2011-11-1 UNIV NEBRASKA COLORADO

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2011 Insurance Workshop

Risk Management Issues in a Volatile Economy

© 2011 NCIS NCIS - 1

Volatile Economy

Thomas P. ZachariasNational Crop Insurance Services

November 1-4, 2011

Colorado

“Time may change me…

But I can’t trace time…”

“…Ch-ch-ch-ch-changes…”


David Bowie

Industry Role

NCIS serves as the primary service organization for the crop insurance


industry.

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NCIS Functions• MPCI and Crop-Hail Program Development and Analysis

– Policy Analysis, Loss Adjustment Procedures, Legal Analysis, Agronomic Research

• Economic and Actuarial Analysis

• Education and Training


– Loss Adjuster Schools – 17 (1,692 attendees)

– National Conferences – 5 (1,037 attendees)

– Annual Regional/State Meetings – 14 (531 attendees)

• Crop-Hail Advisory Organization and Statistical Agent

– Licensed by Individual State Insurance Department

• Public Relations and Industry Outreach

Presentation Overview

• Why are We Here?

• 2010 Recap


• 2011 By the Quarter

• U.S./State Profiles

• Summary and Conclusion

Why are We Here?


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What do we do. . .

Importance of AgricultureThe future of food - Crisis prevention

“What is causing food prices to soar and what can be done about it?”

h i b 26 2011


• The Economist February 26, 2011

What do we do…

Importance of Agriculture

“Hungry for a Solution to Rising Food PricesEven if the global agriculture crisis doesn't turn cataclysmic, it

represents a massive test”


• Bloomberg Businessweek – February 21-27, 2011

Realization of the Vision“The Crossroads” – The Modern Crop Insurance Program (1994 Act, ARPA, 1998 SRA)

– Sustained high levels of participation

Improved actuarial soundness


– Improved actuarial soundness

– Substantive risk-bearing by the private sector

– A mature yet expanding product mix for the American farmer

Or – If you prefer, a more “mellow” perspective. “Nexus” by Dan Fogelberg

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“A Few Good Months”• SUBJECT: 2011 Standard Reinsurance Agreement (FINAL)

BULLETIN NO.: MGR-10-007 - 6/30/2010

“…the hits just keep on happenin’…”• SUBJECT: Guidance Regarding SRA Section III(a)(4)—Agent Compensation

BULLETIN NO.: MGR-10-011 - 9/13/2010

2010 Recap

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”Are we clear?”• SUBJECT: Guidance Regarding Section III(a)(2)(K) of the SRA (Covenant Not to

Sue)

BULLETIN NO.: MGR-10-012 - 10/22/2010

“I’ve been tied to the whippin’ post”• SUBJECT: Guidance Regarding SRA Section III(a)(4)—Agent Compensation

BULLETIN NO: MGR-10-011.1 - 10/29/2010

”Are we clear?....Crystal…”

Industry Update

• 1 “Consolidation” so far –

• 16 AIPs last year at this time - Now 15

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• Most AIPs/SRA holders are now subsidiaries of large insurance and / or financial entities

Trouble in Paradise• Narrower Margins ($6B+ savings from 2011 SRA

renegotiation)

• Returns to Scope /Scale

• IT processing economies

• Increased regulatory burden bla bla bla

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• Increased regulatory burden, bla, bla, bla...

Oh, Don't Forget

• Payment Delays

• A&O Cuts in 2008 Farm Bill

(Scored as approx $6B savings)

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“…The world that we used to know

People tell me it don’t turn no more

The places we used to go

The 2011 Standard Reinsurance Agreement (SRA)

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The places we used to go

Familiar faces that ain’t smilin’ like before

The time of our time has come and gone…

Becker and Fagan – “Midnight Cruiser”

Steely Dan – Can’t Buy a Thrill

RMA Statement 2010 Agricultural and Applied Economics Association (AAEA) Meeting –Denver, Colorado

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“Main purpose of SRA is to hire a delivery system”

• 2011 Standard Reinsurance Agreement capped A&O payments limiting increase due to price spikes

• $6B Estimated Reduction in A&O and Gain/Loss • If previous SRA in effect A&O payments would

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p p ybe about $2 billion

• Under 2011 SRA, A&O expected at $1.3 billion, saving taxpayers about $700+ million in 2011

• Regional Shifts in A&O Due to Caps –(unintended consequences)

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“…You can’t always get what you want

But if you try sometimes you might find

The 2011 SRA Last Call

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You get what you need”

Keith Richards and Mick Jagger

• Total Premium to be Record High

• 2010 Premium $7.6B

• 2011 Estimated at $12B?

2011 Season

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• 2011 Estimated at $12B?

(45+% Increase)

• 2011 Liability > $110B?

• SRA Gain / Loss Provisions Will be Tested

2011 First Quarter

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• NEWS RELEASE 0002.11 –

USDA’s Office of Communication

January 6, 2011 – USDA’s Risk Management Agency Unveils Proposed Rule to Reward Farmers Participating in Federal Crop Insurance Program

The Lake Wobegon Effect: “All Farmers are above average”

• INFORMATIONAL MEMORANDUM: PM-11-011 –

2011 First Quarter

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SUBJECT: Addendum to the 2011 Crop Year (CY) Actuarial Documents

Base prices for major crops are record high.– Spring wheat is up 82%; cotton up 71%; corn; up 51% and soybeans, up 46%.

Price volatility remains high.– RA volatility factor for cotton is up 76%; winter wheat, up 22%; soybeans, up 15%

and corn, up 4%.

USDA forecasted a 10-million-acre increase in plantings of major crops in 2011.

• First spring crop under new Common Crop Insurance Provisions “COMBO” policy for producers seeking to protect against a yield shortfall. In addition, all the prior revenue

li i h b lid d i

2011 First Quarter

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policies have been consolidated into a “revenue protection” policy

• New plans similar to prior APH and revenue plans. Change has been well publicized and agents and educators have been working with farmers for some time to explain the changes.

• With high base prices, revenue guarantees close to or exceed cost of production

• 85% revenue protection close to or exceed total production costs for major crops

2011 First Quarter

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• 75% coverage also exceeding total costs for corn and soybeans and close for spring wheat and upland cotton.

• Cotton and rice with opportunity to cover costs

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Crop Moisture Index by DivisionWeekly Value for Period Ending April 2, 2011

Short Term Need vs. Available Water in a Shallow Soil Profile

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Farm Insurance Fraud is Cheating Taxpayers Out of Millions

“Perpetrators falsely claim weather or insects

What They Are Saying About Us…

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destroyed their crops and cash in on a government-backed insurance program. Some don't bother planting at all. Others sell their harvests in secret.” P.J. Huffstutter, Los Angeles Times February 6, 2011

Crop Moisture Index by DivisionWeekly Value for Period Ending May 28, 2011

Short Term Need vs. Available Water in a Shallow Soil Profile

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Didn’t we just talk about this?• SUBJECT: Notice of Intent to Seek Outside Parties to Research The Reasonable

and Necessary Economic Cost of Program Delivery – 4/20/2011

INFORMATIONAL MEMORANDUM: IS-11-003

“…When the Levee Breaks…”• SUBJECT: Flooding of the Birds Point New Madrid Floodway 5/4/2011

2011 Second Quarter

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• SUBJECT: Flooding of the Birds Point-New Madrid Floodway – 5/4/2011

BULLETIN NO: MGR-11-004

• SUBJECT: Flooding of the Morganza Floodway and the Atchafalaya Basin –5/19/2011

BULLETIN NO.: MGR-11-005

• SUBJECT: Additional Time for Acreage Reporting in Certain Areas Impacted by Flooding and Excessive Precipitation – 6/30/2011

BULLETIN NO.: MGR-11-009


“Most farmers now see [crop insurance] as a primary tool for risk management. An important tool for risk

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important tool for risk management.”

USDA Chief Economist Joseph Glauber on Agri-Pulse’s “Open-Mic,” June 13, 2011

• BULLETIN NO.: MGR-11-010 – 7/22/2011

SUBJECT: Flooding of the Dyer County, Tennessee Levee and Drainage District

2011 Third Quarter

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”…How high’s the water mamma?...”

• BULLETIN NO: MGR-11-012 – 8/19/2011

SUBJECT: Emergency Loss Adjustment Procedures Due to 2011 Crop Year Flooding

”…six feet high and rising…”

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2011 Third Quarter“The heat is on….”

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• “I am against making any cuts in crop insurance…any changes in crop insurance. Crop insurance for me is the bottom line.” Rep. Collin Peterson (D-MN) The Hagstrom Report, August 15, 2011

• Senate Farm Bill Hearing – August 25, 2011

Wichita, Kansas

“As you look at priorities in this new Farm Bill please consider that producers still need a safety net for crop failure and disaster. Crop insurance has been and still is the best tool for these situations. Full funding for the crop insurance program is the highest priority for sunflower growers and I suspect that it is the case for all commodities ” Karl Esping Kansas Sunflower Commission


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commodities. Karl Esping, Kansas Sunflower Commission

“Kansas corn farmers have purchased Federal crop insurance for over 4 million acres of corn, that’s about 80 percent of our corn acres. Weather here is undependable with droughts, storms, hailstorms and wind. That’s why Kansas farmers rely on a strong and viable crop insurance program.” Kenneth McCauley, Kansas Corn Growers

“I think the most efficient program is the crop insurance program. Producers receive insurance proceeds when they need the assistance, not when they are experiencing average revenue years or better.” Jeff Whitham, CEO and Chairman of Western State Bank

U.S. and Colorado Crop-Hail and Multiple Peril

(MPCI) Statistics

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20,000,000,000

25,000,000,000

30,000,000,000

LIAB

CROP-HAIL INSURANCE UNITED STATES LIABILITY TOTALS

1996 - 2010

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0

5,000,000,000

10,000,000,000

15,000,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

BILITY

CROPYEAR

500,000,000

600,000,000

700,000,000

800,000,000

PREMIUM

CROP-HAIL INSURANCEUNITED STATES PREMIUM AND LOSS TOTALS

1996 - 2010

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0

100,000,000

200,000,000

300,000,000

400,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

M

/

LOSS

CROPYEAR

PREMIUM LOSS

2.00

2.50

3.00

3.50

60.00

70.00

80.00

90.00

100.00

e / L

oss

Cos

t

Rat

io

CROP-HAIL INSURANCEUNITED STATES

2005 - 2010

LR=Loss RatioLC=Loss CostAR=Average Rate

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0.00

0.50

1.00

1.50

0.00

10.00

20.00

30.00

40.00

50.00

2005 2006 2007 2008 2009 2010

Ave

rage

Rat

e

Los

s R

Cropyear

LR LC AR

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Production Plan• For 2012 NCIS Filed the Crop-Hail Production Plan (CHPP) in

– Iowa – Kansas– Minnesota– Nebraska– North Dakota– South Dakota

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South Dakota• Current NCIS Crop-Hail Production Plan Policy Covers Only

– Corn– Soybeans– Wheat

• Must have a MPCI Policy in force• Companion Type Policy – Covers the deductible portion not

covered under MPCI for Hail and Fire• Written on a Unit Basis instead of Acre

Production Plan (cont.)

• Insured can elect a modifier to increase approved yield. NCIS modifiers include 100%, 105%, 110%, 115% and 120%

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• NCIS Form includes a 5% Minimum• Losses are not paid out until production can be

determined• CHPP pays out the lesser of the actual hail loss

or the production deficiency due to hail for the unit

Production Plan – United States

• 2010 US Production Plan Loss Ratio: 140%

• 2010 US All Crop-Hail Loss Ratio: 68%

• 2010 US Production Plan Premium: $71

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• 2010 US Production Plan Premium: $71 million

• 2010 US All Crop-Hail Premium: $681 million

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Assumptions Total Guarantee (bushels)

APH (bu) 100 Mod

Acres 200 100% 105% 110% 115% 120%

Price (per bu) $5.00 20,000 21,000 22,000 23,000 24,000

Compute the Total Liability ($)

Mod

100% 105% 110% 115% 120%

100,000 105,000 110,000 115,000 120,000

Compute MPCI Liability Compute the Production Plan Liability ($)

Coverage MPCI Mod

Level Liability 100% 105% 110% 115% 120%

75% 75,000 25,000 30,000 35,000 40,000 45,000

Hail Deficiency

Production Plan Example (For 75% Coverage Level; Basic Hail Form)

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Hail Deficiency

Mod

100% 105% 110% 115% 120%

Hail damage % 20% Bushels 4,000 4,200 4,400 4,600 4,800

Dollars ($) 20,000 21,000 22,000 23,000 24,000

MPCI Production to Count and Production Deficiency

Mod

100% 105% 110% 115% 120%

MPCI PTC /acre (bu) 92 PTC 18,400 18,400 18,400 18,400 18,400

Deficiency (bu) 1,600 2,600 3,600 4,600 5,600

Deficiency ($) 8,000 13,000 18,000 23,000 28,000

Indemnity

Mod

100% 105% 110% 115% 120%

Dollars ($) 8,000 13,000 18,000 23,000 24,000

200,000,000

250,000,000

300,000,000

AC

MULTIPLE PERIL CROP INSURANCEUNITED STATES ACRES TOTALS

1996 - 2010

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0

50,000,000

100,000,000

150,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

CRES

CROPYEAR

80,000,000,000

100,000,000,000

120,000,000,000

LIA

MULTIPLE PERIL CROP INSURANCEUNITED STATES LIABILITY

1996 - 2011*2011 Data is preliminary

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0

20,000,000,000

40,000,000,000

60,000,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 *2011

BILITY

CROPYEAR

14

8,000,000,000

10,000,000,000

12,000,000,000

PREMIUM

MULTIPLE PERIL CROP INSURANCEUNITED STATES PREMIUM AND LOSS TOTALS

1996 - 2010

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0

2,000,000,000

4,000,000,000

6,000,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

M

/

LOSS

CROPYEAR

PREMIUM LOSS

COLORADO

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80,000,000

100,000,000

120,000,000

LIAB

CROP-HAIL INSURANCE COLORADO LIABILITY TOTALS

1996 - 2010

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0

20,000,000

40,000,000

60,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

BILITY

CROPYEAR

15

10,000,000

12,000,000

14,000,000

16,000,000

PREMIUM

CROP-HAIL INSURANCECOLORADO PREMIUM AND LOSS TOTALS

1996 - 2010

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0

2,000,000

4,000,000

6,000,000

8,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

M

/

LOSS

CROPYEAR

PREMIUM LOSS

10.00

12.00

14.00

16.00

80.00

100.00

120.00

140.00

Los

s C

ost

tio

CROP-HAIL INSURANCECOLORADO

2005 - 2010

LR=Loss RatioLC=Loss CostAR=Average Rate

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0.00

2.00

4.00

6.00

8.00

0.00

20.00

40.00

60.00

2005 2006 2007 2008 2009 2010

Ave

rage

Rat

e /

Los

s R

a

Cropyear

LR LC AR

Production Plan - Colorado

• 2010 Colorado Production Plan Loss Ratio: 141%

• 2010 Colorado All Crop-Hail Loss Ratio: 70%

• 2010 Colorado Production Plan Premium: $3 2

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2010 Colorado Production Plan Premium: $3.2 million

• 2010 Colorado All Crop-Hail Premium: $11 million

• 29% of Colorado 2010 Premium is from Production Plan

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4,000,000

5,000,000

6,000,000

7,000,000

AC

MULTIPLE PERIL CROP INSURANCECOLORADO ACRES TOTALS

1996 - 2010

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0

1,000,000

2,000,000

3,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

CRES

CROPYEAR

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

LIA

MULTIPLE PERIL CROP INSURANCECOLORADO LIABILITY

1996 - 2011*2011 Data is preliminary

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0

200,000,000

400,000,000

600,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 *2011

BILITY

CROPYEAR

150,000,000

200,000,000

250,000,000

PREMIUM

MULTIPLE PERIL CROP INSURANCECOLORADO PREMIUM AND LOSS TOTALS

1996 - 2010

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0

50,000,000

100,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

M

/

LOSS

CROPYEAR

PREMIUM LOSS

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(Red October “…1 ping and 1 ping only…”)

Farm Bill: 1 slide 1 slide only

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Q: What do you do when there are two elephants in the room?A: Introduce them.

Direct payments Crop Insurance

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Groucho: “One morning I shot an elephant in my pajamas. How he got into my pajamas I'll never know.”

“After all is said and done…”

Final Thoughts

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Why Crop Insurance is now in a Position of Strength 1--Producers share program cost

2--Producers take personal responsibility for risk management

3--Producers get individual risk management solutions

4--Producers receive indemnities in the timeliest way

5--Program can be quickly adjusted and is self-correcting

6--Payments are not in excess of losses

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6--Payments are not in excess of losses

7--Protection can be used as collateral for loans

8--Program enables pre-harvest marketing

9--Producers not subject to payment limits

10--Producers benefit from the efficiencies of private sector delivery

11--Crop insurance can be green box under the WTO and has flexibility to meet WTO support limits

12--Crop insurance has contributed to deficit reduction

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2011-11-1 UNIV NEBRASKA COLORADO

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