Crop Insurance John Buchanan CARe Seminar C-7 Philadelphia, PA June 7, 2011 CARe 2011 C7: Crop Insurance 1 Antitrust Notice The Casualty Actuarial Society is committed to adhering strictly to the letter and spirit of the antitrust laws. Seminars conducted under the auspices of the CAS are designed solely to provide a forum for the expression of various points of view on topics described in the programs or agendas for such meetings. Under no circumstances shall CAS seminars be used as a means for competing companies or firms to reach any understanding expressed or implied that restricts competition or in any way impairs the ability of members to exercise independent business judgment regarding matters affecting competition. It is the responsibility of all seminar participants to be aware of antitrust regulations, to prevent any written or verbal discussions that appear to violate these laws, and to adhere in every respect to the CAS antitrust compliance policy. 2 1
Crop Session Description Crop Insurance Farmers purchase insurance to cover their agricultural crops against the reduction in yield or revenue because of specified perils. Expertise is typically required to underwrite and price a crop reinsurance program because of the wide range in agricultural crop exposures. This session will provide an overview of crop insurance, including outlining the impact of recent changes to the government assistance programs, and will discuss how crop fund allocation methods are made and reinsurance programs are developed. Additional topics may include the affect of recent and historical meteorological events, projected climate changes, and overview of the crop insurance marketplace in other countries. Moderator: John W. Buchanan, Senior Vice President, Platinum Reinsurance Panelists: Beth Collins, Senior Vice President, Guy Carpenter & Company, Inc. Wade Shuler, Executive Vice President, Heartland Crop Insurance Jack Seaquist, Assistant Vice President, AIR Worldwide 3 Agenda Overview of Crop Insurance (10 mins John Buchanan) Overview Basic Meteorological Information US Crop Insurance (20 mins Beth Collins) Class of Business Historical Perspective Government Subsided Program and Private Reinsurance Primary MPCI Coverage (20 mins Wade Shuler) Types of Insurance Loss Drivers Underwriting Management - Fund Designation Basics Modeling Illustration (20 mins Jack Seaquist) General Framework Agricultural Weather Index Approach Applications US and China Questions 4 2
Overview Size of Primary MPCI Market Overall Results Loss Drivers Drought Excess Moisture Commodity Price Fluctuation APPENDIX Longer term meteo Climate impacts Other markets 5 Growth in MPCI Premium 12,000 MPCI Premium by Type of Policy 10,000 Millions 8,000 6,000 4,000 2,000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Yield Revenue Other 6 3
MPCI Results 12,000 300% Premium ($mm) 10,000 8,000 6,000 4,000 204% 239% 219% 139% 250% 200% 150% 100% 2,000 50% 0 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 0% Premium Gross LR 7 MPCI Causes of Loss Crop years 2002+ zall Other COL, 9.0% Wind/Excess Wind, 4.4% Heat, 4.1% Decline in Price, 4.0% Hail, 8.1% Drought, 43.1% Freeze, 7.0% Excess Moisture/Precip/Rain, 20.2% 8 4
Yields - Corn Drought Year (1988) Figure 1: Corn Yield for Crop Year 1988 http://www.agmanager.info/ 9 Yields - Corn Excess Moisture Year (1993) Figure 1: Corn Yield for Crop Year 1993 10 5
Illustration of Drought Year 11 Current Drought Index 12 6
Commodity Price Fluctuations 13 Historical Price Fluctuations Corn CBOT Monthly 14 7
Appendix 15 Meteo History (last 115 years weighted by growing season and crop states) 16 8
Meteo Compared to Results 185% 165% Wettest Years --- Driest Years 172% 145% 125% 117% 105% 106% 102% 107% 103% 108% 85% 65% 45% 85% 86% 82%83% 73% 72% 68% 64% 57% 56% 75% 76% 67% 70% 67% 62% 53% 46% 47% 43% 39% 84% 65% 68% 48% 59% 91% 65% 76.2% 25% 0 20 40 60 80 100 120 Rainfall / Drought Year Ranking (1895-2010) AIR Gross LR Average Source: AIR recasted gross loss results under 2011 SRA program, historical weather and commodity price fluctuations 17 Climate Change Impacts Crop - Min Precipitation by Decade Wtd Top 10 Exposed States for Corn Growing Season 4.0 3.8 3.6 3.4 3.2 3.0 avg min 2.9 2.8 2.6 2.4 2.2 2.0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 18 9
ENSO Link? 19 World Markets Corn and Soybean Production 20 10