Susan Witcraft Minneapolis Crop Insurance Overview of Primary Market in US June 6-7, 2005.
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Susan Witcraft Minneapolis Crop Insurance Overview of Primary Market in US June 6-7, 2005
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Transcript of Susan Witcraft Minneapolis Crop Insurance Overview of Primary Market in US June 6-7, 2005.
Susan WitcraftMinneapolis
Crop InsuranceOverview of Primary Market in US
June 6-7, 2005
Guy Carpenter 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.
Guy Carpenter 3
Crop Insurance Industry2004 Gross Premium Breakdown Estimate
Named Peril$15M
MPCI $4.2B
Crop Hail$427M
MPCI
Guy Carpenter 5
Multiple Peril Crop Insurance (MPCI)Loss Breakdown by Peril 1981 - 2004
Disease4%
Heat4%
Freeze5%
Excess Moisture24%
Hail8%Drought
40%
Other15%
Disease
Heat
Freeze
Excess Moisture
Hail
Drought
Other
Guy Carpenter 6
“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.
MPCI Industry OverviewDefinitions of Coverage Types
Guy Carpenter 7
MPCI Industry OverviewDefinitions of Coverage Types
“Buy-Up” Insurance Example (Iowa Corn)
Individual Farmer APHYear APH1993 801994 1251995 1501996 1501997 1451998 1401999 1302000 1202001 602002 100Average APH 120
2003 Purchased PolicyMPCI Level 70%Price Election 2.40Amount of Insurance:$201.60
2003 Payout2003 Actual Production: 75Payout: 120 (APH) * 70% (Coverage Level) = 8484 - 75 (2003 Yield) = 9 bushel loss per acre9 * $2.40 (price election) = $21.60 Insurance loss
payment per acre
Guy Carpenter 8
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.
Industry OverviewDefinitions of MPCI Coverage Types
CRC Policy Wording DefinitionsMinimum 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.
AssumptionsAPH = 150 CBOT Price = $2.50 Coverage Level = 70% Minimum Guarantee = $262.50
CRC Insurance Example
Guy Carpenter 9
CRC Insurance Example
Example 1 - “2002 Type Scenario” - Yield CBOT price
Actual Minimum Harvest Harvest Final Actual $ LossYield Guarantee Price Guarantee Guarantee Revenue* Per Acre
80 $262.50 $2.75 $288.75 $288.75 $220.00 $68.75
* Current Yield multiplied by Harvest Price
Example 2 - “2001 Type Scenario in Nebraska” - Yield CBOT price
Actual Minimum Harvest Harvest Final Actual $ LossYield Guarantee Price Guarantee Guarantee Revenue* Per Acre
80 $262.50 $2.25 $236.25 $262.50 $180.00 $82.50
Industry OverviewDefinitions of MPCI Coverage Types
Guy Carpenter 10
CRC Insurance Example
Example 3 - “1994 Type Scenario” - Yield CBOT price
Actual Minimum Harvest Harvest Final Actual $ LossYield Guarantee Price Guarantee Guarantee Revenue* Per Acre175 $262.50 $2.25 $236.25 $262.50 $393.75 $0
* Current Yield multiplied by Harvest Price
Example 4 - Yield CBOT price
Actual Minimum Harvest Harvest Final Actual $ LossYield Guarantee Price Guarantee Guarantee Revenue* Per Acre175 $262.50 $2.75 $288.75 $288.75 $481.25 $0
Industry OverviewDefinitions of MPCI Coverage Types
Guy Carpenter 11
$0
$500,000,000
$1,000,000,000
$1,500,000,000
$2,000,000,000
$2,500,000,000
$3,000,000,000
$3,500,000,000
$4,000,000,000
$4,500,000,000
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00
20
01
20
02
20
03
20
04
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.
Guy Carpenter 12
MPCI 2004 Industry Gross Premium by State
WA MT ND
ORID
WY
MN
CA
NVUT
CO
SD
AZ NM
NE
KS
TX
MO
WI
IA
MI
ME
NY
IL INOH
PA
WV VAKY
OK AR
LA
MS AL
TN
GA
NC
SC
FL
VTNH
MA
RI
DE
CT
MD
NJ
$0 to $25M$25M to $50M
Greater than $100M$50M to $100M
AK
HI
Guy Carpenter 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.
Guy Carpenter 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.
Guy Carpenter 15
Standard Reinsurance AgreementNon Proportional Reinsurance
50
% x
0%
15
% x
50
%
35
% x
65
%
60
% x
10
0%
60
% x
16
0%
28
0%
x 2
00
%
Un
l x 5
00
%
Assigned RiskDevelopmental Cat
Developmental Buy-UpDevelopmental Revenue
Commercial CatCommercial Buy-Up
Commercial Revenue
11%
70%
94%
57%
43%
17%
0%
11%
70%
94%
50%
40%
17%
0%
8%
50%
75%
50%
40%
17%
0%
6%
50%
60%
30%
23%
11%
0%
6%
50%
60%
25%20%
11%
0%
4%
30%
45%
25%20%
11%
0%
2%9%
15%
5% 4%2%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Participation
Loss Ratio Layer
Fund
Guy Carpenter 16
7.60%
31.50%
22.50%
31.50%
48.90%
37.75%
48.90%
-11.00%
-57.80%-57.80%
-62.30%
-101.60% -101.60%-107.60%
-120.00%
-100.00%
-80.00%
-60.00%
-40.00%
-20.00%
0.00%
20.00%
40.00%
60.00%
Assigned Risk Developmental - Buy-up Developmental - Cat Developmental - Revenue
Commercial - Buy-up Commercial - Cat Commercial - Revenue
Standard Reinsurance AgreementNon Proportional Reinsurance
Maximum Net Gains By State
Maximum Net Loss By State
Guy Carpenter 17
Standard Reinsurance AgreementEffect on Net Gain/Loss of Non Proportional Reinsurance
-110%
-100%
-90%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
0% 50% 100% 150% 200% 250% 300% 350% 400% 450% 500%
Gross Loss Ratio
Net
Gai
n/L
oss
Commercial Revenue Commercial Cat/Buy-Up Developmental Revenue
Developmental Cat/Buy-Up Assigned Risk
Guy Carpenter 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.
Guy Carpenter 19
SRAGross U/W Gain Calculation Examples
Assigned Risk Developmental (Buy-up) Commercial (Buy-up) Total
State
Gross Premium (000's)
Gross Premium (000's)
Gross Loss
(000's)Gross
LR
Gross Premium (000's)
Gross Loss
(000's)Gross
LR
Gross Premium (000's)
Gross Loss
(000's)Gross
LR
Gross Premium (000's)
Gross Loss
(000's)Gross
LR
MN $2,000 $200 $320 160% $0 $0 0% $1,800 $900 50% $2,000 $1,220 61%
IA $2,000 $100 $100 100% $200 $130 65% $1,700 $1,105 65% $2,000 $1,335 67%
CA $4,000 $500 $500 100% $500 $1,100 220% $3,000 $3,000 100% $4,000 $4,600 115%
TX $7,000 $3,000 $6,600 220% $2,000 $2,000 100% $2,000 $1,300 65% $7,000 $9,900 141%
Total $15,000 $3,800 $7,520 198% $2,700 $3,230 120% $8,500 $6,305 74% $15,000 $17,055 114%
Guy Carpenter 20
SRANet U/W Gain Calculation Examples
“After Proportional Cessions”
State
Net Premium (000's)
Net Loss (000's) Net LR
Net Premium (000's)
Net Loss (000's) Net LR
Net Premium (000's)
Net Loss (000's) Net LR
Net Premium (000's)
Net Loss (000's) Net LR
MN $50 $80 160% $0 (1) $0 0% $1,800 $900 50% $1,850 $980 53%
IA $25 $25 100% $200 (1) $130 65% $1,700 $1,105 65% $1,925 $1,260 65%
CA $65 $65 100% $500 (1) $1,100 220% $3,000 $3,000 100% $3,565 $4,165 117%
TX $450 $990 220% $700 (2) $700 100% $2,000 $1,300 65% $3,150 $2,990 95%
Total $590 $1,160 197% $1,400 $1,930 138% $8,500 $6,305 74% $10,490 $9,395 90%
(1) 100% Retained
(2) 35% Retained
Assigned Risk Developmental Buy-up Commercial Buy-up Total
Overall Loss Ratio Goes Down with
Proportional Cessions
Guy Carpenter 21
SRANet U/W Gain Calculation Examples
“After Non-Proportional Cessions”
State
Net Premium (000's)
U/W Gain/Loss
(000's) Net L/R
Net Premium (000's)
U/W Gain/Loss
(000's) Net L/R
Net Premium (000's)
U/W Gain/Loss
(000's) Net L/RNet Premium
(000's)
U/W Gain/Loss
(000's) Net L/R
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%
Assigned Risk Developmental Buy-up Commercial Buy-up Total
Overall Loss Ratio Goes Down Further with Non-Proportional Cessions
Guy Carpenter 22
MPCI Historical Industry Underwriting Results
Underwriting Gain / LossYear Gross Premium Net Retained Premium $ %1989 $722,262,045 $352,456,663 $28,892,316 8.20%1990 744,751,547 408,584,026 51,134,007 12.51%1991 656,071,552 445,059,562 41,309,936 9.28%1992 694,514,965 465,872,117 21,811,739 4.68%1993 702,430,420 434,847,472 (83,326,250) -19.16%1994 919,637,263 536,602,513 103,270,641 19.25%1995 1,270,326,512 768,499,418 132,302,113 17.22%1996 1,627,091,008 1,155,072,581 247,571,252 21.43%1997 1,689,202,256 1,263,143,481 352,070,977 27.87%1998 1,875,995,690 1,591,730,382 279,208,820 17.54%1999 2,312,374,790 1,836,870,180 271,756,850 14.79%2000 2,536,402,462 1,893,524,050 285,017,991 15.05%2001 2,977,930,337 2,372,197,462 349,821,584 14.75%2002 2,911,424,789 2,294,612,548 (36,262,528) -1.58%2003 3,436,731,510 2,606,792,668 388,026,833 14.89%2004 4,185,369,786 3,139,784,617 549,462,308 17.50% *
Total $29,262,516,932 $21,565,649,740 $2,982,068,589 13.83%
*Estimated
Guy Carpenter 23
MPCIExpenses
FCIC A&O Reimbursement Summary
34.0%
32.5%31.0%
27.5%
22.0% 22.0% 22.0% 22.0% 22.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
1991 1993 1995 1997 1999 2001 2002 2003 2004
• Continued reduction in the A&O has put many companies in an operational deficit position between 2 -10% of Net Retained Premiums.
Guy Carpenter 24
MPCI Cash Flow Example
Iowa Farmer
Insurance Company / MGA /
AgentFCIC
FCIC
InsuranceCompany
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
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
Escrow Account• In the name 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
Guy Carpenter / Reinsurer
Premium
Losses
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
Guy Carpenter 25
Crop Hail
Guy Carpenter 26
Industry GrowthHistorical Perspective
0
100,000,000
200,000,000
300,000,000
400,000,000
500,000,000
600,000,000
700,000,000
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19
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03
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04
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.
Guy Carpenter 27
Crop Hail 2004 Industry Premium by State
WA MT ND
ORID
WY
MN
CA
NVUT
CO
SD
AZ NM
NE
KS
TX
MO
WI
IA
MI
ME
NY
IL INOH
PA
WV VAKY
OK AR
LA
MS AL
TN
GA
NC
SC
FL
VTNH
MA
RI
DE
CT
MD
NJ
$0 to $1M$1M to $5M
Greater than $10M$5M to $10M
Guy Carpenter 28
Crop Hail Historical Industry Premium and Loss Ratios
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%
Year Premium Loss Ratio
1996 630,965,00072%
1997 594,026,00057%
1998 576,464,00083%
1999 508,108,00076%
2000 468,405,00068%
2001 433,743,00069%
2002 405,003,000 70%
2003 422,216,00056%
2004 427,694,000 57%
Year Premium Loss Ratio
Susan WitcraftMinneapolis
Crop InsuranceOverview of Primary Market in US
June 6-7, 2005
