Overview of U.S. Crop Insurance Industry Insurance and Reinsurance

Transcription

1 Overview of U.S. Crop Insurance Industry Insurance and Reinsurance June 20, 2008

2 2 Legal Disclaimer The content in this presentation has been prepared solely for the purpose of providing information on the agriculture insurance market. It has been compiled in good faith by PartnerRe but no representation is made as to the completeness or accuracy or timeliness of the information it contains. PartnerRe is not responsible for any loss or damage which may directly or indirectly result from any reliance you may place on the information contained in this presentation.

3 3 Presentation Structure and Outline Outline Crop Insurance History and Background Role of the Federal Government Primary Insurer Considerations Reinsurer Considerations Data sourced from the U.S. Department of Agriculture s Risk Management Agency (RMA) and Federal Crop Insurance Corporation (FCIC) unless otherwise noted

4 4 MPCI Program History Multi Peril Crop Insurance Program MPCI offered through federal government in some form since the 1930 s Since 1981, offered as a joint venture between private insurers and federal government US Department of Agriculture (USDA) Risk Management Agency (RMA) Federal Crop Insurance Corporation (FCIC) 16 direct insurers participating SRA Holders SRA Standard Reinsurance Agreement Farmers must purchase MPCI in order to be eligible for disaster aid

5 5 Coverage Information Coverage Overview Protection Against: Low Yields Low Revenue (revenue policies only) Poor Quality Late or Prevented Planting Replanting Costs Covered Perils include: Drought Flood / Excessive Moisture Disease (when unpreventable) Other Natural Causes

6 6 Market Information U.S. Market Information $6.5B industry premium in 2007 up from $4.7B in 2006 Market estimates for 2008 industry premium range as high as $10B Other Products (not covered in this presentation) Crop Hail coverage (provided by private insurance industry) Livestock (provided through FCIC)

7 7 SRA Holders SRA Holder 2007 Premium ($Million) Rural Community Ins. Services Anoka, Minn. $1,643 Rain and Hail LLC Johnston, Iowa $1,424 NAU Country Ins. Co. Ramsey, Minn. $708 Great American Ins. Co. Cincinnati, Ohio $695 ARMtech Ins. Services Lubbock, Texas $384 Producers Ag Ins. Co. Amarillo, Texas $311 Farmers Mutual Hail West Des Moines, Iowa $260 Heartland Crop Ins. Topeka, Kansas $212 Crop 1 Insurance Direct Des Moines, Iowa $211 John Deere Risk Protection Johnston, Iowa $199 Agro National LLC Council Bluffs, Iowa $163 5 others $337 Grand Total $6,547

8 8 Product Distribution and Cost MPCI sold through agents appointed by the 16 SRA holders Specialized crop insurance only agents General insurance agencies Insurance rates are set by FCIC no rate competition among insurers Components of MPCI premium Expected Yield / Revenue Crop Coverage Coverage Level Geography Subsidy Government subsidy of premium can be substantial 58.2% of total premium in 2007

9 9 Categories of Policies 2 Broad Categories of Policies Yield (~25% of industry premium) Protection for Yield less than historical norm Risk is primarily weather related drought and flood Declining in popularity: % of industry premium % of industry premium Revenue (~75% of industry premium) Protects Expected Revenue whether from low yields, low prices, or a combination of both. Premium is a function of projected revenue and will rise or fall sharply when projected harvest prices rise or fall sharply.

10 10 Revenue Policy Example Mechanics of a Basic Revenue Policy Risk is Actual Revenue falling below Projected Revenue by more than the deductible (typically 25% or more), where: Actual Revenue = actual yield x actual harvest price Projected Revenue = historical average yield x projected harvest price Sample Policy and Exposure 500 Acre farm, historically produces 150 bushels of corn per acre or 75,000 bushels total Projected harvest price $5.40 per bushel Projected revenue $405,000 (=75,000 x $5.40) 75% coverage level purchased (25% deductible) or $303,750 If Actual Revenue < $303,750 Claim Payment

11 11 Growth in Underlying Commodity Price fuels Premium Growth Commodity Price Increases Projected Harvest Prices (per bushel) at Sales Closing Year Corn Soybean Wheat 2005 $2.32 $5.53 $ $2.59 $6.18 $ $4.06 $8.09 $ $5.40 $13.36 $11.11 Recent Prices June 19, 2008 $7.56 $15.14 $9.25 Corn, Soybeans and Wheat make up more than 75% of crop insurance premiums.

12 12 Crop Insurance Calendar Midwestern Corn Key dates for 2008 Year for Corn 12/31/07 companies file Plans of Operation with FCIC 3/1/08 projected harvest prices established Average of December 08 futures price for each business day in February 08 3/15/08 sales closing date Farmers choose insurer, products and deductibles 6/30/08 acreage reports due Farmers declare how much of each crop they have planted and in which fields 7/15/08 companies have firm estimate of premium to be collected

13 13 Crop Insurance Calendar Midwestern Corn (cont.) Key dates for 2008 Year for Corn (cont.) 10/1/08 first indications as to projected underwriting results Based on reported and anticipated claims, historical severities and updated projections of harvest price 10/1/08 initial premium due from farmers 11/30/08 harvest price established for most crops Average of December 08 futures price for each business day in November Spring 2009 final net cash settlements between companies and FCIC

14 14 Financial Characteristics Financial Characteristics of Crop Insurance / Reinsurance Premium is estimated based upon the forecasted yield / revenue Premium is adjusted to actual in the third/fourth quarter Premium is earned ratably over the exposure period Expected ultimate loss ratios are applied to premium earned Ultimate loss ratios are adjusted in response to actual / expected experience as the year evolves. Limited cash flow

15 15 Prevented Planting / Replanting Coverage Additional coverage is provided in the event that early season events impact the ability of the farmer to practice best farming techniques Recent Midwestern floods are an example of such an event Prevented Planting coverage: Farmer must choose to continue farming or to take a final payment of 60% of Projected Revenue May plant another crop but no insurance coverage Replant coverage Crop is wiped out and must be replanted Indemnity payment of 20% of Projected Revenue Insurance coverage remains in effect on replanted crops

16 16 Role of the Federal Government Key Responsibilities of RMA and FCIC Product Development Define program and coverages Approve changes Insurance / Reinsurance Coverage Set rates Provide reinsurance via SRA Compliance Auditing Policy rating and claim handling 100% of policies electronically audited Additional audits conducted on-site at companies

17 17 SRA Overview Standard Reinsurance Agreement (SRA) FCIC provides reinsurance protection to crop insurers in front of private market reinsurers SRA is a series of 7 stop loss agreements per state Commercial Fund most risk retained by insurer Revenue products Catastrophe products All other products (including yield) Developmental Fund moderate risk retention Revenue products Catastrophe products All other products (including yield) Assigned Risk minimal risk retention All products combined

18 18 SRA Overview (cont.) Standard Reinsurance Agreement (SRA) Sample Application Commercial Fund Revenue Products Loss scenario Gross L/R Retention Net L/R 100% - 160% 57% 100% - 134% 160% - 220% 43% 134% - 160% 220% - 500% 17% 160% - 208% 500%+ 0% 208% Corresponding retentions for other funds Developmental 30% / 22.5% / 11% / 0%; max Net LR = 162% Assigned Risk 5% / 4% / 2% / 0%; max Net LR = 111% SRA holders also retain less premium in very favorable scenarios

19 19 SRA Overview (cont.) Historical MPCI Loss Ratios 160% 140% 120% 100% 80% 60% 40% 20% 0% Gross (before SRA) Net (after SRA)

20 20 The Primary Insurers 16 SRA Holders writers of primary MPCI insurance Basic Business Model In: Premium Received Administrative and Overhead (A&O) Reimbursement from Federal Government (21% of premium) Out: Agent Commissions Can range from high single digits to mid-high twenties. Claims Paid Operating Expenses Salaries and Overhead Loss Adjustment Expenses (LAE) Systems development and maintenance

21 21 The Primary Insurers (cont.) Reinsurance options beyond SRA Quota Share Stop Loss Impact of the Farm Bill on primary insurers A&O decrease to 19% (essentially offset by higher premium revenue owing to higher crop prices) Snap Back provision reinstates 21% A&O if claim frequency is very high (to address higher LAE)

22 22 The Primary Insurers (cont.) Risk Management and Underwriting Keys to Profitability Risk Evaluation / Reinsurance Fund Selection Commercial, Developmental or Assigned Risk? Geographic Footprint and Spread of Risk Certain regions have better historical profitability than others But, geographic concentration can also lead to higher volatility Operational Efficiency Distinguishing Features between Primary Crop Insurers Service to Agents (including ease of use of systems) Commissions Paid Ancillary Products (including Crop Hail)

23 23 The Reinsurers Types of Crop Reinsurance Quota Share Accept a specified percentage of both premium and loss from the primary company Typically involves a ceding commission paid to the primary to defray acquisition and overhead expenses May also include a profit commission paid when results are exceedingly favorable Typically no cash flow to reinsurer. Account settled with a single payment. Stop Loss Specified premium in exchange for claim payment if loss ratio exceeds a particular level. Expect 0% loss ratio in most years.

24 24 The Reinsurers (cont.) Distinguishing Features between Crop Reinsurers Rates, ceding commissions and/or profit commissions offered Industry expertise and background ability to provide insight into fund selection or model development Continuity of offer Capacity