Industry Role

2011 Insurance Workshop

Risk Management Issues in a Volatile Economy Thomas P. Zacharias National Crop Insurance Services November 1-4, 2011 Colorado

“…Ch-ch-ch-ch-changes…”

“Time may change me… But I can’t trace time…”

David Bowie

Industry Role

NCIS serves as the primary service organization for the crop insurance industry.

1 NCIS Functions • MPCI and Crop-Hail Program Development and Analysis – Policy Analysis, Loss Adjustment Procedures, Legal Analysis, Agronomic Research • Economic and Actuarial Analysis • Education and Training – Loss Adjuster Schools – 17 (1,692 attendees) – National Conferences – 5 (1,037 attendees) – Annual Regional/State Meetings – 14 (531 attendees) • Crop-Hail Advisory Organization and Statistical Agent – Licensed by Individual State Insurance Department • Public Relations and Industry Outreach

Presentation Overview

• Why are We Here? • 2010 Recap • 2011 By the Quarter • U.S./State Profiles • Summary and Conclusion

Why are We Here?

2 What do we do. . . Importance of Agriculture The future of food - Crisis prevention “What is causing food prices to soar and what can be done about it?” •The Economi st Feb ruary 26 , 2011

What do we do… Importance of Agriculture

“Hungry for a Solution to Rising Food Prices Even if the global agriculture crisis doesn't turn cataclysmic, it represents a massive test” • Bloomberg Businessweek – February 21-27, 2011

Realization of the Vision “The Crossroads” – The Modern Crop Insurance Program (1994 Act, ARPA, 1998 SRA) – Sustained high levels of participation – Improved actuarial soundness – Substantive risk-bearing by the private sector – A mature yet expanding product mix for the American farmer

Or – If you prefer, a more “mellow” perspective. “Nexus” by Dan Fogelberg

3 2010 Recap “A Few Good Months” • SUBJECT: 2011 Standard Reinsurance Agreement (FINAL) BULLETIN NO.: MGR-10-007 - 6/30/2010 “…the hits just keep on happenin’…” • SUBJECT: Guidance Regarding SRA Section III(a)(4)—Agent Compensation BULLETIN NO.: MGR-10-011 - 9/13/2010 ”Are we clear?” • SUBJECT: Guidance Regarding Section III(a)(2)(K) of the SRA (Covenant Not to Sue) BULLETIN NO.: MGR-10-012 - 10/22/2010 “I’ve been tied to the whippin’ post” • SUBJECT: Guidance Regarding SRA Section III(a)(4)—Agent Compensation BULLETIN NO: MGR-10-011.1 - 10/29/2010 ”Are we clear?....Crystal…”

Industry Update

• 1 “Consolidation” so far – • 16 AIPs last year at this time - Now 15 • Most AIPs/SRA holders are now subsidiaries of large insurance and / or financial entities

Trouble in Paradise • Narrower Margins ($6B+ savings from 2011 SRA renegotiation) • Returns to Scope /Scale • IT processing economies • Increased regulatory burden , bla , bla , bla ... Oh, Don't Forget • Payment Delays • A&O Cuts in 2008 Farm Bill (Scored as approx $6B savings)

4 The 2011 Standard Reinsurance Agreement (SRA) “…The world that we used to know People tell me it don’t turn no more The places we used to go Familiar faces that ain’t smilin’ like before The time of our time has come and gone…

RMA Statement 2010 Agricultural and Applied Economics Association (AAEA) Meeting – Denver, Colorado

“Main purpose of SRA is to hire a delivery system”

• 2011 Standard Reinsurance Agreement capped A&O payments limiting increase due to price spikes • $6B Estimated Reduction in A&O and Gain/Loss •If pppyrevious SRA in effect A&O payments would be about $2 billion • Under 2011 SRA, A&O expected at $1.3 billion, saving taxpayers about $700+ million in 2011 • Regional Shifts in A&O Due to Caps – (unintended consequences)

5 The 2011 SRA Last Call

“…You can’t always get what you want But if you try sometimes you might find You get what you need”

Keith Richards and Mick Jagger

2011 Season

• Total Premium to be Record High • 2010 Premium $7.6B • 2011 Estimated at $12B? (45+% Increase) • 2011 Liability > $110B? • SRA Gain / Loss Provisions Will be Tested

2011 First Quarter

6 2011 First Quarter • NEWS RELEASE 0002.11 – USDA’s Office of Communication January 6, 2011 – USDA’s Risk Management Agency Unveils Proposed Rule to Reward Farmers Participating in Federal Crop Insurance Program The Lake Wobegon Effect: “All Farmers are above average”

• INFORMATIONAL MEMORANDUM: PM-11-011 – SUBJECT: Addendum to the 2011 Crop Year (CY) Actuarial Documents  Base prices for major crops are record high. – Spring wheat is up 82%; cotton up 71%; corn; up 51% and soybeans, up 46%.  Price volatility remains high. – RA volatility factor for cotton is up 76%; winter wheat, up 22%; soybeans, up 15% and corn, up 4%.  USDA forecasted a 10-million-acre increase in plantings of major crops in 2011.

2011 First Quarter

• First spring crop under new Common Crop Insurance Provisions “COMBO” policy for producers seeking to protect against a yield shortfall. In addition, all the prior revenue polici es h ave b een consolid ated i nto a “revenue protection” policy • New plans similar to prior APH and revenue plans. Change has been well publicized and agents and educators have been working with farmers for some time to explain the changes.

2011 First Quarter • With high base prices, revenue guarantees close to or exceed cost of production • 85% revenue protection close to or exceed total production costs for major crops • 75% coverage also exceeding total costs for corn and soybeans and close for spring wheat and upland cotton. • Cotton and rice with opportunity to cover costs

7 Crop Moisture Index by Division Weekly Value for Period Ending April 2, 2011 Short Term Need vs. Available Water in a Shallow Soil Profile

What They Are Saying About Us…

Farm Insurance Fraud is Cheating Taxpayers Out of Millions

“Perpetrators falsely claim weather or insects destroyed their crops and cash in on a government-backed insurance program. Some don't bother planting at all. Others sell their harvests in secret.” P.J. Huffstutter, Los Angeles Times February 6, 2011

Crop Moisture Index by Division Weekly Value for Period Ending May 28, 2011 Short Term Need vs. Available Water in a Shallow Soil Profile

8 2011 Second Quarter Didn’t we just talk about this? • SUBJECT: Notice of Intent to Seek Outside Parties to Research The Reasonable and Necessary Economic Cost of Program Delivery – 4/20/2011 INFORMATIONAL MEMORANDUM: IS-11-003 “…When the Levee Breaks…” • SUBJECT: Flooding of the Birds Point-New Madrid Floodway – 5/4/2011 BULLETIN NO: MGR-11-004

• SUBJECT: Flooding of the Morganza Floodway and the Atchafalaya Basin – 5/19/2011 BULLETIN NO.: MGR-11-005

What They Are Saying About Us…

“Most farmers now see [crop insurance] as a primary tool for risk management. An important tool for risk management.” USDA Chief Economist Joseph Glauber on Agri-Pulse’s “Open- Mic,” June 13, 2011

2011 Third Quarter

• BULLETIN NO.: MGR-11-010 – 7/22/2011 SUBJECT: Flooding of the Dyer County, Tennessee Levee and Drainage District ”…How high’s the water mamma?...” • BULLETIN NO: MGR-11-012 – 8/19/2011 SUBJECT: Emergency Loss Adjustment Procedures Due to 2011 Crop Year Flooding ”…six feet high and rising…”

9 2011 Third Quarter “The heat is on….”

What They Are Saying About Us… • “I am against making any cuts in crop insurance…any changes in crop insurance. Crop insurance for me is the bottom line.” Rep. Collin Peterson (D-MN) The Hagstrom Report, August 15, 2011

• Senate Farm Bill Hearing – August 25, 2011 Wichita, Kansas “As you look at priorities in this new Farm Bill please consider that producers still need a safety net for crop failure and disaster. Crop insurance has been and still is the best tool for these situations. Full funding for the crop insurance program is the highest priority for sunflower growers and I suspect that it is the case for all commodities.” Karl Esping , Kansas Sunflower Commission

“Kansas corn farmers have purchased Federal crop insurance for over 4 million acres of corn, that’s about 80 percent of our corn acres. Weather here is undependable with droughts, storms, hailstorms and wind. That’s why Kansas farmers rely on a strong and viable crop insurance program.” Kenneth McCauley, Kansas Corn Growers

“I think the most efficient program is the crop insurance program. Producers receive insurance proceeds when they need the assistance, not when they are experiencing average revenue years or better.” Jeff Whitham, CEO and Chairman of Western State Bank © 2011 NCIS NCIS - 29

U.S. and Colorado Crop-Hail and Multiple Peril (MPCI) Statistics

10 CROP-HAIL INSURANCE UNITED STATES LIABILITY TOTALS 1996 - 2010 30,000,000,000

25,000,000,000

20,000,000,000 L I A B I 15,000,000,000 L I T Y 10,000,000,000

5,000,000,000

CROP-HAIL INSURANCE UNITED STATES PREMIUM AND LOSS TOTALS 1996 - 2010 800,000,000

700,000,000

P 600,000,000 R E M 500,000,000 I U M 400,000,000

L 300,000,000 O S S 200,000,000

100,000,000

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 CROPYEAR

LR=Loss Ratio CROP-HAIL INSURANCE LC=Loss Cost UNITED STATES AR=Average Rate 2005 - 2010 100.00 3.50

90.00 3.00 80.00

70.00 2.50

60.00 2.00 atio / Loss / Cost e R 50.00

Loss 1.50 40.00 Average Rat Average

30.00 1.00

20.00 0.50 10.00

0.00 0.00 2005 2006 2007 2008 2009 2010 Cropyear

11 Production Plan • For 2012 NCIS Filed the Crop-Hail Production Plan (CHPP) in –Iowa –Kansas – Minnesota –Nebraska – North Dakota – South Dakota • Current NCIS Crop-Hail Production Plan Policy Covers Only –Corn – Soybeans – Wheat • Must have a MPCI Policy in force • Companion Type Policy – Covers the deductible portion not covered under MPCI for Hail and Fire • Written on a Unit Basis instead of Acre

Production Plan (cont.)

• Insured can elect a modifier to increase approved yield. NCIS modifiers include 100%, 105%, 110%, 115% and 120% • NCIS Form includes a 5% Minimum • Losses are not paid out until production can be determined • CHPP pays out the lesser of the actual hail loss or the production deficiency due to hail for the unit

Production Plan – United States

• 2010 US Production Plan Loss Ratio: 140% • 2010 US All Crop-Hail Loss Ratio: 68% • 2010 US Production Plan Premium: $71 million • 2010 US All Crop-Hail Premium: $681 million

12 Production Plan Example (For 75% Coverage Level; Basic Hail Form) Assumptions Total Guarantee (bushels) APH (bu) 100 Mod Acres 200 100% 105% 110% 115% 120% Price (per bu) $5.00 20,000 21,000 22,000 23,000 24,000

Compute the Total Liability ($) Mod 100% 105% 110% 115% 120% 100,000 105,000 110,000 115,000 120,000

Compute MPCI Liability Compute the Production Plan Liability ($) Coverage MPCI Mod Level Liability 100% 105% 110% 115% 120% 75% 75,000 25,000 30,000 35,000 40,000 45,000

Hail Deficiency Mod 100% 105% 110% 115% 120% Hail damage % 20% Bushels 4,000 4,200 4,400 4,600 4,800 Dollars ($) 20,000 21,000 22,000 23,000 24,000

MPCI Production to Count and Production Deficiency Mod 100% 105% 110% 115% 120% MPCI PTC /acre (bu) 92 PTC 18,400 18,400 18,400 18,400 18,400 Deficiency (bu) 1,600 2,600 3,600 4,600 5,600 Deficiency ($) 8,000 13,000 18,000 23,000 28,000

Indemnity Mod 100% 105% 110% 115% 120% Dollars ($) 8,000 13,000 18,000 23,000 24,000

MULTIPLE PERIL CROP INSURANCE UNITED STATES ACRES TOTALS 1996 - 2010 300,000,000

250,000,000

200,000,000

A C R 150,000,000 E S

100,000,000

50,000,000

MULTIPLE PERIL CROP INSURANCE UNITED STATES LIABILITY 1996 - 2011 *2011 Data is preliminary 120,000,000,000

100,000,000,000

80,000,000,000 L I A B I 60,000,000,000 L I T Y 40,000,000,000

20,000,000,000

13 MULTIPLE PERIL CROP INSURANCE UNITED STATES PREMIUM AND LOSS TOTALS 1996 - 2010 12,000,000,000

10,000,000,000

P R E 8,000,000,000 M I U M 6,000,000,000

L O 4,000,000,000 S S

2,000,000,000

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 CROPYEAR

COLORADO

CROP-HAIL INSURANCE COLORADO LIABILITY TOTALS 1996 - 2010 120,000,000

100,000,000

80,000,000 L I A B I 60,000,000 L I T Y 40,000,000

20,000,000

14 CROP-HAIL INSURANCE COLORADO PREMIUM AND LOSS TOTALS 1996 - 2010 16,000,000

14,000,000

P 12,000,000 R E M 10,000,000 I U M 8,000,000

L 6,000,000 O S S 4,000,000

2,000,000

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 CROPYEAR

LR=Loss Ratio CROP-HAIL INSURANCE LC=Loss Cost COLORADO AR=Average Rate 2005 - 2010 140.00 16.00

14.00 120.00

12.00 100.00

10.00 80.00 Loss Cost tio 8.00

Loss Ra 60.00 6.00 Average Rate Average /

40.00 4.00

20.00 2.00

0.00 0.00 2005 2006 2007 2008 2009 2010 Cropyear

Production Plan - Colorado

• 2010 Colorado Production Plan Loss Ratio: 141% • 2010 Colorado All Crop-Hail Loss Ratio: 70% • 2010 Colorado Production Plan Premium: $3 .2 million • 2010 Colorado All Crop-Hail Premium: $11 million • 29% of Colorado 2010 Premium is from Production Plan

15 MULTIPLE PERIL CROP INSURANCE COLORADO ACRES TOTALS 1996 - 2010 7,000,000

6,000,000

5,000,000

A 4,000,000 C R E S 3,000,000

2,000,000

1,000,000

MULTIPLE PERIL CROP INSURANCE COLORADO LIABILITY 1996 - 2011 *2011 Data is preliminary 1,400,000,000

1,200,000,000

1,000,000,000

L I A 800,000,000 B I L I 600,000,000 T Y

400,000,000

200,000,000

MULTIPLE PERIL CROP INSURANCE COLORADO PREMIUM AND LOSS TOTALS 1996 - 2010 250,000,000

200,000,000 P R E M I 150,000,000 U M

/ 100,000,000 L O S S 50,000,000

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 CROPYEAR

16 Farm Bill: 1 slide 1 slide only

(Red October “…1 ping and 1 ping only…”)

Q: What do you do when there are two elephants in the room? A: Introduce them.

Direct payments Crop Insurance

Groucho: “One morning I shot an elephant in my pajamas. How he got into my pajamas I'll never know.”

Final Thoughts

“After all is said and done…”

17 Why Crop Insurance is now in a Position of Strength 1--Producers share program cost 2--Producers take personal responsibility for risk management 3--Producers get individual risk management solutions 4--Producers receive indemnities in the timeliest way 5--Program can be quickly adjusted and is self-correcting 6--Payments are not in excess of losses 7--Protection can be used as collateral for loans 8--Program enables pre-harvest marketing 9--Producers not subject to payment limits 10--Producers benefit from the efficiencies of private sector delivery 11--Crop insurance can be green box under the WTO and has flexibility to meet WTO support limits 12--Crop insurance has contributed to deficit reduction