Crop Insurance & the 2012 Farm Bill Kent Lanclos

1. United States Department of Agriculture Risk Management Agency Crop Insurance & the 2012 Farm BillKent Lanclos AAEA Annual Meeting July 26, 2011 Pittsburgh, PA

2. Program Participation Kent Lanclos Risk Management Agency 2

3. Program Participation Kent Lanclos Risk Management Agency 3

4. ProgramParticipation Kent Lanclos Risk Management Agency

5. PremiumRates Kent Lanclos Risk Management Agency

6. Premium Rates Rating Methodology Review • RMA’s general approach to premium rating is appropriate • Consistent with actuarial principles • Review posted on RMA’s Website • RMA’s rating methodology, and supporting documentation also available • No legislation required Kent Lanclos Risk Management Agency

7. PremiumRates Rating Methodology Review • Adjusting historical loss experience to reflect • Current T/P mix • Unit structure • Alternative weighting of years • Work underway by contractor • Does not impact price component of revenue rates Kent Lanclos Risk Management Agency

8. Yield Trends Kent Lanclos Risk Management Agency

9. YieldTrends Impact of Yield Drag *CL = coverage level **ECL = effective coverage level Kent Lanclos Risk Management Agency

10. YieldTrends • Addressing Yield Trends • FCIC Board approved 508(h) submission at May 2011 meeting • Proposal by Illinois Corn Marketing Board • Initially for corn & soybeans for 2012 • Potential expansion to other crops in 2013 • No legislation required Kent Lanclos Risk Management Agency

11. DecliningYields • Current Measures • Yield Plug • Replace low yield with 60 percent of the county T-Yield (10-year county average) • Yield Floor • APH can not go below 80 percent of T-Yield • Yield Limitation • Year-to-year change in APH limited to 10 percent Kent Lanclos Risk Management Agency

12. DecliningYields • Addressing Declining Yields • Alternative yield plug that relies on producer’s own history rather than county averages • Variable percentage tied to number of actual yields • More actuals => higher percentage • Replace current T-Yields with Personal T-Yield based on insured’s APH • Legislation may be required • Cost/paygoconsiderations Kent Lanclos Risk Management Agency

13. 3rd PartyDamage • Damage not due to a natural cause • No indemnity payment • Zero production meaning guarantee negatively impacted for next 10 years • Also, premium rate higher because of lower rate yield • Consider options Kent Lanclos Risk Management Agency

14. Crop Insurance in the South South = Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia Midwest = Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin Kent Lanclos Risk Management Agency

15. Crop Insurancein the South • RMA commissioned two studies of crop insurance participation in the South • Consistent findings of 2 studies • No inherent flaw in program/policies such that “crop insurance doesn’t work in the South” • Low participation (particularly BUP) due to • Misinformation & negative perceptions • High premium rates & other risk management options • Reliance on disaster assistance • Not required by lenders • Does not payoff every year Kent Lanclos Risk Management Agency

16. Crop Insurancein the South • Addressing Participation Concerns • Priority for RMA, but … • No silver bullets • Minimizing fraud, waste and abuse to change perceptions • Premium rates • Re-weight historical loss experience • Reduce use of yield floors, cups, disaster plugs, etc. • Education and changing culture is a slow process Kent Lanclos Risk Management Agency

17. ProgramCost Kent Lanclos Risk Management Agency

18. ProgramCost • The new SRA achieved $6 billion in scored savings over 10 years • At current prices, savings would be significantly larger • Future program costs • Lower premium rates => higher participation & coverage levels, but lower premium subsidies and company underwriting gains • CBO scoring assumes loss ratio of 1.0 • Future loss experience may be less favorable than recent past Kent Lanclos Risk Management Agency

19. ProgramCost • Conundrum, if you will • For FSA programs (counter-cyclical payment, marketing loans), higher prices mean reduced spending • For crop insurance, higher prices mean higher more spending for premium subsidies and underwriting gains Kent Lanclos Risk Management Agency