What is in this article?:
- Initial Perspectives of Crop Insurance Underwriting Losses due to 2012 Drought
- Risk Sharing Between Private Crop Insurance Companies and the Federal Government
- Predicting 2012 Underwriting Losses
There is growing interest in understanding the magnitude of losses in the federal crop insurance program, and how those losses are to be shared between the federal government and the crop insurance companies and their reinsurers. At this point, it is difficult to precisely estimate the size of the eventual losses; however, it is safe to assume that losses will be relatively large. Given federal regulation and restrictions on crop insurance companies’ retained exposure, it is highly likely that there are sufficient funds to cover 2012 losses. Additional context and perspective on 2012 losses are provided below.
Historic Premiums, Indemnity, and Gains
Table 1 show gross premiums, gross indemnities, and underwriting gains for federal crop insurance for the past decade. In 2011, gross premium – which includes farmer-paid premium and federal risk subsidies – totaled $11,963 million; gross indemnities were $10,792 million, resulting in $1,171 million of gross gain ($11,963 million gross premium - $10,792 million). Gross gain was split between private insurance companies and the Federal Crop Insurance Corporation (FCIC), the federal corporation that oversees crop insurance. In 2011, private companies had $1,666 million of gains while FCIC had -$495 million of loss.
The size of the crop insurance program has grown over time. Gross premium was $2,909 million in 2002, increasing to $11,963 million in 2011 (see Table 1, above). A number of explanations help to understand the increase. There have been changes to the crop insurance program such as the introduction of higher subsidies for enterprise units, a unit that insures all of one crop in a county. Since this introduction, farmers have shifted to enterprise units while at the same time increasing coverage level. There also has been an increase in commodity prices in 2006, which results in higher value of crop, which in turn leads to higher premium. In addition, and perhaps most importantly, farmers perceive higher risk in agriculture due to rising input costs, which has led to more acres insured at a higher coverage levels.
The crop insurance program has had underwriting gains each year since 2003. Over the past decade, the gross gain totaled $15,419 million. One would expect large losses in a severe drought year like 2012, which appears to be between a 1-in-25- and 1-in-50-year event. Over time, underwriting gain experience will operate in this fashion: most years there will be gains or modest losses punctuated by a small number of years in which losses will be extremely large. The existence of large loss years is one reason for federal involvement in crop insurance as private companies have difficulty bearing the risks of large losses that periodically occur in agriculture.