140
1601
93
0
19
32
19
34
19
36
19
38
19
40
19
42
19
44
19
46
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
10
ye
ar
his
tori
cal
Co
rn G
rain
Bu
she
ls p
er
Pla
nte
d A
cre
s
Source: USDA - NASS
21
CURRENT YEAR NASS CORN YIELD
COMPARED TO ROLLING 10 YEAR AVE
Source: USDA - NASS
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%19
30
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Curr
ent
Year
Dif
fere
nce
Com
pare
d to
Pri
or 1
0 ye
ars
22
DECEMBER CORN FUTURES PRICE
OCTOBER COMPARED TO FEBRUARY
Source: Bloomberg
-40%
-20%
0%
20%
40%
60%
80%1
96
0
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
23
CORN PRICE / YIELD CORRELATION
Source: USDA-NASS and Bloomberg 1960 – 2013 correlation = -0.40; 1983-2013 correlation = -75%
-40%
-20%
0%
20%
40%
60%
80%
100%
-30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0%Co
rn F
utu
res
Pri
ce C
ha
nge
Yield Percentage Change
1988 2012
1983
1993
1974
1973
2008
1974
24
2013 Corn Loss Ratio
Corn Price Declined 22% from $5.65 to $4.39 (for March 15 SCD)
25
2013 Drought Monitor
26
2013 Corn Prevented Planting
27
Alternative Forecasting Models
• Use policy specific information on more granular level Ground-Up
• How to summarize (crop/state)?
• Issues with policy terms Loss
Development
• Some AIPs do not set up case reserves
Case OS runoff
• Average % liability per claim
• Claim reporting varies greatly Claim Count
28
Ground-Up Forecasting Model Issues
• Calculate expected indemnity with forecasted yield and distribution
• Include prices for revenue policies
Policy Level Detail
• Research is unclear about distributions
• Yield trend issues
• One distribution / different crops /regions /years
Yield Distribution?
• Irrigated vs. Non-Irrigated
• Different distributions in different years Practices
• Enterprise and whole farm units
• Near-zero yields (silage or abandonment) Policy Issues
29
Ground-Up Yield Distribution Example 0
.00
0.0
5
0.1
0
0.1
5
0.2
0
0.2
5
0.3
0
0.3
5
0.4
0
0.4
5
0.5
0
0.5
5
0.6
0
0.6
5
0.7
0
0.7
5
0.8
0
0.8
5
0.9
0
0.9
5
1.0
0
1.0
5
1.1
0
1.1
5
1.2
0
1.2
5
1.3
0
1.3
5
1.4
0
1.4
5
1.5
0
1.5
5
1.6
0
1.6
5
1.7
0
1.7
5
1.8
0
1.8
5
1.9
0
1.9
5
2.0
0
Normal Trunc-Norm Lognormal Inverse LN Beta
Note: Each distribution has CV of 35%. Assumes no yield trend.
Yield Protection 85% Coverage Level
Revenue Protection
With 20% Price Decline
30
Private / Hail Insurance
• Pays out quickly after event
Traditional Hail (Named Peril) Policies
• Indemnity is a function of MPCI losses
• Slower payout than traditional hail
Production Plans Policies
• Paid and/or Incurred Loss development
• B-F Methods
• Majority of loss paid before 12/31/YY
Development methods used
31
FUTURE OUTLOOK ON U.S.
CROP INSURANCE AND
IMPLICATIONS ON RESERVING
32
FUTURE OUTLOOK - U.S. CROP INSURANCE
Farm Bill 2014
– Elimination of direct payments from FSA; Farmer must choose to
enroll in Agriculture Risk Coverage (ARC) or be eligible for
Supplemental Coverage Option (SCO).
– Farmer can buy traditional MPCI policy plus area risk coverage on
top: SCO or STAX
– May change purchasing behavior of traditional MPCI policies
Continued expansion into underserved markets
– Group 3 States
– Fruit and Vegetables
– Livestock/aquaculture
– Organic
– Revenue Plans
33
FUTURE OUTLOOK - U.S. CROP INSURANCE
Increase in farmers’ coverages/guarantees
– Trend Adjusted APH (introduced in 2012)
– Personal T-Yield history
– Low Yield Exclusion in APH
– Addition of Area Risk coverage (SCO) combined with MPCI
– Split Irrigation and Non-Irrigation Practices for enterprise units
Reserving Implications
– More exposure to Area Risk Plans
• Area Risk Plans typically not paid until April following crop year
– Lower deductibles = more frequent payments
– Split practices = increase overall indemnity
34
Questions
