Real Cost of Crop Insurance, Farmers Write Big Premium Checks

Transcription

1 Real Cost of Crop Insurance, Farmers Write Big Premium Checks By Dr. G. Art Barnaby, Jr. Professor Agricultural Economics Kansas State University Presented to Minnesota Crop Insurance Conference, Sponsored by Center for Farm Financial Management, Verizon Wireless Center Mankato, MN, September 11-12, Check out our WEB page at 1 Real Taxpayer Cost for Crop Insurance 1. Headlines claim 2012 crop insurance will cost taxpayers $30 to $40 billion! Farmers laughing all the way to the bank with over paid claims! Forecast? 2. New headline; Crop insurance Cost Taxpayers $17.4 Billion! Fact or Repeated false claim? 3. Replace crop insurance with a free disaster program; 4. Or Free Market ; eliminate all safety net programs and layoff all FSA and RMA employees. 5. Farm Bill interest groups include farmers, ag. lenders, Farm Credit (agent), Grain Companies, RMA employees, FSA employees, crop insurance agents, AIPs, EWG, RMA consultants, food stamp supporters, Land Grant Universities, others, and taxpayers. 6. Many analysts doubt that current institutional constraints would allow either policy extreme. 2 1

2 Are Crop Insurance Claims Higher than Expected? 1. The $17.4 billion in 2012 claims were only partly paid by Taxpayers! In addition, the long run national loss ratio will remain below 1.0; the targeted loss ratio. 2. During the past 19 years, only 2 underwriting losses over 5%, 2002 & Government accounting does not recognize RMA underwriting gains (under spent subsidy), but does include underwriting losses. 4. Net RMA cost including net gains have averaged about $4 billion per year. Including A&O total under $5.2B average. 3 USA Crop Insurance Performance, All Contracts Pol Earn Prem Net Acres Liabilities Total Premium Subsidy Indemnity /Gain Premium Paid Ratio by Farmers Farm-er Ratio Year (000) (000) (000) (000) (000) (000) (000) (000) (000) ,475 4,423, ,957 74, ,178 (502,221) % ,632 13,535, , ,965 1,212,235 (397,933) % ,361 12,828, , , ,032 (136,563) % ,357 11,215, , , ,289 (218,240) % ,107 11,334, , , ,215 (159,426) % ,725 11,353, , ,009 1,655,479 (899,740) % ,640 13,608, , , , , % , ,511 23,728,454 1,543, ,372 1,567,732 (24,382) % , ,864 26,876,813 1,838, ,063 1,492, , % , ,189 25,458,851 1,775, , , , % , ,835 27,921,436 1,875, ,312 1,677, , % , ,918 30,939,450 2,310, ,872 2,434,715 (124,582) % , ,467 34,443,753 2,540, ,192 2,594,834 (54,671) % , ,329 36,728,587 2,961,848 1,771,322 2,960,125 1, % , ,865 37,299,303 2,915,944 1,741,028 4,066,732 (1,150,788) % , ,409 40,620,507 3,431,359 2,041,658 3,260, , % , ,020 46,602,280 4,186,133 2,472,282 3,209, , % , ,856 44,258,915 3,949,230 2,337,101 2,367,323 1,581, % , ,082 49,919,480 4,579,539 2,682,006 3,503,536 1,076, % , ,634 67,339,911 6,562,118 3,823,353 3,547,569 3,014, % , ,250 89,892,360 9,850,879 5,690,668 8,677,910 1,172, % , ,776 79,575,187 8,950,746 5,426,886 5,228,924 3,721, % , ,268 78,104,325 7,594,397 4,711,271 4,251,436 3,342, % , , ,112,377 11,955,219 7,452,814 10,826,308 1,128, % , , ,938,299 11,087,372 6,960,499 17,316,100 (6,228,728) % to ,473, ,121,987 83,967,611 47,113,662 69,774,003 14,193, % 1.89 Est History 4,755,680 1,049,060,285 95,054,983 54,074,162 87,090,103 7,964, %

3 Pol Earn Prem Minnesota Corn Ratio by Year % Of Premium Net Total Farm-er Indemnity Year Acres Liabilities Prem-ium Subsidy Paid Ratio (000) (000) (000) (000) (000) (000) Farm- Ratio ,875 2, ,710 22,416 6,358 16,058 23, % ,053 2, ,316 21,659 6,198 15, , % ,333 4, ,721 39,224 11,197 28,027 3, % ,534 5, ,493 47,285 24,216 23,069 9, % ,406 5, ,117 61,142 30,643 30,499 10, % ,471 5, ,757 56,514 26,474 30,040 7, % ,886 5, ,059,034 67,276 30,483 36,793 7, % ,825 5, ,655 70,007 24,804 45,203 10, % ,720 6, ,093,857 80,844 23,096 57,748 13, % ,232 5, ,158,036 92,635 53,929 38,706 71, % ,816 6, ,244,363 99,937 56,506 43,430 10, % ,068 6, ,348, ,168 64,238 48,930 28, % ,055 6, ,700, ,328 84,397 63,931 92, % ,099 6, ,437, ,530 67,338 52,192 24, % ,320 6, ,654, ,500 75,316 59,184 39, % ,035 7, ,309, , , , , % ,439 7, ,069, , , , , % ,475 7, ,228, , , ,967 45, % ,737 7, ,256, , ,312 93,878 22, % ,068 7, ,455, , , , , % ,986 8, ,086, , , , , % Yr Total 127,020 41,031,624 3,349,753 1,892,918 1,456,835 1,379, % 0.95 One Year Stress Equal to 1.00 loss Ratio = 3,793,658 Aggregate Ratio With a Catastrophic Year 1.36 Farmer Paid 5 Pol Earn Prem Illinois Corn Crop Insurance History % Of Premium Farmer Paid Net Total Farm-er Indemnity Year Acres Liabilities Prem-ium Subsidy Paid Ratio (000) (000) (000) (000) (000) (000) Farm- Ratio ,033 3, ,302 29,782 6,158 23,624 6, % ,580 3, ,423 27,596 5,703 21,893 15, % ,275 3, ,609 36,000 7,607 28,393 2, % ,519 8, ,152,122 48,050 24,345 23,705 41, % ,477 7, ,253,366 58,458 26,772 31,687 28, % ,986 6, ,111,147 53,838 22,693 31,145 14, % ,919 6, ,227,417 61,084 24,026 37,059 31, % ,257 6, ,302,777 79,773 21,650 58,123 33, % ,750 7, ,628, ,782 20,564 83,219 28, % ,241 7, ,653, ,188 60,311 52,877 30, % ,108 7, ,749, ,409 60,482 54,927 99, % ,773 7, ,960, ,961 71,642 65,318 40, % ,338 8, ,431, ,049 92,456 80,594 60, % ,075 8, ,375, ,968 89,933 79, , % ,880 8, ,535, , , ,350 26, % ,753 10, ,960, , , ,863 47, % ,422 9, ,717, , , , , % ,020 9, ,350, , , , , % ,965 9, ,496, , , , , % ,780 10, ,591, , , , , % ,911 10, ,399, , , ,687 3,197, % Yr Total 151,649 55,548,273 3,990,632 2,019,806 1,970,826 1,662, % Yr Total 161,963 63,948,135 4,512,608 2,313,095 2,199,513 4,859, % 2.21 One Year Stress Equal to 1.00 loss Ratio = 3,197,181 Aggregate Ratio With a Catastrophic Year

4 2012 Current Crop Insurance Results (Top 15 Premium States) Earn Pre Ne t Acres Total Liabilities Premium Subsidy Indemnity Assigned Farm - State m (000) (000) (000) (000) (000) Ratio Risk er LR ILLINOIS ,928 12,157, , ,671 3,501, % KENTUCKY ,978 1,571, ,453 93, , % 9.64 INDIANA ,743 5,760, , ,630 1,481, % 7.72 MISSOURI ,490 3,491, , ,711 1,158, % 9.23 NEBRASKA ,685 8,733, , ,489 1,551, % 5.72 IOWA ,713 14,939, , ,518 2,012, % 5.27 KANSAS ,272 5,666, , ,703 1,372, % 4.30 WISCONSIN ,202 2,842, , , , % 4.87 SOUTH DAKOTA ,988 5,392, , ,220 1,112, % 4.94 TEXAS ,160 5,240,947 1,082, ,429 1,414, % 3.81 COLORADO ,108 1,394, , , , % 3.18 OHIO ,882 4,036, , , , % 3.14 MICHIGAN ,255 2,189, , , , % 3.65 OKLAHOMA ,794 1,207, , , , % 2.23 MONTANA ,436 1,287, , , , % 1.33 CALIFORNIA NORTH ,603 5,396, , , , % 1.34 CAROLINA ,680 1,784, , ,295 85, % 1.21 MISSISSIPPI 8.2 3,512 1,244, ,061 95,036 55, % 1.49 MINNESOTA ,500 10,042, , , , %.79 NORTH DAKOTA ,323 6,351, , , , %.72 Total 1, , ,127,221 11,110,588 6,975,463 17,400, % State Ratio Yr NE IL IN IA MN KS TX MI OK MS OH MAX Min Avg

5 Comparisons of an AIP s Gain/ from Group 1 States vs. All other States Group Assigned Group & 3 2 Risk 3 Underwriting Gains 0% L/R to 50% 5.0% 5.0% 5.0% 50% L/R to 65% 40.0% 40.0% 13.5% 65% L/R to 100% 75.0% 97.5% 12.5% Underwriting es 100% L/R to 160% 65.0% 42.5% 7.5% 160% L/R to 220% 45.0% 20.0% 6.0% 220% L/R to 500% 10.0% 5.0% 3.0% 500% L/R to end 0.0% 0.0% 0.0% 1 Group 1 states include Iowa, Illinois, Indiana, Nebraska, and Minnesota; all other states are group 2 and 3. 1,2 Must cede 6.5% of the premium to RMA. 3 Must retain 20% of premium. 9 Group 1 State and a AIP with a Ratio of 67% Group 1 State; AIP Gain/ Retained % AIP L/R Premium Share AIP Share Share Total Commercial 65% $1,000, % 75.0% $257,250 Quota Share (6.5%) ($16,721) Assigned Risk 160% $1,000, % (7.5%) ($900) AIP Gain/ $239, RMA Gain/ RMA Commercial Pool 65% $1,000, % 25.0% $85,750 Quota Share 6.5% $16,721 RMA Assigned Risk Pool 160% $1,000, % (92.5%) ($11,100) RMA Gain/ $91,371 Total Gain $331,

6 Group 2 State and a AIP with a Ratio of 132% Total ($315,000) Iowa AIP with Ratio of 220% Iowa; AIP Gain/ % AIP Group 2 State; AIP Gain/ Retained % AIP L/R Premium Share AIP Share Share Total Commercial 65% $1,000, % 97.5% $102,375 Quota Share (6.5%) ($6,654) Assigned Risk 160% $1,000, % (7.5%) ($31,500) AIP Gain/ $64, RMA Gain/ RMA Commercial Pool 65% $1,000, % 2.5% $2,625 Quota Share 6.5% $6,654 RMA Assigned Risk Pool 160% $1,000, % (92.5%) ($388,500) RMA Gain/ ($379,221) Retain- L/R Premium ed Share AIP Share Share Total Commercial 160% $1,000, % (65.0%) ($385,710) 220% $1,000, % (45.0%) ($267,030) Quota Share 6.5% $42,428 Assigned Risk 160% $1,000, % (7.5%) ($495) 220% $1,000, % (6.0%) ($396) AIP Gain/ ($611,203) RMA Gain/ RMA Commercial Pool 160% $1,000, % (35.0%) ($207,690) 220% $1,000, % (55.0%) ($326,370) Quota Share (6.5%) ($42,428) RMA Assigned Risk Pool 160% $1,000, % (92.5%) ($6,105) 220% $1,000, % (94.0%) ($6,204) RMA Gain/ ($588,797) Total ($1,200,000) 12 6

7 12 Yr Avg Cost of Crop Insurance Post 2000 ARPA Act Corn Goss Strike Net $ Coverage Prem paid nity ratio Gross AIP RMA sidy" RMA A&O Gross farm-er Indem- loss Underwriting Gain/ "Sub- Net Year Price Acres 1 < ( ) > < ( ) > 2001 $ ,729 2,978 1,206 2, (334) 1,772 2, $ ,299 2,909 1,168 4, (1,149) (48) (1,101) 1,741 2, $ ,621 3,434 1,392 3, (201) 2,042 2, $ ,602 4,186 1,709 3, ,477 2, $ ,259 3,945 1,601 2, , ,344 1, $ ,919 4,709 2,027 3, , ,682 2, $ ,340 6,547 2,724 3, ,082 1,572 1,510 3,823 2,313 1, $ ,892 9,832 4,141 8, ,113 1, ,691 5,673 2, $ ,575 8,949 3,522 5, ,733 2,298 1,435 5,427 3,992 1, $ ,104 7,592 2,882 4, ,357 1,919 1,438 4,710 3,272 1, $ ,112 11,959 4,506 10, ,152 1,666 (514) 7,453 7,967 1, $ ,127 11,111 4,135 17, (6,290) (1,313) (4,977) 6,975 11,952 1,316 Average Net Government Cost for Crop Insurance over 12 Years $4.053 billion Average A&O Cost for Crop Insurance..... $1.137 billion Avg. Farmer Cost for Crop Insurance.. $2.584 billion Average Insurance Companies (AIPs) Gains... $862 million Average Gross Indemnity Payments $5.776 billion 1 Source: United States Government Accountability Office, Crop Insurance; Savings Would Result from Program Changes and Greater Use of Data Mining, GAO , a report to the Ranking Member, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, U.S. Senate, March The A&O costs w ere capped in the 2013 Standard Reinsurance Agreement (SRA) at about $1.3 billion; mostly paid to agents for commissions. The A&O cap reduced the A&O payment by about a $800 to $900 million. There are about $77-80 million in RMA employee and government operating expenses, in addition to the other costs States with Highest % of Premium in Assigned Risk (Greater than $100 million premium) % State Assigned Total Premium TEXAS 71.4% 1,082,419,001 OKLAHOMA 70.3% 253,609,499 NORTH CAROLINA 40.5% 201,808,723 GEORGIA 38.9% 173,040,250 MISSISSIPPI 32.6% 132,061,350 COLORADO 32.1% 217,908,056 KANSAS 26.3% 808,690,529 KENTUCKY 24.4% 144,453,394 ARKANSAS 22.8% 132,704,615 TENNESSEE 22.8% 103,103,401 FLORIDA 22.8% 116,947,535 WASHINGTON 19.5% 144,028,

8 12 States with Lowest % of Premium in Assigned Risk (Greater than $100 million premium) State % Assigned Total Premium IOWA 1.1% 902,148,810 NEBRASKA 2.2% 668,833,002 MINNESOTA 2.9% 824,743,109 INDIANA 5.0% 437,529,330 ILLINOIS 5.0% 772,604,993 MISSOURI 7.6% 367,187,146 OHIO 7.7% 326,200,047 WISCONSIN 9.1% 269,563,460 MONTANA 10.5% 206,502,254 CALIFORNIA 11.3% 261,090,966 SOUTH DAKOTA 11.8% 701,202,312 MICHIGAN 12.5% 195,148, Consequences of SRA on AIP and Taxpayer Costs 1. Encourages AIPs to take more polices in the commercial pool with a targeted loss ratio of about 65%. 2. There is very little benefit for an AIP to reduce the number of polices in the commercial pool to generate a loss ratio below 50%. 3. AIPs have more risk exposure and receive a smaller share of the gain in a Group 1 state. 4. In Group 1, states with loss ratios below 2.20, AIPs pay 55% up to 65% of the underwriting loss vs % up to 42% for the other states. 5. A paper titled, Understanding the Standard Reinsurance Agreement, Explains Crop Insurance Companies es, posted on at link:

9 Improved Underwriting and Rating of the Assigned Risk Pool 1. In 2011, about 82% of the national crop insurance premium was placed in the Commercial Fund. 2. In 2011, about 18% of the national crop insurance premium was placed in the Assigned Risk Fund. Companies are required to retain 20% of the premium/risk in the Assigned Risk Fund. 3. The 2011 Commercial Fund generated a $2.239B gain but Assigned Risk Fund suffered a -$1.121B loss, for a net gain of $1.117B gain. 4. In 2012, about 79% of the national crop insurance premium was placed in the Commercial Fund, with the balance of 21% in Assigned risk. 17 Improved Underwriting and Rating of the Assigned Risk Pool 4. Historically most of the underwriting losses are in the Assigned Risk Fund. Last Commercial Fund loss was in 2002 (expected loss in 2012). 5. Fix the rates and underwriting rules for policies in the Assigned Risk Fund and lower taxpayer cost. 6. Effectively the Assigned Risk Fund is the social part of the crop insurance program. In a private market many of these farmers would be uninsurable. 18 9

10 Comparisons of Coverage and Premiums for Iowa vs. Kansas Farmer Avg % Coverage Avg Rate Prem Ceded Avg Rate Total Net Liabilities Premium Acres ( ) ( ) ( ) $ Coverage per Ac IA , $ % 1.2% 2.6% KS , $ % 19.8% 5.6% ` Premium Ceded does not include the 6.5% quota share of the Commercial pool that is ceded 19 Farm Bill Changes to Crop Insurance 1. Catastrophic Risk Protection (CAT) premium reduction that is 100% subsidy to reduce Farm Bill cost 2. Enterprise units for irrigated and non-irrigated crops in the same county 3. Secretary shall use county data collected by the Risk Management Agency or the National Agricultural Statistics Service, or both for area plans 4. If the Farm Service Agency determines any producer s average adjusted gross income is over $750,000; the producer s share of the crop insurance premium will increase 15 percentage points. Does not apply to CAT. $250K AGI limit voted down in the House. 5. Increase the yield plug from 60% to 70% of T yield

11 Thank You DR. G. A. ART BARNABY, JR. KANSAS STATE UNIVERSITY PHONE: Check out our WEB page at Copyright 2013, All Rights Reserved 21 11