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Wednesday, April 15, 2015

2014 Loss Experience for Revenue Protection Products

ifr150417–46
2014 Loss Experience for Revenue Protection Products
Gary Schnitkey, Ag Economist - University of Illinois

The Risk Management Agency has published federal crop insurance data for 2014. Todd Gleason has more on what the information shows.

The RMA data for most of the 2014 COMBO product insurance…
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The RMA data for most of the 2014 COMBO product insurance payments is published in the agency’s Summary of Business report. It is possible to use the data to calculate the loss performance of a product. You do that by dividing the losses by total premiums collected. Revenue Protection, or R-P crop insurance, is designed to have a ratio of one. It is supposed, over time, to pay out as much as it takes in to the system says University of Illinois Ag Economist Gary Schnitkey.

Schnitkey :17 …you would expect to be on a long run basis.

Quote Summary - Some years you would expect higher than that, like 2012, and some years lower than that. Last year for corn we had a 1.04, which means we paid out $1.04 for every $1 paid in. So about where you would expect to be on a long run basis.

Of course how those dollars are paid out, or the distribution, varies from year to year… usually by region. That certainly was the case for corn and the Revenue Protection product in 2014 says Schnitkey. Not everybody received a $1.04. Central and southern Illinois farms received very few payments. Illinois’ loss ratio for corn was point four (0.4). Most of the Illinois losses were in the norther tier of counties. The largest loss ratios happened in Iowa and Minnesota.

Schnitkey :23 …and revenue is what mattes not yield alone.

Quote Summary - This is because Iowa and Minnesota had lower yields relative to their guarantee yields. Illinois, Indiana, and Missouri had very low loss ratios because their yields in those areas. Again we are looking at RP, which is revenue protection, and revenue is what mattes not yield alone.

Revenue is price times yield.

Here is that calculation. The projected price for corn was $4.62 and the actual price was $3.49. If the corn yield was at or above the farm’s guaranteed yield no payments were made. If it was below it, then a payment was received.

Iowa and Minnesota corn yields weren’t that low, by the way, but the price of corn… it was that low. So the RP insurance paid to make up the revenue short fall.