The following information is a Web Extra from the pages of Top Producer. It corresponds with the article "Price at Play." You can find the article in Top Producer’s January 2013 issue.
Will your crop insurance premiums increase or decline? USDA’s Risk Management Agency has new rates, premiums and updated maps for each crop.
PREMIUM RATE ADJUSTMENT
Background on Process
Section 508(i) of the Federal Crop Insurance Act (Act) requires the Risk Management Agency (RMA) to set premium rates and implement rate changes in a timely manner to cover expected losses and a reasonable reserve. To ensure rates are actuarially sound, the Act also requires RMA to conduct periodic reviews of premium rates and its methodology for establishing premium rates.
In March 2009, RMA retained a distinguished group of economists and actuaries to perform a comprehensive review of RMA?s premium rating methodology. The previous review was completed in 2000. A final draft of the review was published in April 2010. It found that RMA?s loss-cost rating methodology was appropriate. This method sets premium rates according to the average historical rate of loss (e.g., if, on average, policies pay out ten percent of their value, then charge a ten percent rate). However, the review provided several recommendations on the use of the historical loss experience to better refine the premium rates within that methodology.
A key recommendation from the review was that RMA should "evaluate alternative loss cost experience weighting methods", especially with a view toward placing more weight on loss experience from recent years that may be more representative of today?s agricultural risks. A follow-up study addressing this recommendation was initiated in August 2010 with a final draft produced in July 2011.
RMA submitted the study for external review by six experts, as well as made it available to the public for comment. Subsequently, the authors of the study were given the opportunity to respond to the external professional reviews. This process was complete in November 2011.
On November 29, 2011, RMA announced it was implementing adjustments to premium rates in a "phased in" approach allowing for further adjustment pending additional analysis of peer review comments. On average, last year?s changes reduced corn farmers? rates by 7 percent and soybean farmers? rates by 9 percent. The 7 percent rate decrease for corn included the effects of discontinuing a premium discount provided by the Biotech Endorsement program and rolling it into the base premium rate. The Biotech Endorsement provided a premium discount to growers who planted stacked-trait-hybrid corn seed.
Since November 2011, RMA has fully evaluated the study, reviews, and the authors? responses to the reviews and confirmed that premium rate changes are appropriate, although some refinements to the study were made in response to specific points and suggestions made by the reviewers. While the use of historical loss data has been revised, the underlying loss cost rating methodology remains the same.
Keep reading and see the updated maps for each crop.