Evaluating crop insurance options for 2014
The next table combines information from the previous tables and presents the net cost of insurance expected over time given the starting conditions of the farm and the insurance provisions for this year. Net cost is defined as the farmer paid premium less the average payment received. A negative "cost" indicates that the product pays back more on average than it costs -- as would often be expected given the overall target loss ratio of approximately 1.0, and the fact that the farmer paid portion of the premium is subsidized to encourage participation.
click image to zoom As shown in the table, Revenue Protection pays back on average about $13.26 more than its premium cost while under RP-HPE a producer in McLean County would expect to gain $7.44/acre over the long run by purchasing RP-85% every year. Although sometimes counterintuitive, numbers in parentheses that are larger are more negative and are thus more preferred. Higher positive numbers are associated with larger net costs through time. A zero would be a breakeven policy that paid back just what it cost over time. Recall that the RP policy pays more on average and in more years, but the lower premium cost of the HPE policy more than offsets the payment differences in this specific case. YP would in this case actually pay back the most on average through time in excess of its lower premiums, but again not necessarily be as correlated with revenue shortfalls. Given the very high premiums for Area policies in McLean, the high payments roughly offset the initial costs and return a bit more than the premium on average for ARP and ARP-HPE, but do not quite cover the average cost of YP. Interestingly, even a few counties away from McLean with similar expected yields can have substantially different patterns, especially in terms of the Area products. Given the subsidy structure, the general findings in most counties is that the average cost of insurance is negative through time as expected, and also that higher coverage options are usually preferred on an actuarial basis.
Net cost does not provide a complete picture of the impact of insurance usage however as it is also important to understand the impact of insurance on the likelihood of experiencing particularly low revenues. For example, one might be most interested in which insurance allows a farmer to bid most for cash rent, or insure that all variable costs can be covered, or do the best job of offsetting particularly low revenue outcomes under hedged production, and so on. One way to begin to understand this type of impact is to examine the VARs or "Values at Risk" under different insurance contracts.
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