Evaluating crop insurance options for 2014
The remainder of the presentation focuses on Enterprise units as many farmers will find Enterprise policies to be a better choice because the policy will be less expensive and more related to overall revenue from the crop insured. Comparable analyses considering Basic units are available at the farmdoc website for those interested.
click image to zoom The following table provides the average payments per acre expected if this year's conditions were repeated over and over, a large number of times across all possible outcomes, and the average across all iterations calculated. As shown in the table, the payments increase as election levels increase reflecting the increased value of coverage for all insurance products. The Yield Protection policy (YP) would be expected to make average payments of $16.27/acre at the 85% election level over a large number of times. Of course, many years the payments will be zero, and some years the payments would be much higher. Notice that the RP policy always is expected to make larger payments than the RP-HPE policy, but not always by as much as the difference in premium costs. Under an 85% election, for example, RP would be expected to make indemnity payments of $21.82 per acre on average over a large number of years, while the RP-HPE policy would make average payments of $14.08. The Area policies (rightmost 3 columns) begin with 70% coverage options and range to 90% unlike farm-level policies that have maximums of 85%. The highest coverage ARP policies also have the highest expected average payments due to the protection factor allowing a 1.2 scaling of payments to help offset the farm-to-county basis risk that remains due to imperfect correlation between the farm and the county yields.
click image to zoom Next, a table is provided with the frequency of payment, or the fraction of years that at least some payment would occur. As can be seen in the table, the YP policy makes payments in about 18.5% of years at an 85% election and virtually never gets triggered at lower coverage levels. The revenue policies increase in frequency faster as coverage levels are increased due to the possibility of price movements also generating claims even under near typical yields. In the case of RP at 85%, a farm with these characteristics would expect to a claim in about 24% of the years. Group policies, while they tend to pay in high frequencies at high elections, are less correlated with revenue shortfalls and thus may provide less risk protection despite the often higher frequencies of being triggered, especially at the highest election levels.
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