Why Farm Revenue Protection Matters
"The latest I have seen out of the USDA is for $15 billion to $16 billion in claims," he said. "With $10 billion in premiums, that leaves an underwriting loss of $5 billion to $6 billion. Some of that will be paid by the insurance companies, with the biggest hit to them in Iowa, though Indiana had greater losses."
Barnaby based his argument on the reinsurance agreement between the private insurance companies and the USDA Risk Management Agency (RMA) and projected loss ratios. For group 1 states, which include Iowa, Illinois, Indiana and Nebraska, a loss ratio of 160 would require companies to pay 65 percent of the underwriting loss. For that portion of the loss ratio over 160 and under 220, the company share drops to 55 percent. For the portion of loss ratios over 220, they would pay 10 percent.
"The loss ratio is across all crops, and better than expected soybean yields are having an impact there, as had falling prices in October," said Barnaby. "The truth is a 220 loss ratio doesn't happen very often."
Art Barnaby As of September, Carl Ashenbrenner, a consultant with Milliman, an independent actuarial product and service provider to the insurance industry, released forecasts for 12 major corn and soybean producing states. He projected an underwriting loss ratio of 226 for corn and soybeans combined. However, with higher than expected yields in many areas, the loss ratio across the board may be significantly less. Even though it is likely to remain very high in Indiana, a less hard hit state like Iowa, which has twice the premium base, has losses falling mostly on the companies, not the taxpayer.
"We're anticipating a loss ratio of less than 220 for most companies in Iowa, and as a result, the approved insurance providers (AIPs) will pay most of the loss," said Barnaby.
Even if the Indiana loss ratio is above 220 and the taxpayer picks up 90 percent of the underwriting loss, it will still likely be less than the losses the AIPs absorb in Iowa. If these prove out to be accurate, the actual underwriting loss picked up by taxpayers will be a fraction of the earlier projected costs, perhaps $4 billion or $5 billion. If the RMA had been allowed to bank the $1.4 billion in underwriting gains it received in 2010 and that of other years past, underwriting losses would be even less. Of course, if the RMA even got credit for gains, the perceived subsidy for farm premiums of around $6 billion would also be less. Unfortunately, any gains go directly to the general fund.
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