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Crop Insurance Model

The FAPRI Crop Insurance Model examines and projects the coverage, usage, performance, and expenditures for the U.S. crop insurance program.

Structure of the FAPRI/CARD U.S. Crop Insurance Model

The FAPRI/CARD U.S. Crop Insurance Model combines historical agricultural and crop insurance data with FAPRI projections of national agricultural production and prices to project the performance and costs of the federally subsidized crop insurance program over the next decade. Projections are made for the number of acres insured, total premiums, total premium subsidies, total producer-paid premiums, total indemnities, the total participation rate, loss ratios, and various other costs associated with crop insurance.

To begin, we have created a historical crop insurance data set that is updated annually. This data set tracks relevant insurance variables at several levels of aggregation (national, by state, by county, by crop, etc.). The data includes the number of insured acres, premiums, indemnities, premium subsidies, liabilities, price elections, futures prices, and various costs, such as underwriting, delivery expenses, and administrative and operating expenses. A vast majority of this data is obtained from the Risk Management Agency (RMA) Web site through the Summary of Business reports, the Manager's Bulletins, and the Research & Development Bulletins. Other data sources include the federal budget reports, commodity market yearbooks, USDA publications, and other RMA communications. These data are then combined with historical production and price data and employed to form models and assumptions about future crop insurance activity. Once the models and assumptions are set, we use the FAPRI projections of national agricultural production and prices to provide the basis for the crop insurance projections.

To track the eligibility of acres for crop insurance, we combine USDA-NASS (National Agricultural Statistics Service) county crops data with the listing of crop insurance eligible crop-county combinations. Given this data, we compute the proportions of total planted acres eligible for crop insurance. These proportions are employed throughout the projection period. Under the baseline set-up, only those crop insurance expansions that have been announced by RMA are included in the analysis. This follows the FAPRI baseline procedure of adhering to the current policy structure.

Price projections are based on historical ratios of FAPRI farm prices and the relevant insurance prices for the various policies. Changes in total eligible acres will follow the changes in the eight crop-planted acres from the FAPRI baseline models. Given the level of detail in the NASS and RMA historical data, we divide the FAPRI national acreage projections into county-level estimates. Projections for insured acres, number of insurance policies, liabilities, premiums, premium subsidies, and indemnities are made at the county-crop-insurance policy-coverage level combination; thus, there are several projections for any given county. Insured acres are a function of county-planted acres, historical crop insurance participation, updates for insurance policy area expansions, and changes in crop insurance subsidy levels. The number of policies sold for each county-crop-insurance policy-coverage level combination is a function of projected insured acres and the historical ratio of insured acres and crop insurance policies.

Liabilities are a function of the number of policies sold, historical liabilities, projected and historical prices, and the insurance coverage level. Projections of premium rates are calculated from the most recent year's figures, insurance price movements, and an inflationary component. Total premiums are derived from projected liabilities and premium rates. For the projection period, we assume that all crop insurance products are actuarially fair. This means that expected indemnities equal total premiums. This results in a loss ratio (the ratio of indemnities to premiums) of one. Total premium subsidies are computed as the product of total premiums and the premium subsidy rate for the given insurance policy-coverage level combination.

Costs for delivery expenses, administrative and operating expenses, and sales commissions will be computed as specified in the most recent Standard Reinsurance Agreement. Underwriting costs are estimated from historical and projected premiums, indemnities, and historical underwriting cost data. Once the models have been run, overall crop insurance totals are formed and reported on an insurance-year basis. Also, government costs and obligations for crop insurance are reported on a fiscal-year basis.

View the current FAPRI-ISU 2011 World Agricultural Outlook.

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