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Crop Insurance Overview of Primary Market in US

June 6-7, 2005. Crop Insurance Overview of Primary Market in US. Susan Witcraft Minneapolis. U.S. Crop Insurance Three Classes of Business. MPCI (Multiple Peril Crop Insurance) Government supported program.

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Crop Insurance Overview of Primary Market in US

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  1. June 6-7, 2005 Crop InsuranceOverview of Primary Market in US Susan Witcraft Minneapolis

  2. U.S. Crop InsuranceThree Classes of Business MPCI (Multiple Peril Crop Insurance) • Government supported program. • Rates, policy forms, underwriting guidelines and loss adjusting procedures are all established by the Federal Crop Insurance Corporation (FCIC). • FCIC offers attractive inuring reinsurance protections. • The Policy is “Yield” or “Revenue” based covering “All Perils”. Crop Hail • Traditional crop insurance that has been around since the early 1900’s. • Policy covers only Hail and Allied Coverages. • Policy structured as a “percentage of insured value” basis. Named Peril • Single peril coverage on specific crops or MPCI Add On / Deductible Protection.

  3. Crop Insurance Industry2004 Gross Premium Breakdown Estimate Named Peril $15M Crop Hail $427M MPCI $4.2B

  4. MPCI

  5. Multiple Peril Crop Insurance (MPCI)Loss Breakdown by Peril 1981 - 2004

  6. MPCI Industry OverviewDefinitions of Coverage Types “Buy Up” This is a production or yield based policy. This traditional type coverage utilizes a farmer’s deductible level and individual Actual Production History (APH – 6- to 10-year average yield) to determine coverage. The farmer chooses a coverage level (ranging from 50% - 90%) and price election when buying a policy. Catastrophe This is also a production or yield based policy. This coverage was introduced by the FCIC in 1995 after the 1993 MPCI loss as a further “subsidy” to the market. The policy offers 50% coverage at 60% of the MPCI price election.

  7. Individual Farmer APH Year APH 1993 80 1994 125 1995 150 1996 150 1997 145 1998 140 1999 130 2000 120 2001 60 2002 100 Average APH 120 MPCI Industry OverviewDefinitions of Coverage Types “Buy-Up” Insurance Example (Iowa Corn) 2003 Purchased Policy MPCI Level 70% Price Election 2.40 Amount of Insurance: $201.60 2003 Payout 2003 Actual Production: 75 Payout: 120 (APH) * 70% (Coverage Level) = 84 84 - 75 (2003 Yield) = 9 bushel loss per acre 9 * $2.40 (price election) = $21.60 Insurance loss payment per acre

  8. Industry OverviewDefinitions of MPCI Coverage Types Revenue (CRC or RA) This is a revenue protection policy. This coverage was first introduced to the market in 1996 for corn and soybeans in the states of Iowa and Nebraska. The FCIC has expanded this coverage for other crops and in nearly all states. The revenue coverage guarantee is determined using the farmers APH and Chicago Board of Trade (CBOT) commodity prices. CRC Insurance Example CRC Policy Wording Definitions Minimum Guarantee - APH multiplied by the Base Price multiplied by the coverage level elected. Harvest Guarantee - APH multiplied by the Harvest Price multiplied by the coverage level elected. Final Guarantee - Greater of the Minimum or Harvest Guarantee. Assumptions APH = 150 CBOT Price = $2.50 Coverage Level = 70% Minimum Guarantee = $262.50

  9. Industry OverviewDefinitions of MPCI Coverage Types CRC Insurance Example Example 1 - “2002 Type Scenario” - Yield  CBOT price  Actual Minimum Harvest Harvest Final Actual $ Loss Yield Guarantee Price Guarantee Guarantee Revenue* Per Acre 80 $262.50 $2.75 $288.75 $288.75 $220.00 $68.75 Example 2 - “2001 Type Scenario in Nebraska” - Yield  CBOT price  Actual Minimum Harvest Harvest Final Actual $ Loss Yield Guarantee Price Guarantee Guarantee Revenue* Per Acre 80 $262.50 $2.25 $236.25 $262.50 $180.00 $82.50 * Current Yield multiplied by Harvest Price

  10. Industry OverviewDefinitions of MPCI Coverage Types CRC Insurance Example Example 3 - “1994 Type Scenario” - Yield  CBOT price  Actual Minimum Harvest Harvest Final Actual $ Loss Yield Guarantee Price Guarantee Guarantee Revenue* Per Acre 175 $262.50 $2.25 $236.25 $262.50 $393.75 $0 Example 4 - Yield  CBOT price  Actual Minimum Harvest Harvest Final Actual $ Loss Yield Guarantee Price Guarantee Guarantee Revenue* Per Acre 175 $262.50 $2.75 $288.75 $288.75 $481.25 $0 * Current Yield multiplied by Harvest Price

  11. MPCIHistorical Perspective – “Late 1990’s” • Crop Insurance Reform and 1996 Farm bill spurred MPCI sales. FCIC ceased to deliver the MPCI product under bill. • Increased premium subsidy for farmers in 1999 • Introduction of Revenue products in 1996.

  12. MPCI 2004 Industry Gross Premium by State AK NH VT WA ME MT ND MA MN OR NY RI ID WI SD MI CT WY PA IA NJ NE OH NV IL IN DE UT WV VA CO MD CA KS MO KY NC TN OK AR SC AZ NM GA AL MS TX LA $0 to $25M FL $25M to $50M $50M to $100M Greater than $100M HI

  13. MPCIStandard Reinsurance Agreement (SRA) • SRA - a Contract between the Government (FCIC) and the private insurance company. • Proportional and non proportional reinsurances available. • The SRA allows ceding companies to cede or designate each crop contract (policy) to one of the following seven funds: • Assigned Risk • Developmental – Cat • Developmental – Buy-up • Developmental – Revenue • Commercial – Cat • Commercial – Buy-up • Commercial – Revenue • Ceding companies utilize historical experience, market knowledge and underwriting models to determine the business they wish to retain and the undesirable business they wish to cede to the FCIC.

  14. Standard Reinsurance Agreement Proportional Reinsurance – A • Assigned Risk Fund • Company’s less desirable business - “Social Fund”. • FCIC sets cession limits by state, based on loss history. • 75%-85% of the business is proportionately ceded to FCIC. • Developmental Fund • Accommodates business where “uncertainty” exists or where Assigned Risk limits are exceeded. • Up to 65% of gross premiums can be ceded to FCIC. • Commercial Fund • Accommodates a Company’s most profitable business. • Highest profit potential and highest risk potential. • Up to 50% of gross premiums can be ceded to FCIC.

  15. Standard Reinsurance AgreementNon Proportional Reinsurance

  16. Standard Reinsurance AgreementNon Proportional Reinsurance Maximum Net Loss By State Maximum Net Gains By State

  17. Standard Reinsurance AgreementEffect on Net Gain/Loss of Non Proportional Reinsurance

  18. Standard Reinsurance AgreementProportional Reinsurance – B • FCIC assumes a 5% share of the total gain or loss of a Company’s book of business. • Provision first introduced for the 2005 crop season. • Due to the profitable nature of the business, this provision is the Government’s way of reducing their cost to service and manage the MPCI Program.

  19. SRAGrossU/W Gain Calculation Examples

  20. Developmental Buy-up Assigned Risk Commercial Buy-up Total (1) 100% Retained (2) 35% Retained SRANet U/W Gain Calculation Examples “After Proportional Cessions” Net Net Net Premium Net Loss Premium Net Loss Premium Net Loss Net Premium Net Loss (000's) (000's) Net LR (000's) (000's) Net LR (000's) (000's) Net LR (000's) (000's) Net LR State MN $50 $80 160% $0 $0 0% $1,800 $900 50% $1,850 $980 53% (1) IA $25 $25 100% $200 $130 65% $1,700 $1,105 65% $1,925 $1,260 65% (1) CA $65 $65 100% $500 $1,100 220% $3,000 $3,000 100% $3,565 $4,165 117% (1) TX $450 $990 220% $700 $700 100% $2,000 $1,300 65% $3,150 $2,990 95% (2) 74% Total $590 $1,160 197% $1,400 $1,930 138% $8,500 $6,305 $10,490 $9,395 90% Overall Loss Ratio Goes Down with Proportional Cessions

  21. SRANet U/W Gain Calculation Examples “After Non-Proportional Cessions” Developmental Buy-up Assigned Risk Commercial Buy-up Total Net U/W Net U/W Net U/W U/W Premium Gain/Loss Premium Gain/Loss Premium Gain/Loss Net Premium Gain/Loss (000's) (000's) Net L/R (000's) (000's) Net L/R (000's) (000's) Net L/R (000's) (000's) Net L/R State MN $50 ($2) 103% $0 $0 100% $1,800 $781 57% $1,850 $780 58% IA $25 $0 100% $200 $42 79% $1,700 $559 67% $1,925 $601 69% CA $65 $0 100% $500 ($135) 127% $3,000 $0 100% $3,565 ($135) 104% TX $450 ($24) 105% $700 $0 100% $2,000 $658 67% $3,150 $634 80% Total $590 ($26) 104% $1,400 ($93) 113% $8,500 $1,999 24% $10,490 $1,880 82% Total U/W Gain 18% Overall Loss Ratio Goes Down Further with Non-Proportional Cessions

  22. MPCI Historical Industry Underwriting Results

  23. MPCIExpenses FCIC A&O Reimbursement Summary • Continued reduction in the A&O has put many companies in an operational deficit position between 2 -10% of Net Retained Premiums.

  24. Iowa Farmer Insurance Company / MGA / Agent FCIC FCIC Insurance Company Guy Carpenter / Reinsurer MPCI Cash Flow Example Needs to purchase MPCI Policy to protect Corn by no later than March 15th for crops planted in Summer of previous season through Spring of current season • Escrow Account • In thename of FCIC to fund claim payment requests • FCIC funds account within 3 days of receiving certified claim • Insurance Company funds their own claim payment account from escrow to pay the Farmer Losses • Operating Account • Premium Collections from Insured • Monthly settlements with FCIC • A & O Expense Reimbursement • Premium Due FCIC • Funds most of the transactions like payments for agent commissions, LAE, etc. • Settlement on 3/31 of following year of U/W gain/loss from FCIC Premium Reinsurance contract runs from 1/1 to 12/31 of current year and protects U/W after SRA for crops planted through 3/15 of current year. Single premium/loss transaction within 30 days after settlement with FCIC

  25. Crop Hail

  26. Industry GrowthHistorical Perspective Crop Hail Industry Historical Premium • Prior to the advent of the Multi-Peril Crop Insurance, Farmers managed their agricultural risk through Crop Hail coverages and various disaster relief programs. • With the increased popularity of CRC coverages, and higher MPCI subsidies to the Farmer, Crop Hail insurance products started to decline as a risk management tool. • With the profitability of MPCI business, ceding companies targeted growth in the MPCI class by offering agents more competitive hail products.

  27. Crop Hail 2004 Industry Premium by State NH VT WA ME MT ND MA MN OR NY RI ID WI SD MI CT WY PA IA NJ NE OH NV IL IN DE UT WV VA CO MD CA KS MO KY NC TN OK AR SC AZ NM GA AL MS TX LA $0 to $1M FL $1M to $5M $5M to $10M Greater than $10M

  28. YearPremiumLoss Ratio YearPremiumLoss Ratio 1988 362,842,000 36% 1989 374,948,000 55% 1990 410,681,000 77% 1991 412,480,000 61% 1992 423,054,000 110% 1993 486,958,000 81% 1994 515,819,000 87% 1995 531,409,000 58% • 1996 630,965,000 72% • 1997 594,026,000 57% • 1998 576,464,000 83% • 1999 508,108,000 76% • 2000 468,405,000 68% • 2001 433,743,000 69% • 405,003,000 70% • 422,216,000 56% • 2004 427,694,000 57% Crop Hail Historical Industry Premium and Loss Ratios

  29. June 6-7, 2005 Crop InsuranceOverview of Primary Market in US Susan Witcraft Minneapolis

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