PUBLICATION OF NATIONAL CROP CR OP INSURANCE SERVICES ® INSU RANCE

VOL. 44, NO. 2 MAY 2011

TODAY®

Volatility Factor in Concept and Practice Profitability an d Effectiveness of the Federal Crop Insurance Program Technology on the move.

RCIS CIMax® software was the first automated system for crop insurance agents. RCIS Quest® was the first automated claim software. In 2010, we introduced the first mobile claim inquiry with RCIS Mobile Portal. Our technology and infrastructure give RCIS agents speed and convenience, even in peak acreage reporting season. Visit rcis.com.

More than a promise—a partnership you can rely on.

Rural Community Insurance Agency, Inc., D/B/A RCIS. RCIS is an equal opportunity provider. © 2011 Rural Community Insurance Agency, Inc. All rights reserved. TODAY PRES IDENT’S MESSAGE What’s the Message? So Simple and So Important Even An Adult Can Explain It!

Laurie Langstraat, Editor A while back, I was running an errand with our oldest granddaughter when from the car seat TODAY IS PROVIDED AS A SERVICE OF comes the question “ ... what is it you do?” ® NATIONAL CROP INSURANCE SERVICES Hmm m...s hould I explain the ongoing SRA TO EDUCATE READERS ABOUT THE RISK MANAGEMENT TOOLS PRODUCERS USE renegotiations? What about the new Common TO PROTECT THEMSELVES FROM Crop Insurance Provisions? What about revenue THE RISKS ASSOCIATED WITH coverage and volatility factors? With these PRODUCTION AGRICULTURE. thoughts and a host of crop insurance acronyms

TODAY is published quarterly–February, May, (MPCI, RMA, FCIC, APH, CIH, LAM, etc.) swirling August, and November by in my head, I simply responded, “ ... we help farm - ers grow the food we eat.” National Crop Insurance Services 8900 Indian Creek Parkway, Suite 600 That was over a year ago; now fast forward to Overland Park, Kansas 66210 Spring of 2011. The cover of the February 21-27

If you move, or if your address is incorrect, issue of Bloomberg Businessweek reads “Food please send old address label clipped from recent issue Tom Zacharias, NCIS President Crisis: Weather, Speculation, and Politics have along with your new or corrected address to created a Global Food Crisis that threatens ... Everything.” Same week, the February 26 Laurie Langstraat, Editor, at the above address. issue of The Economist has a Special Report entitled “Feeding the World-The 9 Billion NCIS Website: http://www.ag-risk.org People Question.” Again the question “ ... what is it you do?” Can we, as the crop insurance industry, have a more important role and mission than to “help farmers grow the food we eat” by providing financial stability, peace of mind, and support to agriculture, both domestically, as well as internationally? I don’t think so. So how important is agriculture? Let’s start with the demand side. Well, the people of this world need to eat. Currently, world population is approximately 6.9 billion, expected to increase to 9.1 billion by 2050, according to the medium variant projections of the NCIS ® EXECUTIVE COMMITTEE Steve Rutledge, Chairman Population Division of the United Nations. With urbanization, income growth and chang - Ted Etheredge, Vice Chairman ing diets, food demand will grow sharply. Tim Weber, Second Vice Chairman What about the supply side? That is where the crop insurance industry comes in. Last month’s USDA Prospective Plantings report indicated farmers intend to plant 92.2 million NCIS ® MANAGEMENT acres of corn and 76.6 million acres of soybeans this spring. If realized, this would be the Thomas P. Zacharias, President P. John Owen, General Counsel second-highest planted corn acreage since 1944, behind only the 93.5 million acres plant - James M. Crist, CFO/COO ed in 2007. Increases of 250,000 acres or more are expected in Iowa, Kansas, Nebraska, Frank F. Schnapp, Senior Vice President North Dakota, Ohio, and South Dakota. Soybean planted area for 2011 is estimated at 76.6 Mike Sieben, Senior Vice President million acres, down one percent from last year, but if realized, the third largest on record. All wheat planted area is estimated at 58.0 million acres, up 8 percent from last year. And Creative Layout and Design cotton, too, at 12.6 million acres is expected to be up 15 percent. by Graphic Arts of Topeka, Inc., Kansas In terms of yields and acres-that is, total production-we find ourselves at peak capacity. With stocks low and demand high, we are using up the once-excess production capacity of American agriculture. On one hand, this is very impressive, Winner of The Golden ARC Award alternatively, we find ourselves questioning the agriculture’s ability to meet the coming need for food, fiber and renewable fuel. Continued on page 44 Printed on recycled paper. CROP INSURANCE TODAY ® 1 CR OP INSU RANCE VOL. 44, NO. 2 MAY 2011

TODAY® Table of Contents

1 What’s the Message?

4 2010 Year in Review

15 Volatility Factor in Concept and Practice

22 Step 2-Human Resources: What are my interests and skills?

4 26 Passing the Gavel

28 Profitability and Effectiveness of the Federal Crop Insurance Program

34 2011 NCIS Board of Directors

35 NCIS Service and Leadership Awards

38 NCIS Leadershi p—Regional/State Crop Insurance Committees

40 2010 Crop-Hail Loss Ratio by State

42 In Memory of Oscar Deardorff and Gary Schmidt 15

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Copyright Notice All material distributed by National Crop Insurance Services is protected by copyright and other laws. All rights reserved. Possession of this material does not confer the right to print, reprint, publish, copy, input, transform, distribute or use same in any manner without the prior written permission of NCIS. Permission is hereby granted to Members in good standing of NCIS whose Membership Class (and service area, if membership is limited by service area) entitles them to receive copies of the enclosed or attached material to reprint, copy or distribute such NCIS copyrighted material in its present form solely for their own business use and solely to employees, adjusters or agents who are under contract with them, and as a condition to receiving such copies, such employees, adjusters and agents agree that they will not reprint, copy or distribute, or permit use of any such NCIS copyrighted material to or by any other person and/or company, or transform 28 into another work such NCIS copyrighted material, without prior written permission of NCIS. © 2011 National Crop Insurance Services, Inc.

TODAY crop insurance Yea2010r in Review

By Keith Collins and Harun Bulut, NCIS

Year in Review is an annual feature of Crop Insurance TODA Y ® business, paid losses as a percent of premium written were lower and is intended to provide a historical record of the performance as compared with 2008 and 2009, yet remained higher than in ear - of crop insurance during the previous crop year. lier years going back to 2003. Key market and policy developments also highlighted 2010. Overview Despite generally strong U.S. crop production, crop prices soared The 2010 crop year started with a sharp decline in winter wheat as the year unfolded, sharply raising U.S. farm income. World food planted area during the fall of 2009, as low wheat prices, wet and biofuel use spurred crop demand and, combined with a series weather and late harvests of 2009 row crops delayed and reduced of crop production shortfalls in foreign countries, put stress on plantings and slowed crop development. The winter of 2009-10 already low global crop supplies, raising food price concerns in featured a persistent high pressure system that continually fed cold developing countries. U.S. policy focused on taming a record air into the central and southern states and an El Nino that helped Federal budget deficit, which influenced the negotiations for the produce stormy weather patterns across these regions. However, 2011 Standard Reinsurance Agreement (SRA). Begun in the fall of drier spring weather permitted rapid planting of major crops. 2009, the negotiations were completed by July 2010 with the result Winter wheat production turned out only slightly below 2009 being a reduction of funding for crop insurance of $6 billion over despite the acreage decline, and spring wheat production was up, 10 years. An estimated $4 billion of that total was allocated to with record-high yields. Warm temperatures in the major crop pro - deficit reduction. Further funding reductions for agriculture appear duction areas of the Plains and Midwest states spurred rapid crop likely to be made in the 2012 Farm Bill, and initial Congressional development during the summer and continued with timely har - hearings on the legislation were conducted during the summer vests, although cool, wet weather affected the Northern Plains, of 2010. Pacific Northwest and California. The 2010 corn harvest was down In keeping with past annual reviews, this article expands on from 2009’s record high, as high temperatures late in the summer this overview by reporting on the 2010 crop insurance season and cut into corn yields in the Central Corn Belt, although yields were highlighting the significant events that affected the program. A up from a year earlier in the northern and southern tier of states. brief discussion of weather conditions and their impacts on crop Soybean production was the second highest ever and cotton pro - production is followed by a review of commodity market prices. duction was up over 50 percent. With the generally favorable Crop-hail experience for the U.S. and Canada is presented, fol - weather and large harvests, crop insurance losses as a percent of lowed by overall results of the Federal crop insurance program. premium under the Federal crop insurance program were the low - Finally, issues for the crop insurance industry from the 2011 SRA est since the modern program began in 1980. Regarding crop-hail and the prospective 2012 Farm Bill are examined. 4 MAy 2011 Weather and Production The area planted for harvest of winter Figure 1. Winter 2009/2010 National Climatic Data Center/NESDIS/NOAA wheat was 37.1 million acres during the fall of 2009, down 14 percent from 2008, the lowest since 1913. Seeding started slow, delayed by late harvests of spring crops and wet weather. Most states in hard red wheat areas reduced planted acreage, with Kansas having its lowest since 1957, Oklahoma the lowest since 1971, and Texas the lowest since 1973. In soft red states, acreages were at a record low for Illinois, Indiana, Missouri and Ohio. In the Pacific Northwest, seeding started early, and acreage was down only one percent from a year earlier. By the end of November, the winter wheat crop was rated 64 percent good to excellent, about the same as the year earlier. The National Climatic Data Center (NCDC) reported the winter of 2009-2010 was the seventeenth coldest and fifteenth wettest ever. Winter precipitation averaged 114 percent of normal as shown in Fig. 1. The excellent spring weather for much of was 127 percent of the previous five-year It was among the ten driest winters in the nation facilitated rapid planting for all average pace. Corn plantings finished at Wyoming and Idaho, but among the top major crops, as illustrated in Fig. 3. This con - 88.2 million acres, up two percent from ten wettest in South Dakota, Alabama, and trasted sharply with 2009, when wet, cool 2009. Similarly, planting for soybeans and seven coastal states from Florida to New weather caused significant planting delays. spring wheat advanced rapidly. Soybean Jersey. Notable events included two In 2010, by April 25 (week 16), 50 percent of planted area at 77.4 million acres was near - December blizzards in the Plains and the U.S. corn acreage was planted, the earli - ly identical with the 2009 level. Barley and upper Midwest, a severe January freeze in est date that planting has ever reached 50 oats planting was ahead of normal, and Florida, and record February snowfall in percent. At that point, corn planting progress sorghum was near normal. Acreage fell 2.2 the Mid-Atlantic States. California received more normal winter snowfall after three years of drought. Figure 2. Spring 2010 National Climatic Data Center/NESDIS/NOAA With generally favorable winter and spring weather, U.S. winter wheat produc - tion totaled 1.49 billion bushels, only three percent below 2009, despite the large drop in planted area. U.S. yield was 46.8 bushels per acre, the fourth highest ever. Excellent weather in Oklahoma and Texas resulted in greater harvested acres than in 2009. Production fell in all soft red states, while production in white wheat states was up 14 percent. Spring was warm and fairly dry for much of the nation, see Fig. 2, although there was some late spring rain in the western Corn Belt that ruined just-seeded crops. Spring rain alleviated the winter dry - ness in the Northwest, while California remained cool. As the spring proceeded, dryness emerged in Great Lake states and drought appeared in Gulf Coast states.

CROP INSURANCE TODAY ® 5 bushels was five percent more than 2009 Figure 3. Planting Progress: Share of Crop Planted Compared with 2005-09 and the third highest ever. U.S. yield was a record-high 46.1 bushels per acre, breaking the prior record set in 2009. U.S. corn production was 12.4 billion bushels, five percent below the record- high of 13.1 billion produced in 2009. Yield was 152.8 bushels per acre, 11.9 bushels below 2009’s record 164.7 bushels. Yields were down across much of the Corn Belt, Central Great Plains, Ohio Valley, and Mid-Atlantic States com - pared with 2009, with high temperatures a contributing factor. However, yields were up in the Southern Great Plains, Delta and Southeast regions and were at record highs in Michigan, Minnesota, North Dakota and Wisconsin. U.S. soy - bean production was 3.33 billion million from 2009 for these three feed areas faced cool, damp weather that bushels, down one percent from 2009 grains. Upland cotton started slowly in delayed small grain development and and the second largest ever. Average California but quickly caught up to normal harvesting. California also had delayed yield was 43.5 bushels, 0.5 bushels progress and U.S. planted area was 11.0 development and harvest for crops such below 2009’s record high. Hot, dry million acres, up 20 percent, reflecting as rice and cotton. weather during blooming and pod devel - improved price prospects relative to other Overall major crop conditions opment reduced yield potential. Upland crops. Rice progressed rapidly except in remained favorable throughout the grow - cotton production was 17.8 million bales, cool, wet California. U.S. rice acreage ing season and yields of most major 51 percent over 2009. The U.S. average planted totaled 3.6 million, up 16 percent. crops turned out high or record high. Fig. yield was estimated at 814 pounds per During the summer, the Plains and the 4 indicates the portion of key crops rated acre, up 48 pounds from 2009. With Midwest states experienced above-nor - good or excellent in the weekly survey expanded acreage, rice production in mal temperatures and ample rain causing conducted by the National Agricultural 2010 was a record-high 243 million hun - most crops to develop and mature quick - Statistics Service. All major crops had 50 dredweight (cwt), 11 percent above ly, enabling a rapid harvest. High temper - percent or more of the crop rated good 2009, despite an average yield of 6,725 atures and drought in the eastern Corn or excellent throughout the growing sea - pounds per acre that was 360 pounds Belt and South reduced prospective son. Spring wheat had the highest rat - below the 2009 yield. yields. Some northern and northwestern ings, and 2010 production of 616 million As calendar 2010 closed, a developing La Niña contributed to drought across the Figure 4. U.S. Crop Conditions: Share of Crop Rated Good to Excellent South, dry conditions in the Southern Plains and Southwest and cold, stormy conditions in the Pacific Northwest to the Upper Midwest.

[Information for this section was obtained from the publication of the National Climatic Data Center at the National Oceanic and Atmospheric Administration “State of the Climate National Overview for Annual 2010”, published online, December 2010, and retrieved on March 18, 2011 from http://www.ncdc.noaa.gov/sotc/national/2010 /13 and USDA publications, including “Global Crop Production Review, 2009”, “Prospective Plantings March 2010”, “Crop Production 2010 Summary”, and various issues of the “Weekly Weather and Crop Bulletin” and “World Agricultural Supply and Demand Estimates Report”.]

6 MAy 2011 Commodity Markets Figure 5. World Production and Use of Grain and Oilseeds and Prices Global commodity markets tightened significantly during 2010, and midway through the marketing year, season-aver - age prices received by farmers were fore - cast by USDA to set new record highs, surpassing the previous records set in 2008. With growth returning to the glob - al economy after the financial crisis of 2008-09, particularly in emerging mar - kets, global food consumption has con - tinued to surge ahead. Demand growth has been especially strong in Developing Asia, including China, as well as Latin America. Fig. 5 shows the pickup in glob - al use of all grains and oilseeds since 2003. U.S. ethanol producers are forecast to purchase 40 percent of 2010 U.S. corn production. In the face of the strong $5.40 per bushel, compared with the pre - The overall effect on farm prices due to global demand for food, fiber and renew - vious record of $4.09 in 2008-09. Soybean 2010’s strong export demand, rising oil able fuel, a series of weather problems prices are forecast at a record $11.60 per prices and farm production costs, biofuel caused global grain and oilseed produc - bushel, compared to the prior record of demand, weaker foreign currency value of tion to decline below total use, cutting $10.10 in 2007-08. Similarly, cotton prices the dollar and reduced global crop produc - into global reserves. Drought in Russia, are expected to be 81.5 cents per pound, tion is summarized by the index of prices excess moisture in South Asia, floods in the highest price since at least 1965. The received by farmers for all crops, Table 1. Australia, dry weather in Argentina and all-wheat farm price, forecast at $5.70 per The index for calendar year 2010 was up the decline in the U.S. corn crop all con - bushel, is up sharply but remains below slightly from 2009 and below 2008. tributed to the reduction in global grain the 2008-09 record of $6.78 per bushel. However, the rapid increase in 2010 crop and oilseed production in 2010. Rice, which is in ample supply, is expect - farm prices occurred during the second Global consumers looked to the ed to average $12.50 per cwt, down from half of the year, the main harvest period, United States to help offset their reduced 2009-10 and well below 2008-09’s average and by December 2010, the monthly index production during 2010-11. Increased farm price of $16.80 per cwt. had reached 175. U.S. production enabled large increases in U.S. wheat and cotton exports. However, low stocks and reduced U.S. Figure 6. U.S. Stocks/Use and Prices production of corn and soybeans resulted in large price increases needed to ration tight supplies among uses. Fig. 6 illus - trates U.S. carryover stocks of corn and soybeans as a percent of total use, a measure of the tightness of crop markets. Corn carryover stocks on September 1, 2011 are forecast by USDA to be only five percent of 2010-11 total use of corn, tied with 1995-96, and the lowest since at least 1960. Soybean stocks are expected to be only 4.2 percent of use, the lowest ever. Season-average farm prices, which are well correlated with stocks-to-use ratios, are expected to reflect this historic tightness. Corn farm prices for 2010-11 are forecast to average a record high

CROP INSURANCE TODAY ® 7 Fig. 7 shows the general pattern of Table 1. Index of Farm Prices Received by Producers, All Crops 2010 crop year prices for major crops, 1990-92 = 100 using as illustration the December futures 2005 2006 2007 2008 2009 2010 Dec. 2010 contract prices for corn on a weekly basis Index 110 120 142 169 150 156 175 for 2006 through 2010. In contrast to the Source: NASS Agricultural Prices sharp increase in the first half of 2008 that dissipated as the large harvest became known, December futures prices in 2010 began rising midway through the year as Table 2. Revenue Policy Base Prices 1/ global crop production problems began Crop 2008 2009 2010 Change to surface. Table 2 provides the base prices for Wheat, winter ($/bu) (KCBOT) 5.88 8.77 5.42 -38% revenue policies for major crops over the Wheat, spring ($/bu) 11.11 6.20 5.43 -12% past several years. In 2008, all base prices Corn ($/bu) 5.40 4.04 3.99 -1% for spring-planted crops were record Soybeans ($/bu) 13.36 8,80 9.23 5% highs and declined in 2009. In 2009, the Cotton ($/bu) 0.77 0.55 0.72 31% base price for winter wheat set a record Rice ($/cwt) 14.40 13.10 14.00 7% high. Expectations were that market prices 1/ For Revenue Assurance plans. for major spring-planted crops would Source: Various RMA Manager’s Bulletins decline in 2010, except for cotton, and base prices for spring wheat and corn did decline, while soybean base prices were Table 3. Revenue Policy Implied Price Volatilities 1/ up slightly. Cotton base prices increased markedly in response to expected tighter Crop 2008 2009 2010 Change markets in 2010-11. The 2010 winter Wheat, winter (KCBOT) 0.24 0.33 0.27 -18% wheat base price fell from the 2009 record Wheat, spring 0.33 0.25 0.24 -4% as a large build up in wheat stocks was Corn 0.30 0.37 0.28 -24% expected for the 2010 wheat marketing Soybeans 0.31 0.31 0.20 -35% year at the time the base price was Cotton 0.20 0.27 0.21 -22% determined. Rice 0.15 0.22 0.19 -14% Implied volatility factors, which are 1/ For Revenue Assurance plans. determined from options contracts, are Source: Various RMA Manager’s Bulletins used in the calculation of premium rates for revenue policies. Table 3 shows implied price volatilities for major crops. After an increase in 2009 for most crops, Figure 7. Weekly Corn Futures Prices Life of Dec. Contracts 2006-2010 volatilities declined for all major crops in 2010, which contributed to premium rate reductions. Fig. 8 shows the effects of price move - ments on the base and harvest prices for the 2010 CRC and RA plans of insurance for the major crops (corn, soybean, winter and spring wheat, cotton and rice). During 2008, the last year of a large run- up in crop prices, harvest prices turned out mostly below base prices, which triggered indemnities for many revenue policies. However, consistent with the increase in market prices that occurred during the sec - ond half of 2010, and illustrated by the behavior of corn prices in Fig. 7, harvest prices for major spring-planted crops exceeded base prices in 2010.

8 MAy 2011 In 2008, harvest prices for corn were 24 percent below base prices for CRC plans of Figure 8. Prices for Major 2010 Crop Revenue Policies insurance and 31 percent lower for RA plans, and again in 2009, corn harvest prices were below base prices. In contrast, 2010 corn harvest prices exceed base prices by 37 percent for CRC and 38 per - cent for RA. For soybeans, harvest prices were below base prices in 2008, unlike 2009 when harvest prices exceeded base prices as a reduced South American soy - bean harvest strengthened fall prices. In 2010, soybean CRC harvest prices were 16 percent above base prices and RA harvest prices were 26 percent above base prices. Spring wheat and cotton harvest prices in 2010 also exceeded base prices, while rice harvest prices, with ample stocks, were three percent below base prices. Cotton was a remarkable story, with harvest prices 85 percent higher than base prices in 2010 as global cotton use is exceeding produc - Federal Crop Insurance Results differed for the various insur - tion for the fourth consecutive year. With Program Experience ance plans (final reinsurance data for the U.S. cotton exports up sharply, U.S. ending At the time this article was written, the group risk plans, GRP and GRIP, were not stocks for 2010-11 are forecast at only 1.9 crop insurance program loss ratio (gross available at the time this article was writ - million bales, one million bales below last indemnities divided by gross premium) for ten). The U.S. loss ratio for individual farm season and far below 2007-08’s level of the 2010 crop year was estimated at 0.52, revenue protection (including the CRC, 10.1 million. The expected stock level the lowest since the public-private program RA, IP and IIP plans of insurance) was would be the lowest since 1924, and the began in 1980. This experience continued 0.54, similar to the U.S. loss ratio for all stocks-to-use ratio of 10 percent would be the unusually low loss experience evident plans. The rainfall and vegetative area a record-low. since 2004, except for 2008 which had a plans for pasture, range and forage had The 2010 harvest price for winter wheat more expected loss ratio of 0.88, see Table 4. loss ratios of 0.69 and 0.04, respectively. (Southern Plains) for CRC was 12 percent The total liability, premium written, and Actual Production History (APH) yield below, and RA was one percent below, the indemnities paid in 2010 were below the plans had a loss ratio of 0.62, while all CRC and RA base price of $5.42 per levels of 2009 and the records set in 2008. remaining plans of insurance (excluding bushel. The base price was established in The acres insured were also below those in GRP and GRIP) had an overall loss ratio of the summer of 2009, well before the price 2008 and 2009 and mainly reflected a 0.23. The loss ratio on revenue plans was increases in 2010. The harvest prices were decline in acreage planted to all crops, the below that on APH plans, similar to 2009, determined before the global production termination of the Rangeland plan of insur - but unlike 2008 when harvest prices fell problems that began with the drought in ance and lower participation in the Pasture, below base prices and triggered large Russian and Kazakhstan and the excessive Range and Forage plan of insurance. indemnities on revenue plans. In 2010, rain in Canada were fully determined and global wheat prices took off. The 2009 winter wheat harvest prices for the CRC Table 4. Federal Crop Insurance Program, Gross Basis (Mil. $) and RA plans were also lower than base Crop Year Liability Premium Indemnity Acres Loss Ratio prices. Harvest prices in both 2009 and 2004 46,600 4,186 3,209 221 0.77 2010 reflected expected increases in wheat 2005 44,259 3,949 2,367 246 0.60 carryover stocks in 2009-10 and again in 2006 49,919 4,580 3,504 242 0.77 2010-11 at the time the harvest prices were being determined. 2007 67,340 6,562 3,548 272 0.54 2008 89,897 9,851 8,679 272 0.88 [Information for this section of the article was obtained from the Risk Management 2009 79,567 8,949 5,221 265 0.58 Agency, National Agricultural Statistics Service, 2010 78,003 7,582 3,980 256 0.52 1/ USDA’s “World Agricultural Supply and Demand Estimates Report,” the commodity 1/ As of March 18, 2011; data not complete outlook reports of USDA’s Economic Research Source: RMA Summary of Business Reports, March 15, 2011 Service, and data from Barchart.com.]

CROP INSURANCE TODAY ® 9 also a factor in revenue policy losses in Figure 9. Numbers of States with Loss Ratios in the Indicated Range New Jersey (soybeans) and Virginia (cot - ton and corn). Mississippi (corn) and South Dakota (corn and soybeans) faced some losses due to price declines but excess moisture and rain appear to have been large factors. The map in Fig. 11 shows gross loss ratios by state. States where the loss ratio exceeded the U.S. statutory target (1.00) are shown in blue or red. The states are Kentucky, Nevada, North Carolina, West Virginia and Virginia, which together accounted for $262 million in gross pre - mium in 2010, only 3.4 percent of the U.S. total. The effect of the late season hot and dry weather in the Southeast is evident on the map.

[Information for this section of the article was obtained from Summary of Business reports released by the Risk Management Figure 10. State Loss Ratios by State, 2010 Agency.]

U.S. Crop-Hail Experience For the U.S., crop-hail insurance gen - erally refers to policies in which direct damage to hail is the primary cause of loss. In addition to hail damage, many policy forms carry endorsements for additional perils. For the most part, the added perils include wind and fire, although there are exceptions. For the purpose of this article, results will be reported for all losses on hail policies, including the experience of non-mem - ber companies not included in NCIS’ Annual Statistical Summary reports. Premium for 2010 was $681 million (much higher than 2009, up a bit from 0.455 million units were indemnified, revenue plans. Some states had loss 2008, and the highest in the last seven compared with 0.595 million in 2009 and ratios for revenue plans that were much years), providing more than $27 billion 1.049 million in 2008. higher than yield plans, including in privately insured crop-hail insurance Fig. 9 shows how widespread the California, Georgia, Mississippi, New coverage for U.S. farmers, Table 5. excellent loss ratios were for revenue and Jersey, South Dakota and Virginia. From a profitability standpoint, 2010 yield-based plans of insurance. Loss ratios Revenue policies are only a small frac - was a better year for the industry com - for the revenue-based plans in the majori - tion of plans sold in California and the pared with 2008 and 2009. ty of states (31 out of 47) were below 0.75. relatively higher loss ratio was due to Nevertheless, losses of $459.3 million Loss ratios for yield plans were somewhat losses on cotton, which developed slow - exceeded the earlier years going back higher, but 36 of 50 states had loss ratios ly all summer. Georgia had higher loss to 2003, and particularly were more below 0.75. ratios on revenue policies due to cotton than twice the amount paid in 2006. Fig. 10 illustrates the loss ratios by and soybeans, which were affected by The country-wide loss ratio of 0.67 state. Of the 50 states, a majority (30) had hot, dry weather in late summer. The (paid losses divided by premium writ - a higher loss ratio for yield plans than high temperatures and dry weather were ten) improved compared with ratios in

10 MAy 2011 2008 and 2009 and yet remained above Table 5. U.S. Crop-Hail Results, all Perils (Mil. $) those going back to 2003. Large storms contributed importantly Crop Year Liability Premium Losses Loss Ratio to losses for the year. The largest one-day 2004 $13,942 $414.0 $241.9 0.58 storm in 2010 occurred in Minnesota on 2005 13,879 412.2 183.7 0.45 June 25, resulting in more than $14.4 mil - 2006 15,529 403.8 202.2 0.50 lion dollars paid out to farmers. The top 2007 19,373 487.8 234.9 0.48 10 storm events for the year, measured in 2008 27,525 668.0 554.6 0.83 terms of losses, occurred in Minnesota, 2009 25,479 619.8 565.7 0.91 Kansas, Iowa, South Dakota, Montana, 2010 27,158 680.9 459.3 0.67 North Dakota, Texas, with over $59 mil - lion being paid out in these states. Of the top 50 most damaging storms, 17 occurred in the month of July, 16 in June, Figure 11. 2010 MPCI Premium and Loss Ratios - All Plans Combined six in August, and four in October. On a county by county basis, Nebraska counties took the top four spots for the largest payouts: $12.96 million in Holt County, $9.4 million in Kearney, $5.97 million in Dawson County, $5.4 million in Lincoln County. The fifth largest payout was $5.2 million in Blue Earth County, Minnesota. The top five losses on a coun - ty basis came down by nearly 45 percent compared to the top five in 2009 and became slightly lower than those in 2008. Crop-hail loss ratios by state are shown in Fig. 12. Colors identify states with similar loss ratios, and shading is used to identify states with similar premi - um volume. Crop-hail insurance was written in 43 states in 2010. Of these, nine states had a loss ratio in excess of 0.70. Arizona, with premium over $2.25 mil - Canadian Crop-Hail While Alberta had frequent storms all lion, had the highest lost ratio of 2.5 and Experience summer, results were fairly favorable. is in red on the map. In addition, Crop-hail business in Canada is prima - Losses totaled C$38 million, down 22 per - Montana ($22.4 million premium), rily written in the prairie provinces of cent from 2009 but similar to the 10-year Nebraska ($103.6 million premium), Alberta, Manitoba and Saskatchewan. average. Premiums were C$62 million, up Minnesota (near $60 million premium), After a low-loss year in 2009, crop-hail from 2009, and the loss ratio was 0.61 and Wyoming ($1.72 million premium) losses increased sharply in 2010. Payouts down from 0.83 in 2009. had loss ratios ranging from 1.15 to 1.02, totaled C$155 million (Canadian), over Saskatchewan, the largest province in respectively. The loss ratio for the double the level of 2009 but still less than terms of hail business, had about C$166 remaining states was less than 1.00. half the record losses of 2008. Total pre - million in premium for the year, down California, with a premium exceeding mium for 2010 for all three provinces was from C$172 million in 2009. Losses in $1.27 million, had a loss ratio of 0.99. C$264 million which resulted in a loss 2010 were C$103 million and the loss Utah had a loss ratio of 0.85 albeit with a ratio of 0.59, compared with 0.29 in 2009 ratio was 0.62. This experience was much very small premium of just over $53,000. and the severe loss ratio of 1.18 experi - different from 2009 when payouts were a Finally, Idaho, with a premium over $10.5 enced in 2008. record low of $23.4 million and the loss million and New Mexico with a premium Manitoba had premiums of C$37.6 mil - ratio was only 0.136. The number of lion, down 12 percent from 2009 and pay - close to $1.9 million, had loss ratios 0.74 claims rose from 4,075 in 2009 to 11,600 outs of C$14.8 million. The loss ratio of and 0.73, respectively. in 2010 with storms generally lighter but 0.39 exceeded 2009’s 0.29. About 2,200 more widespread. [Information for this section was claims were filed, below 2009 and the obtained from NCIS’ Insured Crop Summary [Information for this section of the article was and claim files.] five-year average. taken from the The Hail Report , a publication

CROP INSURANCE TODAY ® 11 sponsored by the Canadian Crop Hail Association. The Hail Report is produced Figure 12. 2010 U.S. Crop Hail Premium & Loss Ratios – every two weeks during the hail season.] All Crops, Losses, Plans Combined

Program and Policy Developments The first half of 2010 featured the con - clusion of the renegotiation of the Standard Reinsurance Agreement (SRA). In late 2009, RMA announced its intention to ter - minate the 2005 SRA and negotiate a new SRA for the 2011 reinsurance year. In December 2009, RMA released the first draft of the 2011 SRA seeking to reduce program funding by $8.4 billion over 10 years. After industry objections, two addi - tional drafts and technical corrections, the SRA negotiations were completed in mid- 2010, and the 2011 SRA was signed by the then-16 companies. The final version was estimated by RMA to reduce program funding by $6 billion over 10 years. Key agent compensation. Under the SRA, com - Industry provided recommendations to features of the final SRA include two state panies cannot compensate agents in RMA, and RMA ultimately issued a groups for reinsurance terms, with poten - excess of their total A&O payments. Managers Bulletin defining compensation tial underwriting gains reduced for five However, these payments are not known subject to, and exempt from, the agent Corn Belt states (Group 1) and increased until far after premiums are collected, forc - cap. In a move related to the SRA, the for all other states (Group 2 and 3), a net ing companies to estimate total industry administration announced at the end of book quota share set at 6.5 percent, with A&O and their share of total A&O and 2010 that part of the $6 billion SRA savings 1.5 points of underwriting gains returned then only pay out a prudent level of com - would be used to provide a “good per - to the companies operating in underserved pensation that would avoid exceeding the formance refund” of premiums paid to states (Group 3), a cap on administrative unknown dollar level of the agent cap. In producers who had a limited number of and operating expense (A&O) payments addition to the difficulty of addressing the losses in past years. The final rule for the and a cap on agent compensation. amount and timing of agent compensa - program had not been issued at the time Implementation of the SRA occupied tion, the definition of compensation this article was written. the remainder of 2010. A key issue had to be developed. The 2008 Farm Bill expires in September was the application of the caps 2012, and 2010 marked the beginning of the on A&O payments and discussion in Congress on the successor legislation. The House

12 MAy 2011 and Senate Agricultural Committees held straight year in the Federal crop insurance provided essential protection to producers hearings on the prospective Farm Bill dur - program, participation remained high. during 2010. ing the summer of 2010 on a wide range of Lower wheat and corn base prices and The Federal crop insurance program has issues. While witnesses representing farm reduced volatility factors for all major crops emerged as the most essential component of and commodity groups, academics, farmers contributed to the reduction in liability and the farm safety net. As the Congress and others raised general issues of concern gross premiums. A large reduction in approaches the 2012 Farm Bill, while grap - about the affordability and coverage of crop insured pasture, range and forage land pling with record-high Federal deficits and insurance, few specific recommendations accounted for the decline in insured acres debt, the fundamental contribution of crop were made and no conclusions were since 2008. However, insured acres, exclud - insurance in protecting farm production and reached by Congress. With a change of ing pasture, range and forage land, was the farmers from risk must be recognized and leadership of the House Agriculture highest ever in 2010. Rising prices and gen - maintained. Crop insurance provides indi - Committee as a result of the November 2010 erally good yields reduced the frequency of vidualized risk protection, requires produc - elections, the 2012 Farm Bill is now expect - claims and losses in 2010. The estimated ers to offset part of the costs of the program, ed to be developed during 2012 rather than loss ratio of 0.54 was the lowest in the his - pays claims promptly, facilitates pre-harvest during 2011. The large, continuing Federal tory of the modern program, which dates to marketing, ensures access to credit and has budget deficit is expected to place very tight the Federal Crop Insurance Act of 1980. The a very strong loss adjustment process that budget constraints on program spending companies approved to provide crop insur - ensures producers receive only the pay - authorized in the next Farm Bill. ance coverage continue to be financially ments they merit. Moreover, crop insurance sound, with the strength to meet the finan - companies have created a delivery system Conclusion cial obligations that stem from a range of that features substantial invested assets in The crop insurance industry again deliv - natural disasters. The Crop-hail program, people, places and technology that should ered essential services and benefits to U.S. which provides protection against localized be leveraged to the fullest extent possible by agricultural producers in a timely way in damages that might otherwise be nonin - the government as a means to increase the 2010. While liability, gross premium, and sured losses for producers under the efficiency of delivering risk management insured acres all declined for a second Multiple Peril Crop Insurance program again opportunities to producers.

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© 2011 NAU Country Insurance Company. All Rights Reserved. NAU Country Insurance Company is an Equal Opportunity Provider. 1.888.NAU.MPCI | www.naucountry.com TODAY crop insurance Volatility Factor in Concept and Practice

By Harun Bulut, Frank Schnapp and Keith Collins, NCIS Starting in crop year 2011, the Risk In Combo policy rating, RMA integrates Management Agency (RMA) introduced the the main elements of the major crop insur - Common Crop Insurance Policy (Combo ance plans and develops a single rating policy) with the goal of unifying and sim - and pricing procedure in order to make plifying the crop insurance program. 1 With insurance coverage, protection and cost the Combo policy, Crop Revenue Coverage consistent across the board. A single pro - (CRC), Revenue Assurance jected price will be used in all three (YP, (RA), Income Protection RP, and RP-HPE) plans of insurance, help - (IP), and Indexed Income ing to simplify and streamline the program. Protection (IIP) are replaced In order to account for price risk, volatility by a single uniform policy: factors are used in calculating premium Revenue Protection rates for revenue protection coverage. Prior with or with - to 2011, price volatility factors were used out harvest for rating the Revenue Assurance (RA) pro - price exclusion gram only. Despite the industry’s familiari - (RP-HPE and ty with the RA program, the use of volatil - RP, respec - ity factors in the calculation of the revenue tively). The APH add-on component of the premium rate in plan of insurance is the Combo policy has created some confu - replaced by Yield sion and operational issues. The objective Protection (YP) for crops of this article is to examine how the price with Commodity Exchange and volatility factors are determined in price discovery. Combo rating and assess the reasonable - ness of the process. Price Component of Combo Rating The Commodity Exchange Price Provisions (CEPP) endorsement defines the price component in Combo rating. CEPP uses exchange prices because these are well-studied and established as unbiased and efficient in utilizing all the infor - mation available to market participants. The exchanges used are the Chicago Board of

1 http://www.rma.usda.gov/news/2010/06/combo.pdf CROP INSURANCE TODAY ® 15 Trade (CBOT), the Kansas City Board days (prior to the end of the price discov - day during February (the projected price of Trade (KCBOT), the Minneapolis ery period). Averages are listed at the top discovery month) to the 16th day of Grain Exchange, Inc. (MGEX), and of the exhibit. October is calculated and divided by 365. Intercontinental Exchange (ICE). The square root of the quotient is then Combo rating applies for the following Volatility Component of taken. The result is a time adjustment crops: corn, cotton, grain sorghum, rice, Combo Rating which is then multiplied by the implied soybeans, sunflowers, wheat, barley, malt - The CEPP describes how prices are volatility corresponding to the same date. ing barley, and canola/rapeseed. These determined for the Combo program. The far right column of Table 1 pres - crops constitute the bulk of the crop insur - However, it doesn’t explain how volatility ents the resulting time-adjusted volatilities ance business, about 73% of the total liabil - factors are to be determined. RMA deter - for the last five days of February. The ity. Exchange prices are available for corn mines the volatility factors based on the last factor from the first row of Table 1 (CBOT), wheat (CBOT, MGE, or KCBT five days of the price discovery period. is calculated below. For 2/22/2011, depending on the state and type of wheat), Using the last five days of volatility seems using the following Excel formula, cotton (ICE), soybeans (CBOT), rice to have the purpose of estimating the most ((( DATE (2 011, 10,16 )–DATE (2011,2,22 ))/365) ^0. 5 (CBOT), and canola/rapeseed (ICE). current volatility possible prior to sales the quotient is calculated as 0.804099087. Because the price of corn is highly corre - closing date. RMA recently posted a one- From barchart.com, the implied volatili - lated with the prices of barley and grain page summary on their website describing ty for the December contract is 0.375 for the volatility procedure. 3 sorghum, the latter are based on the corn February 22, 2011. Multiplying 0.375 by exchange price (CBOT). Similarly, soybean RMA calculates implied volatility using 0.804099087 yields 0.302. Similar calcula - oil futures from CBOT are used for the data from barchart.com. 4 Anyone at any tions are done for the remaining days of price of oil-type sunflowers. time can acquire the same information by February. Finally, a simple average of time- For a given crop, different futures con - paying a subscription fee to access the adjusted volatility factors is obtained and tract delivery months can be applicable for website. Once the implied volatility esti - rounded to two decimals. The result is 0.29 determining the projected price (base mates are available, they are further in this example. Note that for corn, the har - price). For example, the CBOT September adjusted for the time difference specific to vest price discovery month is October for futures contract is used for determining the crop insurance. RMA provides an exam - the majority of states. For some states such price for Texas corn (whose sales closing ple for 2010 Iowa corn in their one-pager. as Idaho, Michigan, Oregon and date is January 31). For counties with a The following discussion updates that Washington, the harvest price is deter - March 15 sales closing date, corn policies example for 2011. use the harvest year’s CBOT December For Iowa corn, the harvest price discov - mined in November. That would result in a corn futures contract. Using the latter ery period is October, and the relevant different time adjustment; the average example, daily settlement prices for the futures contract is the December 2011 con - would be calculated as 0.31, implying harvest year’s December corn futures con - tract (CZ11 in barchart.com notation). slightly higher risk and higher premium for tract are averaged in February, which is the Using Excel, the number of days from each those states. base price discovery month as defined by the CEPP. The reason the base price dis - covery month is so close to the sales clos - Table 1. Determining the Volatility Factor for 2011 Iowa Corn ing date is to establish the policy price Contract Date Implied Time Adjusted Implied Volatility using the most current market information. Volatility (RMA’s Volatility Factor) For the harvest price, the December CZ11 2/22/2011 0.375 0.302 futures contract’s daily settlement prices CZ11 2/23/2011 0.365 0.293 are averaged in October, which is the har - CZ11 2/24/2011 0.360 0.288 vest price discovery month in most coun - CZ11 2/25/2011 0.362 0.289 ties. Furthermore, RMA uses the average CZ11 2/28/2011 0.365 0.290 price over the entire price discovery peri - Simple Average 0.29 od (base or harvest) with the purpose of smoothing out day-to-day variations. RMA provides an on-line price discov - 2 To view active discovery periods: http://www3.rma.usda.gov/apps/pricediscoveryweb/ ery tool in their website. 2 The tool ActiveDiscoveryPeriods.aspx . By the time this article was written, there were no crops in discovery. reports the price election for the RP plan To view commodities recently in discovery: (therefore for the YP plan) along with http://www3.rma.usda.gov/apps/pricediscoveryweb/CropsInDiscovery.aspx volatility figures as the discovery month For location specific daily prices: http://www3.rma.usda.gov/apps/pricediscoveryweb/DailyPrices.aspx proceeds. The tool lists month-to-date values for the average price and the aver - 3 http://www.rma.usda.gov/pubs/2011/volatilitymethodology.pdf age volatility over the most recent five 4 http://acs.barchart.com/ 16 MAy 2011 A Closer Look at the Figure 1. December Corn Futures Prices 2006 versus 2008 Implied Volatilities- Theoretical Roots Volatility essentially is a measure of the degree of change in futures price over a year and represents the market’s view on the uncertainty (risk) associated with a futures price over a year. 5 Based on visual inspection of Fig. 1, it is apparent that December Corn futures price was more volatile (that is, it showed a higher degree of change) in 2008 as compared to 2006. In 2008, the futures price showed a dra - matic surge in the first half the year and a sharp decline during the rest of that year. Along these downward and upward paths, the data exhibited sharp spikes followed Figure 2. Implied Volatilities in January and February 2011-2006* by steep drops. In comparison, corn December futures prices in 2006 remained mostly stable and the changes were minor and much smoother. Of course, the preceding discussion of Fig. 1 is after the fact, that is, after the entire data was observed. At the planting time of a given year, the underlying futures price data is only partially observed and provides only limited infor - mation to infer the underlying volatility. In any case, volatility during in a given year is not directly observable and needs to be estimated. One way to estimate volatility is to utilize time-series (historical) informa - tion on the futures price which would be a backward-looking approach. A sophisti - cated econometric method based on this on a few readily available parameters: the The Black-Sholes model assumes that approach is discussed later in this section. prices for call and put options, the current volatility is constant. This assumption Another way is to take a forward-looking futures price, and the strike price of the needs to be justified as price volatility can approach and compute the implied volatil - option are all available from the futures vary over time (Hull, page 493). If the ity based on the prices of current options market. The interest rate for the risk-free volatility is not constant, then that requires linked to the futures price. The latter is the asset and the time period before the using sophisticated econometric models, approach taken by RMA. options expire are known. The only such as generalized autoregressive condi - Black-Sholes formulas relate prices of remaining factor is the volatility factor, tional heteroscedasticity (GARCH) models put and call options to volatility and pro - which can be computed using the formu - which are frequently used in estimating vide a convenient way to estimate the la for determining the price of the put or volatility in finance literature (Hull, Chapter volatility factor. 6 The formulas are based call option. 7 21). These methods utilize historical data to estimate the volatility, albeit most recent

5 For a technical (more precise and involved) definition of volatility, the readers are referred to observations carry higher weights. The Appendix 1 in the Supplementary Material for this article posted at the NCIS website: final estimated model provides weights for http://www.ag-risk.org/NCISPub.htm . the following components (in a particular 6 For Black-Sholes formulas and their derivation, the readers are referred to Appendix 2 section of specification): long-term volatility value, the Supplementary Material. volatility estimate in the last period, and the 7 Barchart.com provides the resulting implied volatilities. Otherwise, iterative search methods such squared percentage change in the futures as Goal Seek in Excel, can be used to calculate the implied volatilities from the Black-Sholes for - price in the last period. mulas. Alternatively, using blkimpv function (where Black-Sholes formulas are coded) in MatLab software, we are able to replicate the numbers provided by barchart.com . RMA gives equal weights to the

CROP INSURANCE TODAY ® 17 implied volatilities from the last five days simulation process takes this difference Operational Issues with of the price discovery period. In doing into account and produces the rates so, RMA’s method ignores the informa - accordingly. RMA’s Volatility Method- tion on the futures contract prior to last Barnaby describes RP and RP-HPE as Stability of Volatility five days of February (for March 15 sales a yield-adjusted Asian (YAA) put option. Values closing dates), therefore, it does not fully Asian options are those options where The root of the operational issues utilize all the available information on the the payoff depends on the average price regarding volatility lies in the fact that crop futures contract. Finally, the assumption of the underlying asset for a pre-deter - insurance agents may be using company of equal weights on the last five observa - mined time period (Hull). Indeed, in premium quoting systems that use the prior tions in the price discovery period seems crop insurance, harvest price for major year’s volatility factor by default until the to be based on practicality, and does not crops is the average of futures prices price discovery period ends. With the large appear to be derived from an economet - obtained over the harvest price discov - changes in volatility factors from year to ric estimation. ery period. RMA states (in their one- year as shown in Fig. 2, this has the poten - Fig. 2 presents the implied volatilities pager) that the premium rate to lock-in tial to seriously distort any premium quotes. for December corn futures in January and a harvest price with crop insurance is In addition, agents have only about two February from 2011 to 2006, respectively. equivalent to the amount the market weeks between the end of the price discov - Note that the implied volatilities in these charges to lock in a futures price via ery period and the sales closing date. The figures are obtained from barchart.com, options. This statement may need some short time frame, combined with the large on an annual basis and are not time clarification. One distinction is that a number of policies with sales closing dates adjusted. As shown in the Figure, implied CME option uses spot price, whereas a (e.g., March 15) creates a time and work - volatilities can differ from one year to the YAA option uses an average of prices load issue. The more time they have to pre - next. Based on visual inspection, volatili - during the price discovery period. In pare quotes and issue policies, the easier it ty within a year mostly varies within five addition, Barnaby finds that RP as a YAA is for the agents to get their work done. basis points (except 2008 where it shows put option is much cheaper than a CME However, the time available for agents to wider variation up to 10 basis points). put option in 2011, as the former costs meet with customers is reduced due to the Nevertheless, volatility behavior appears less than 3 cents per bushel of corn ver - fact that YP prices no longer come out ear - to be changing over time. sus the latter costing 75 cents. The main lier than RP prices now that Combo estab - reason for this difference is that for CME lishes a single price for both plans. Combining Price and contracts the yield is fixed. The value of One issue is whether agents simply Volatility Components in an option solely depends on the price need better information or whether volatil - move. With RP, because yield factors ity factors needed to be determined at an Combo Rating into the farmer’s revenue, RP pays less earlier date. Some agents may prefer to RMA combines the base price with frequently and pays less than CME change the period used to determine the volatility estimate in simulations to options, which explains the difference volatility to the last five days of the previ - obtain the revenue-add on component in value . ous month. The government could poten - in the Combo premium rating. The method draws from price and yield dis - tributions and imposes an historical price-yield correlation to obtain the Figure 3. Implied Volatilities: Comparison of Five-Day-Averages in joint distribution. 8 Because the variance January/February to the Final Five-Day-Average (2011-2006)* of the price distribution is determined by the volatility factor, the volatility fac - tor affects price draws, which in turn affect premium rates. The revenue add- on component of the Combo rating is then obtained as the difference between simulated price risk and simu - lated yield risk. 9 Adding the resulting revenue add-on rate to the Yield Protection rate gives the premium rates for revenue plans. Note that with the RP-HPE plan the guarantee is fixed at the base price, whereas the RP plan uses the higher of the planting and har - vest prices in setting the guarantee. The

18 MAy 2011 tially respond to this by noting that since volatility factors don’t vary much during Figure 4. Total Premium Related to Volatility the price discovery period, agents should (Iowa Soybeans Farm with $11.63/bu Base Price) be able to use the most recent average value to prepare reasonably accurate price quotes without waiting for the price dis - covery period to close. This is consistent with the claim that implied volatilities are less variable than the option price (Hull, page 297). Because it seems unlikely that RMA will revise their price discovery period for pro - jecting prices and locking-down volatilities, the relevant question is whether agents can prepare reasonably accurate quotes using the future prices and volatilities values pro - vided by barchart.com a month earlier. For rolling average of volatilities throughout RMA’s Cost Estimator allowed us to enter sales closing on March 15, that would January and February remained lower than our own selected values for volatilities mean using the information provided by the average volatility in the last five days of and calculate premiums. Fig. 4 presents barchart.com in January. If volatility is rea - February, therefore, their differences are the results for Iowa soybeans for the 2011 sonably stable, this shouldn’t create a sig - negative. That relationship was even more crop year. This example is for a 38 acre nificant issue with regard to the premium prominent in the month of January. farm in Kossuth County with 85% cover - calculation. Nevertheless that pattern changed in the age level, optional units, approved yield To investigate the stability of the volatil - last three years. The rolling average of 38 bushels per acre, and rate yield of ity factor, Fig. 3 depicts the difference appears to oscillate within five basis points 36 bushels per acre. The projected price between a five-day rolling average of around the average in the last five days of is assumed to be $11.63 per bushel, implied volatilities (obtained from put February; therefore, the horizontal axis is which was also the 2010 harvest price. options linked to the December corn con - crossed several times in these years. From Fig. 4, for Iowa soybeans, we found tract) in January and February from the Taking this to the bottom line, the useful - a nearly linear increasing relationship average implied volatility in the last five ness of using an earlier time period all between volatility and total premium. A days of February from 2011 to 2006, depends on the degree of sensitivity of similar relationship was observed for respectively. Note that the average implied premium calculation to the possible errors other crops. If volatility increases, we volatility in the last five days of February in estimating volatilities. would expect the premium to go up. But, varies year to year and is provided along given the complexity of the Combo rating with the corresponding year at the chart Elasticity (Sensitivity) of procedure, the resulting nearly linear legend (see the right margin in the chart). Premiums with Respect relationship was unexpected. On the chart, trading days in January and to Volatility Based on information in Fig. 4, Fig. 5 February are displayed on the horizontal Using RMA’s Cost Estimator-premium further depicts the change in total premi - axis and the point differences are on the calculation tool for Combo policies, we um as volatility increases 10 basis points vertical axis. In the last trading day of prepared premium estimates for major (e.g., going from 0.3 to 0.4 or 30% to February (see the far right observation) all crops (corn, soybeans, grain sorghum, 40%; represented by middle point 0.35 in graphs touch to zero based on the way in cotton, and spring wheat) to investigate the Figure). What is striking is that the which the chart has been constructed. the sensitivity of total premium calcula - change in premium is positive and steep - What is apparent from Fig. 3 is that the tions to volatility. These calculations were er as volatility increases in range below relationship is quite different in early years prepared on November 19, 2010. At that 45%, which turned out to be the (2006 to 2008) versus later years (2009 to time, RMA’s volatility factor was set only observed range of volatility from 2011 2011). Particularly, from 2006 to 2008, the for winter wheat. For remaining crops, to 2006 (see Fig. 2). Furthermore, one can come up with a preliminary esti -

8 The distribution of futures prices is also derived in Appendix 1 section of the Supplementary mate of sensitivity based on this exam - Material. ple for Iowa soybeans farm: going from 0.3 to 0.4, a 10 basis point increase, 9 In effect, the rating procedure computes the indemnity payment for 500 possible combinations of yield and price for an insured unit, finds the probability of each outcome, and uses the combi - results in a $452 increase in total premi - nation of indemnity payments and probabilities to determine the average indemnity payment. A um. Because the total premium amount similar simulation process is used to determine the average indemnity payment for the same 500 yield outcomes, this time using a fixed price equal to the projected price at planting. is $2,053 at 0.3, a one basis point

CROP INSURANCE TODAY ® 19 increase in the volatility factor would increase total premium by approximate - Figure 5. Change in Total Premium per 10 Point Change in Volatility ly 2.2%, which can be verified from the (Iowa Soybeans Farm with $11.63/bu Base Price) following: 1 (2505 2053) x – = 2.2% 2053 (0.4 – 0.3) at this ra()nge of volatility values. If instead the projected price increased by 1%, the total premium would go up by 1% because the premium is the liability times the pre - mium rate, and the liability is the price times the rate yield. That means, at least in this example, total premium is more sensi - tive with respect to the one point increase in volatility factor compared to the one percent increase in price. ed out that volatility could be critical in References determining premiums and A&O com - Conclusion Barnaby. 2011. Ag Manager Issue. With the arrival of Combo policies, the pensation. What is needed is quantifica - “Farmers Who Cancel Their Coverage Will concept of volatility will play a more signif - tion of the impact of variation in volatili - Only Save 2 Cents!” Kansas State Research and Extension. February 9. icant role in the crop insurance program. ty. This is especially important as the way This article has explored the concept and RMA uses volatility in premium rates is Hull, J.C. 2009. Options, Futures and Other unclear. More transparency on how this Derivatives. Seventh Edition. Pearson Prentice reviewed its role within Combo rating. Our Hall, New Jersey. treatment of the topic amounts to scratch - concept is computed and used in ing the surface and by no means is defini - ratemaking is needed and future research tive. This very preliminary analysis point - on this area is warranted.

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STEP 2-HUMAN RESOURCES Q: What are my interests and skills?

This is the second in a ten-part series of articles on “ The Steps of Farm Business Planning .” The introductory article for the series was published in the November 2010 issue of Crop Insurance TODAY ® and additional articles will be printed each quarter.

resources) should be put to their most pro - be to answer the following questions: ductive use. Individuals who are underem - 1. What am I currently doing? ployed or whose responsibilities do not 2. What am I qualified to do? align with their skills and interests may not 3. What am I interested in doing? realize their potential nor enjoy maximum These questions invite individuals to personal satisfaction. In those cases, “farm - consider their likes, dislikes, strengths, ing as a way of life” may become more an weaknesses, interests, abilities, training, excuse than a pleasant declaration. In com - and experiences. The responses should parison, happy people are generally more help identify each person’s unique skills or productive and successful. characteristics that can be used to operate An important question for each person the farm more competitively. Opportunities By Dr. Laurence Crane, NCIS to answer is: “From among all the activities to modify or add enterprises also could I am qualified to do, what do I most like to emerge as a result of completing this step. do?” One way to develop a response may Furthermore, this may be a good point in The human element of a farm is often the most difficult to objectively evaluate and manage. Individuals’ skills and interests are as important to the success of a farm business as are other resources such as land, capital, equipment or livestock. This step is an opportunity for each person involved in the farm to assess and docu - ment their interests and skills.

The purpose of this step in the business planning process is for you, the owners, to assess yourselves relative to the farm oper - ation. The previous step focused on the physical resources in the business; this step emphasizes getting to know the human resources. Although the discussion focuses on the owners and their families, you may decide to involve some or all of your employees in this step. All resources (including human

22 MAy 2011 the planning process to evaluate non-farm opportunities.

Who to Involve in this Step? Completing this step should not be lim - ited to the farm owners. Family members whose interests and desires impact the business may also want to consider these questions for themselves. Likewise, poten - tial owners/investors, such as an adult child who is interested in being involved in the business, could be included in this step. Their interests and skills will be criti - key employees with available on-farm What am I Currently cal to the future success of the business. employment, off-farm employment, or Family members who will not be involved value-added initiatives. Likewise, enter - Doing? This begins the documentation process in the business probably do not need to prises can be selected and tasks reas - of all the things you do on the farm. List complete this step. signed based on the results of this step. in detail each function you participate in. Some owners may consider involving Again, this process could reveal tasks It is a start to the identification of the tasks key employees; for example, an employee that may be best performed by hiring you perform, and will become part of an who intends to be part of the operation for another employee, custom operator, or “owner’s manual” that describes how vari - a long time or whose skills are critical to consultant. ous tasks should be performed and the successful operation of the farm. An owner The information compiled by com - skills needed to perform them. This infor - may not be as interested in involving pleting this self-assessment exercise pro - mation provides a basis for comparing the employees who are likely to leave soon to vides input and background information answers to the next two questions. pursue other career opportunities. for several other steps in the business Although this step could be completed as planning process. For example, the own - part of a regular employee performance ers’ interests and skills are important in What do I Want to do? evaluation, it should not be considered a developing personal and business goals The answer to this question provides substitute for such a review. (Step 4). Opportunities to hire needed the framework for setting personal and Farmers who employ little or no hired skills is also important in designing alter - business goals and identifying the potential labor and work primarily by themselves native enterprises (Step 6) and a transi - enterprise combination that the owners may think these questions are irrelevant tional plan (Step 7). The information would like to include in the long-term because they feel, “I have to do what learned in this section should also help business plan. A related question is “What needs to be done. I cannot refuse to do refine the business’ labor management do I not want to do?” Answering this ques - what I do not like to do because there is plan (Step 5). tion helps eliminate certain enterprises the no one else to complete the job.” Following is a short list of questions owners do not want included in their plan. However, selecting enterprises and design - offered to help start your self-assessment. The owners may want to prioritize all ing a transitional plan that minimizes activ - Another tool to help ascertain an individ - potential enterprises recognizing that some ities that they do not enjoy and maximizes ual’s interests and personality characteris - enterprises may need to be included (for activities they most enjoy could lead to tics would be to use aptitude tests avail - crop rotation purposes or government pro - increased productivity and profitability for able from other sources, such as the gram requirements) even though the own - the farm business. In addition, the owners Myers-Briggs Type Indicator . These stan - ers would prefer not to operate them. might identify opportunities to employ out - dardized tests usually provide an indica - side help (e.g., consultant, custom hire, or tion of management style, personality What am I Qualified part-time help) which would then allow types, and related information. Such to do? them to concentrate on activities they results can contribute further insights in The purpose of this question is to doc - enjoy the most and perform the best. identifying each person’s characteristics ument each person’s skills. In answering and strengths. this question, you are urged to think What to do with the Don’t just mentally answer these broadly about your skills and qualifica - Information questions, but take the time and make tions. The answer to this question may not One benefit of this step is matching the effort to write down your answers. be as obvious as the previous answer, but the interests and skills of the owners, You may be surprised at what you will should be straightforward. Experience, family members, potential owners, and learn by doing this. education, skills, strengths, and limitations

CROP INSURANCE TODAY ® 23 in farming or agribusiness should guide the they were to do something else, such as must be considered. Some individuals shy thought process. Non-farm skills and expe - working off the farm or operating different away from risk; others are more willing to rience are equally important to be identi - enterprises. An alternative question is to accept risk exposure. fied and listed. ask, “How many dollars of income must I An individual’s attitude toward risk has receive for my labor to retain my interest in some similarities with opportunity cost; What Skills Should I my activities?” Of course, the answer to this that is, the level of enjoyment that they Improve? question depends on how well the individ - receive from the activity will influence how A related question is, “Which of my ual likes the activity and how much they willing they are to accept the accompany - skills should I improve?” Historically, farm - need to earn to maintain their desired stan - ing risks. Therefore, an individual’s willing - ers have worked hard to maintain their dard of living. ness to accept risk exposure may vary understanding of emerging production The amount owners charge themselves among activities. practices. More recently, they have focused for their time and labor (that is, their It is important that each owner perform on enhancing their understanding of con - opportunity costs) does not have to be the their own assessment of their willingness sumer preferences and commodity market - same for every activity. The difference will to assume risk. The willingness of individ - ing. Today, general management issues reflect, in part, how well they enjoy doing uals to accept risk changes over time; atti - involving financial decision making, labor the activity; for example, individuals often tude toward risk often changes as we and management, and processing of agricultur - require no cash income for the labor they our families grow older. Monitoring atti - al commodities are emerging as areas spend on an activity they consider to be tude towards risk is part of the farm plan - where farmers often want additional infor - a hobby. ning puzzle. mation and skills. This question asks each person to identify which skills they want to What is my Willingness What is Your Ideal Job enhance. Another aspect of this issue is to to Assume Risk? Description? identify alternatives for improving those Risk is an issue that arises throughout The last part of the question asks you to skills, such as attending workshops, cours - the planning process. In the preceding write the ideal job description for yourself. es, self-study, or various other forms of step, the owners considered their farm’s Writing this short description will help you education. capacity to assume risk. This question asks clarify your thinking about what you want them to look at themselves and determine to do and what you are qualified to do. What is the Opportunity how much and what type of risk they are You could specify tasks and duties you Cost of my Labor? willing to assume. The answer may not be want to perform and the compensation This question asks each person to con - quantifiable, that is, it may not be possible you desire (not necessarily how much you sider how much they could be earning if to express in numbers, but it is a factor that presently earn or spend on family living expenses). Doing this will help identify which direction you would like to go and what limitations and challenges could potential - ly prevent you from getting there. This also will help identify additional training or expertise that you may want or need to obtain. The ideal job description may not be what you end up doing immediately, but provides direction for the long-run.

Conclusion Individuals’ skills and interests are as important to a farm business as are other resources such as land, capital, equipment or livestock. This step is an opportunity for each person involved in the farm to assess and document their interests and skills. This information about oneself will serve as a point of reference in the thought process as other steps in the planning process are completed. Did you know... ADM Crop Risk Services offers expert marketing services?

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TODAY crop insurance Passing the Gavel

The February 2011 NCIS Board of Directors meeting brought a change of leadership to the chairman’s position. Steve Rutledge, Farmers Mutual Hail Insurance Company of Iowa (FMH), became the twelfth person to serve as Chairman of the association (post-merger). “I’m very excited about working with Steve,” said Tom Zacharias, President of NCIS. “He has an excellent background because of the 38 years he spent working in various capacities for

Farmers Mutual Hail. His knowledge of Steve Rutledge Steve Harms the reinsurance business will be invalu - able as the industry faces the current the MCPI business. The combination of “Through his leadership we saw the com - risk environment.” Steve’s experience in both the field and pletion of the final stages of the 2008 Farm Mr. Rutledge began his long-standing home office gave him the skills needed to Bill and the negotiations of the 2011 SRA. career with FMH selling crop insurance lead the company. As a result, Steve was He is to be commended for his willingness and adjusting losses. He transferred to the promoted to serve as president and CEO to serve and his unwavering support of the Reinsurance Department in 1983 and only of the company in 2001, the positions he association. He’s always had a great vision a few years later led the department as held until his retirement in late 2010. He for what this industry can do. We wish him vice president and manager. In 1988, Steve continues to serve as the company’s well in his future endeavors.” was asked to lead Chairman of the Board. Mr. Harms began his career with Rain FMH’s entry into The outgoing chairman for the and Hail as an adjuster in 1973 and has NCIS Board of Directors is Steve since contributed to the success of the Harms, Rain and Hail Insurance company by holding several different posi - Service, Inc., a position he held tions such as Field Supervisor, from 2008-2010. Claims/Quality Control Manager, Division “We appreciate Steve’s efforts Manager, Executive Vice President, and during his tenure,” said President, and currently serves as Zacharias. Chairman of the Board.

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By Ben Wilner and Laura Carolan, Grant Thornton LLP and Frank Schnapp, NCIS

With the continuing growth of the ticipating in the program. In addition to Originally available only through the Federal Crop Insurance program in recent documenting the most recent year’s Federal government, the program has years, the cost for delivering the program results, the Grant Thornton report also operated for the past three decades as a has come under increasing scrutiny from provides a long-term perspective on deliv - public-private partnership between mem - both Congress and the Administration. ery costs and profitability, examines the bers of NCIS and the Federal Crop Due to the unique characteristics of the cost of private sector delivery in compari - Insurance Corporation (“FCIC”). The basic public-private partnership and the short - son to the government’s expense reim - terms of this relationship are set forth in a comings in the way in which the govern - bursements, and benchmarks the crop Standard Reinsurance Agreement (“SRA”) ment accounts for program expenditures, insurance program against the Property & signed by FCIC and each AIP. The SRA a systematic evaluation of the profitability Casualty (“P&C”) insurance industry. The establishes the terms under which FCIC and effectiveness of private sector delivery objective of this exercise is to provide a provides reinsurance and subsidies on eli - is vital to the public debate. To address reliable, comprehensive, and transparent gible crop insurance contracts sold by each this need, NCIS engaged the services of measure of the profitability and cost effec - AIP. Day to day management of the pro - Grant Thornton LLP to prepare an annual tiveness of the public-private partnership. gram is the responsibility of the Risk review of the program’s performance This article provides a brief overview of Management Agency (“RMA”) of the U.S. using information collected from the the 2010 Grant Thornton report. The report Department of Agriculture. In crop year approved insurance providers (“AIP”) par - compares MPCI experience on an industry - 2009, the MPCI program: wide basis for reinsurance years 1992 • Provided coverage on 264 million acres through 2009, to P&C industry experience of eligible acreage of major U.S. crops; 1 Due to the unique character - from A.M. Best on a calendar year basis • Insured liability of $79.6 billion; over the same period. Since results can • Generated total premiums of $8.9 bil - istics of the public-private fluctuate widely from year to year, the lion (of which $5.4 billion were premi - partnership and the short - long-term perspective provided by the um subsidies); and Grant Thornton report is essential in any • Distributed $5.2 billion in indemnity comings in the way in which comparison of the performance of the two payments. 2 programs. As a Congressionally authorized insur - the government accounts ance program subsidized by the U.S. for program expenditures, a Federal Crop Insurance Treasury, FCIC and RMA have the respon - Program sibility of ensuring that the profitability of systematic evaluation of the The Federal Crop Insurance program, the MPCI program is reasonable in relation commonly known as MPCI, has been to the financial risk incurred by the partici - profitability and effectiveness offered to U.S. farmers since the 1930s. pating AIPs. In addition, the government of private sector delivery is 1 http://www.rma.usda.gov/pubs/rme/aboutrma.pdf as of 10-15-2009. vital to the public debate. 2 http://www3.rma.usda.gov/apps/sob/current_week/sobrpt2007-2010.pdf as of 10-12-2010.

28 MAy 2011 that of the broader P&C industry. This greater operational risk of the MPCI pro - gram needs to be recognized in compar - isons of the two programs. Another difference that needs to be taken into account is the relative size of the MPCI and P&C industries. The Grant Thornton report addresses this difference by measuring the profitability and expense of each program as a ratio to each pro - gram’s premium. By comparing profitabili - ty to the revenue from which it was gener - ated, the analysis can rely on publicly avail - able information and avoids the use of arbitrary assumptions and allocation proce - dures required for other measures of prof - itability, such as return on equity. One final issue that arises in comparing profits and expenses to premium across the two industries is that premiums are has a duty to taxpayers to ensure that the respects that need to be taken into consid - established on a different basis for the program is delivered to insured farmers in eration in any comparison between the MPCI program than for the P&C industry. a cost effective manner. The Grant programs. For example, AIPs have no con - P&C industry premiums, in general, are set Thornton report examines how effectively trol over the rates charged to policyholders at a level high enough to cover 1) the the program has performed in meeting and are instead required to charge the rates expected losses, 2) company expenses, these objectives. set by RMA. AIPs are also required to including loss adjustment, company over - accept all eligible producers and, as a head, and agent commissions, and 3) a Use of the Property & result, have no ability to select the risks small loading for the insurer’s profit. MPCI they would like to insure. P&C insurers, on premiums, on the other hand, are intended Casualty Industry as a the other hand, have the ability to set their to cover only the expected losses with no Benchmark own rates in order to more accurately loading for company expenses or profit. The MPCI program has many similari - reflect differences in risk. P&C insurers also Instead, a separate A&O reimbursement is ties to other lines of insurance in the have the ability, with some exceptions, to paid to cover each AIP’s anticipated oper - broader P&C industry. These similarities choose whether or not to accept each risk ating costs. Since the MPCI and P&C pre - make it possible to use the P&C industry as or to modify the coverage offered to the miums are not on a consistent basis, a a benchmark for evaluating the profitabili - insured. In addition, P&C insurers can direct comparison of the ratios of profit or ty and efficiency of the MPCI program. The increase rates in future years in order to expense to premium for the two industries most recent Grant Thornton report recoup losses from prior years. The ability would not be appropriate. improves on previous analyses by also to diversify against risk is another key dif - Restating the premium for the two pro - comparing the MPCI program to two com - ference. Extreme weather conditions in a grams on a consistent basis can be done in parable segments of the P&C industry, particular year can cause the crop insur - one of two ways. One approach would be Homeowners and Private Passenger Auto ance industry to be highly unprofitable, to include A&O reimbursements as part of Physical Damage. These two lines of insur - whereas P&C insurers have a much greater the MPCI premium, while the other would ance are similar to MPCI in the sense that ability to diversify their risk across states be to exclude expenses from the P&C pre - both provide property coverage to individ - and lines of insurance. This lack of control mium. Under the first approach, the adjust - uals rather than businesses and have low over rates and underwriting decisions ed premiums are a mixture of expected litigation expenses. along with the limited ability of AIPs to indemnities and expenses. In the second Despite its similarity to P&C insurance, diversify makes the profitability of the approach, the adjusted premiums repre - the MPCI program is unique in certain MPCI program much more uncertain than sent the benefits provided to policyholders

CROP INSURANCE TODAY ® 29 loss was only a small percent of premium. Figure 1. Comparison of Pretax Net Income as a Percentage of See Figure 1 for a presentation of these Adjusted Retained Premiums or Net Earned Premiums results on an annual basis. Any comparison of the profitability of the two programs also needs to consider the degree of risk for the participating com - panies. Financial theory suggests that investors are willing to take greater risks if they have an opportunity for greater rewards. Risk can be measured in terms of the annual standard deviations of the returns for both programs. Based on Grant Thornton’s analysis, the MPCI program has been riskier than the P&C industry over the period from 1992 to 2009. The weighted Source: 2010 Grant Thornton Update, Exhibit 1, MPCI Pretax Net Income after Quota Share/Adjusted Retained Premium; Exhibit 2, P&C Pretax Net Income/Adjusted Net Earned standard deviation for the MPCI program is Premium 10.2 percent, which exceeds the 9.9 per - by the program, in other words, the expect - Net Earned Premium (“NEP”), where the cent value observed for the P&C industry. ed indemnity payments. The first approach denominator is Net Earned Premium less Likewise, on an unweighted basis, the stan - distorts the comparison because P&C the expense loading. As discussed above, dard deviation for the MPCI program is expenses are a much larger portion of the the removal of the expense loading from 12.4 percent, which is again greater than premium than are MPCI industry expenses. the P&C premium ensures that the P&C the 9.8 percent value for the P&C industry. The second approach avoids this distortion and MPCI returns are stated on a consistent The greater risk of the MPCI program is and has the further advantage that the per - basis, with denominators of each ratio rep - inherent in its structure. As previously dis - formance of the program is measured in resenting the expected indemnities under cussed, the P&C industry has greater con - relation to the benefits delivered to policy - each program. trol over its own ratemaking and under - holders. Grant Thornton uses the more Using this methodology, the Grant writing activities, while MPCI companies meaningful second approach as the basis Thornton report calculates the long-term are required to adhere to the ratemaking for comparing the two programs. profitability of each program on an decisions and policy provisions established unweighted basis as well as weighted by by RMA, regardless of underwriting loss Profitability Comparison the premiums earned in each year. experience. For the P&C industry, profits are defined Regardless of which measure is used, the In summary, the MPCI program is both as industrywide Pretax Net Income after MPCI program is less profitable than the less profitable and riskier than the P&C reinsurance. For the MPCI program, Pretax P&C industry. Over the period from 1992 industry in general. Even though AIPs are Net Income consists of the net underwriting to 2009, the weighted average profitability exposed to greater risks than P&C insurers, of the P&C industry was 17.3 percent of gain or loss after quota share plus any net they are not being compensated with Adjusted Net Earned Premiums as com - gain or loss on the A&O reimbursement. greater financial rewards for taking pared to 16.0 percent of Adjusted Retained Since the A&O reimbursement is insuffi - that risk. Premium for the MPCI program. On an cient to cover the full cost of program deliv - unweighted basis, the average profitability ery in most years (as discussed below), of the P&C industry over the same period Efficiency Comparison AIPs absorb any shortfall as a reduction in The second major objective of the Grant was 16.7 percent as compared to 12.8 per - their profits. Even with this taken into Thornton report was to evaluate the cost of cent for the MPCI program. account, the true profitability of the crop delivering the MPCI program in relation to In comparing results over time, the P&C insurance industry is overstated by the the P&C industry. Although there are simi - industry was more profitable in ten of the Grant Thornton report in that the cost of larities in the types of expenses incurred by eighteen years. The MPCI program realized commercial reinsurance is excluded. both businesses, expenses incurred by a net loss in 1993 (due to spring floods in As previously discussed, the profitabili - MPCI companies are unique in the insur - the Midwest) and 2002 (due to drought in ty comparison between the two industries ance industry and involve some costs not portions of the Great Plains). The P&C is based on the ratio of profits to premium. usually incurred in other insurance lines, industry experienced its only annual net For the MPCI program, profitability is such as loss adjustment training for a wide loss in 2001, the year of the attack on the measured by the ratio of Pretax Net variety of crops. World Trade Center towers in New York Income to Retained Premium. 3 For the The MPCI expense ratio is defined as City. Even in that year, the P&C industry P&C industry, profitability is measured by Total Expenses divided by Gross the ratio of Pretax Net Income to Adjusted 3 2005-2009 adjusted for Quota Share. Premiums. The three major expense com -

30 MAy 2011 ponents are loss adjustment, commissions, and all other expenses, the last of which Figure 2. Total Expense to Premium Ratio includes company overhead and operating MPCI vs. Property & Casualty costs. Since P&C industry premiums include a large loading for expenses while MPCI premiums do not, the P&C expense ratio is defined as Total Expenses divided by Direct Premiums Written net of Expenses (“Adjusted DPW”) in order to restate the premiums on a consistent basis with MPCI premiums. Figure 2 shows that the MPCI program expense ratio has been well below the P&C industry expense ratio in every year from 1992 through 2009. The average expense ratio for the MPCI program was only 27.5 percent over the period as com - pared to 60.4 percent for the P&C industry. This indicates that AIPs are able to deliver Sources: Expenses: 1992-1998: PwC 1999 Update Exhibit 4 and Deloitte 2004 Report Exhibit 5.1; 1999-2009: Surveys of NCIS member companies the MPCI program to policyholders at a much lower cost-to-benefit ratio than the A&O Reimbursements: 1992-2006: MPCI data from RMA charts, August 14, 2007 as provided P&C industry in general. by NCIS; 2007-2009: Surveys of NCIS member companies Figure 2 also shows that the expense ratio for the MPCI program has declined significantly over time. Since 1993, the highest expense ratio was 34.2 percent, and Figure 3. 5-Year Average (2005-2009) this ratio has not exceeded 25.1 percent since 2005. The decline in the MPCI Loss Adjustment Exp % of ADWP expense ratio is consistent with the improved efficiency of the industry as pro - gram participation has increased dramati - cally in the past two decades. Farmer par - ticipation in the program was less than 10 percent in 1980 and has grown to over 80 percent in 2009. 4 The decline in expenses has occurred even under stringent govern - Commission Exp % of ADWP mental requirements for insurers to provide service to all eligible producers regardless of cost. Due to this requirement, AIPs are precluded from taking many actions that other types of insurers use to contain costs and enhance economic viability. While this requirement may significantly increase overall program costs, it does support the Other Exp % of ADWP social goal of making crop insurance avail - able to all eligible farmers. Figure 3 compares the 5-year averages (2005-2009) for each of the three major expense components. MPCI expense ratios are compared to two selected P&C lines and the total P&C industry. This analysis addresses the concern that a comparison of expenses to the total P&C industry might Sources: Homeowners Multiple Peril, Private Passenger Automobile Physical Damage, and Total P&C (Total All Lines): 2005-2009: A.M. Best’s Aggregates & Averages 2010, pages 380, 383, 385

4 Grant Thornton 2010 update report. MPCI: 2005-2009: Surveys of NCIS member companies

CROP INSURANCE TODAY ® 31 not be appropriate due to the inclusion of insurance products intended for commer - Figure 4. MPCI Expenses vs. A&O Reimbursements cial customers. Homeowners Multiple Peril and Private Passenger Automobile Physical Damage were selected for this comparison due to their similarity to MPCI. All three coverages insure property for individuals rather than large commercial enterprises, and have low litigation expenses. The results shown here indicate that the loss adjustment and other expense ratios for MPCI are significantly lower than either of the two P&C lines and the P&C industry in total. The commission expense ratio for

Private Passenger Automobile Physical Sources: Expenses: 1992-1998: PwC 1999 Update Exhibit 4 and Deloitte 2004 Report Exhibit Damage line is slightly less than MPCI, 5.1; 1999-2009: Surveys of NCIS member companies while the MPCI commission ratio is below A&O Reimbursements: 1992-2006: MPCI data from RMA charts, August 14, 2007 as provided that for Homeowners and the P&C industry by NCIS; 2007-2009: Surveys of NCIS member companies as a whole. million in 2002, 2006 and 2007, and Conclusion A&O Reimbursements exceeded $475 million in 2009. Grant Thornton also confirmed that the The results of the 2010 Grant A&O reimbursements received by AIPs Thornton Update are consistent with continue to be insufficient to cover all of 2011 Standard those from prior years. The MPCI pro - their costs. As shown in Figure 4, AIPs Reinsurance Agreement gram is not as profitable, yet exposes With the recent renegotiation of the SRA, incurred total expenses in 2008 equal to AIPs to greater risk than P&C insurance underwriting gains are anticipated to be less 22.1 percent of gross premium as com - in general. The P&C industry has had in future years than under the old agree - only a single year in its history, 2001, in pared to A&O reimbursements of 20.4 per - ment. These changes became effective on which the industry as a whole lost cent, leading to a shortfall of approximate - July 1, 2010, the start of the 2011 reinsur - money (largely due to the extraordinary ly 1.6 percent of premium, or $160.8 mil - ance year. Major changes included a sharp losses related to September 11th). In lion. In 2009, AIPs incurred expenses of reduction in underwriting gain potential in contrast, the crop insurance industry as a 23.8 percent of premium while A&O reim - certain states, modest changes in gain and whole has experienced losses in two of bursements fell to 18.3 percent of premi - loss potential in other states, and the intro - the 18 years between 1992 and 2009 ums, resulting in a much larger shortfall of duction of an upper limit on the amount of (1993 and 2002). The delivery cost for approximately 5.5 percent, or $476.1 mil - A&O reimbursements to be paid to compa - the MPCI program as measured by the lion. The inadequacy of the A&O reim - nies participating in the program. Since ratio of expenses to adjusted premium bursements is absorbed by the AIPs as a these changes are entirely prospective in continues to be substantially below that reduction in their pre-tax net income. nature, they have no impact on historical for the P&C industry, but total A&O reim - Figure 4 illustrates that A&O reimburse - results through the 2009 reinsurance year bursements have fallen short of industry ments have consistently fallen below actu - shown in the report. expenses for every year since 1997. Loss al expenses in recent years even with sig - adjustment and all other expenses for nificate reductions in expense ratios Crop insurance continues MPCI are much lower than those for achieved by AIPs over time through Homeowners and Private Passenger Auto increased efficiency. However, renegotia - to be a difficult business in Physical Damage in relation to adjusted tions of the SRA and the passage of the which to operate, but the premium. MPCI commissions are below Agricultural Research, Extension, and those for Homeowners but slightly Education Reform Act of 1998 have crop insurance industry greater than Private Passenger Auto sharply reduced A&O reimbursements continues to meet these Physical Damage. Crop insurance contin - over time. For this reason, A&O reim - ues to be a difficult business in which to bursements have fallen short of covering challenges in order to operate, but the crop insurance industry industry expenses in every year since deliver the program in a continues to meet these challenges in 1997, with the shortfall exceeding $100 order to deliver the program in a cost- million in every year since 1998. cost-effective manner to effective manner to all eligible Unreimbursed expenses exceeded $200 all eligible producers. producers.

32 MAy 2011

TODAY crop insurance 2011 NCIS Board of Directors

Back Row (left to right): Mike Day , Rural Community Insurance Services; Jim Korin , NAU Country Insurance; Steve Harms , Rain and Hail; Jim Aldeman , American Farm Bureau Insurance Services; and, Ben Latham , ProAg. Front Row (left to right): Tom Zacharias , NCIS; Ted Etheredge , Vice Chairman, ARMtech Insurance Services; Steve Rutledge , Chairman, Farmers Mutual Hail Insurance Company of Iowa; and, Tim Weber , Second Vice Chairman, Great American Insurance Company. INDUSTRY NCIS AWARDS Under the direction of its Board of The newest award established is the The two winners will be presented with Directors, National Crop Insurance Industry Leadership Award. This award, their awards at the crop insurance industry Services has developed two national targeted primarily to members of the NCIS annual convention held in February of awards to be given to individuals who regional/state crop insurance committees, each year. achieve excellence in the criteria set out by was created to formally recognize individ - All nominations must be submitted in the awards. uals who are directly involved in the crop writing to NCIS by October 15, 2011, for The first award is the Outstanding insurance industry and who consistently awards to be given at the 2012 Annual Service Award. This award, primarily for serve the industry by providing outstanding Convention. For nomination information agents, has actually been in existence since leadership. Company employees at both and forms to be submitted, please go to 2001 and has been awarded to several the field and management level are eligible the NCIS website at www.ag-risk.org to excellent individuals. The purpose of this to be nominated. download. If you have any questions award is to promote exceptional service The criteria for both awards are: regarding the criteria or whom is eligible industry-wide, and encourage outstanding 1. Strong personal and business ethics. for either award, please contact Laurie outreach efforts to all farmers, especially 2. Demonstrated service above and Langstraat at NCIS at [email protected] or limited-resource farmers, by highlighting beyond to the crop insurance industry. 913-685-2767. an individual who has demonstrated 3. Represents themselves, their company, exceptional service. and the crop insurance industry well.

34 MAy 2011 TODAY crop insurance Mike Gaynier Awarded Outstanding Service Award

Mike Gaynier, Spartan Crop Insurance, Ithica, Mich., was the recipient of the 2011 Crop Insurance Industry Outstanding Service Award in recognition for outstand - ing service and outreach to small, limited resource, and socially disadvantaged farm - ers. Steve Harms, Chairman of the National Crop Insurance Services (NCIS) Board of Directors, and Tom Zacharias, President of NCIS, presented the award at the 2011 Crop Insurance Industry Annual Convention in February. Mike grew up in southeast Michigan and graduated from Central Michigan University. He began his career as an agricultural loan officer with the Farm Credit Services of Southeastern Michigan and soon became the branch manager for Monroe County. During this time, Mike realized how well crop insurance worked with the other serv - Presenting the award to Mike Gaynier (center) was Tom Zacharias (left), President of National Crop Insurance Services (NCIS), and, Steve Harms (right), Rain and Hail Insurance L.L.C. and ices the Farm Credit System provided. He Chairman of the NCIS Board of Directors. became a leader in promoting crop insur - ance and became a key person in the One such relationship is with The and his affiliates work with specialty Michigan “A” Team – a team comprised of Andersons, a regional grain company crop groups to make sure they under - the five Farm Credit Associations chartered located in Maumee, Ohio. In addition to stand the crop insurance products that in Michigan, traveling throughout the state originating grain, The Andersons provide are available. He and his affiliates con - to promote crop insurance. many products that assist farmers in put - duct seminars with the groups and then In 1997, Mike left the Farm Credit ting together a marketing plan allowing follow up with each individual to make System and purchased a partnership in the their customers to achieve a better price sure they understand what products are Spartan Crop Insurance Agency to devote for their commodity and to achieve a available and how they work. his full time to promoting crop insurance. profit for their farm enterprise. Mike has Mike stays active with his state legis - Over the next few years under Mike’s lead - always promoted that crop insurance lators to ensure they all understand cur - ership and the help of his partners Scott and a good marketing plan allow farm - rent crop insurance issues and the Crumbaugh and Eric Cook, the agency ers to be more profitable. He has con - importance of crop insurance. He is well grew to servicing business in eight states, ducted many seminars with thousands of acquainted with his U.S. Representative, and they have developed relationships farmers, assisting them in understanding John Dingell. It is not uncommon for with other organizations providing services how this concept can provide the best Mike to receive calls from the and products for area farmers. This model opportunity to be profitable over time. Congressman’s staff concerning crop continues to expand and has allowed Mike Mike lives in an area that has many insurance issues. This personal relation - and his affiliates to become one of the specialty crops such as tomatoes, cab - ship allows him to speak directly to the largest crop insurance agencies in their bage, perennial crops, and organic crops Congressman if the issue is one that operating area. are common in this area as well. Mike needs his attention.

CROP INSURANCE TODAY ® 35 TODAY crop insurance Joel Weiss Presented Industry Leadership Award

Joel Weiss, Great American Insurance Company, Lawrence, Kan, was presented with the 2011 Crop Insurance Industry Leadership Award at the 2011 Crop Insurance Industry Annual Convention in February. This award is given to individu - als who are directly involved in the crop insurance industry and who consistently serve the industry by providing outstand - ing leadership. Joel began his crop insurance journey as an adjuster for Blakely Crop Hail in 1974 in Lincoln, NE. In early 1977, he began working full-time for Blakely to manage their sales and adjusting processes in Iowa. As the territory grew, a staff of 15-20 sum - mer adjusters would report to Joel’s home office regularly. His wife, Maureen, always kept a meal ready for them while they fin - ished their paperwork. Joel and his family often spent the weekends driving around Iowa dropping off the loss documents that Presenting the award to Joel Weiss (center) was Tom Zacharias (left), President of National Crop arrived from the Topeka office on Friday, Insurance Services (NCIS), and, Steve Harms (right), Rain and Hail Insurance L.L.C. and Chairman of the NCIS Board of Directors. to small-town motels so the adjusters could begin working losses on Monday morning. he has earned by being part of this indus - Joel believes businesses are built on Joel worked as a state fieldman for try. The opportunities to serve on state and relationships and he walks the talk always seven years and then moved to the home national committees and share his knowl - taking time to motivate and educate those office in Topeka, KS, in 1983 as the nation - edge are responsible for his commitment to he mentors with an often heard instruction al marketing manager. Blakely was sold to the industry as a whole. Forging friend - of “just listen and learn.” When asked how Farmer’s Crop Insurance Alliance and ships with his competitors is a great source he is doing, you will most often hear, “I’ve eventually sold again to Great American. of pride. Leading efforts to educate regula - never had it this good!” Crop insurance is Joel “retired” for a few days and went to tors, elevate standards, and clarify objec - such a part of who Joel is that it sometimes work officially for Great American. tives to better serve the agents and farmers is difficult to determine where one starts Joel would be the first to tell you that were a very important part of his mission. and the other ends. the life-long friends are the biggest reward TODAY crop insurance Greg Meek Presented NCIS Membership Service Award

Greg Meek, formerly of Farmers Mutual Hail Insurance Company of Iowa, West Des Moines, IA, was presented with the National Crop Insurance Services Membership Services Award at the 2011 Crop Insurance Industry Annual Convention in February. Greg devoted most of his 36-year career to the promotion and betterment of Farmers Mutual Hail Insurance Company of Iowa, and the crop insurance industry as a whole. Through the years, Greg’s insight, integrity, and experience have been key components to his success. Greg began working for Farmers Mutual Hail as an adjuster, then field super - visor and finally state supervisor for Arkansas and Missouri. He moved to the home office in 1995 to become the assis - tant claims manager and, soon after, claims manager. Greg retired from Farmers Mutual Hail in 2010 as the senior vice pres - Presenting the award to Greg Meek (center) was Tom Zacharias (left), President of National ident of the MPCI Department. Crop Insurance Services (NCIS), and, Steve Harms (right), Rain and Hail Insurance L.L.C. and Chairman of the NCIS Board of Directors. Greg gave generously of his time to industry associations. He rose to the top extra mile. Greg served as chairman of the oversaw many changes to handbooks, positions on some committees because of NCIS Crop-Hail Policy, Procedure and Loss policies and the research projects. his leadership and willingness to go the Adjustment Committee for many years and TODAY crop insurance NCIS Leadershi p Regional /State Cro p Insurance Committees

In late March, the 2011 chairmen of the 18 NCIS Regional/State Crop Insurance Committees met for their annual training and instruction to ensure that the R/S commit - tees understand their role, function properly, and are effective in accomplishing their responsibilities. While the elected Chairman provides leadership and direction, the real strength of each individual committee comes from the committed participation of all its members. All companies are strongly encouraged to actively participate in the committees in the states where they write business. These R/S standing committees are authorized by the NCIS Bylaws and are organized to: • Recommend coverage and language changes to the Crop-Hail and MPCI policy forms and endorsements; • Recommend new or revised loss adjustment procedures and forms; By Dr. Laurence Crane, NCIS • Promote communication and cooperation within the crop insurance industry;

Those attending the 2011 R/S Chairman Orientation training included: Back Row (left to right): Steve Short; Nancy Garoutte; David Grogan; John Boomsma; Teri Fellon; John McMartin; Lindsey Schneider; George Swaney, ARMtech Insurance (substituting for Al Taylor); Sharon Shock; Willie Capers; Kent Kroshus ; and, Kenny Young . Front Row (left to right): Ed Cerven , RCIS (substituting for Jeff Cameron); Freddy Beach; Ted Cremers; and, Rocky Blair . 38 MAy 2011 • Provide a forum for the discussion of • Planning and conducting effective from Ogilvy Public Relations Worldwide. claims related issues in compliance with meetings and loss school activities; and The purpose of this session was to help the federal and state law, including anti- • Parliamentary Procedure. chairmen further develop their skills in trust laws; and, Additionally, they participated in a half- interacting with the media and to support • Promote and participate in risk manage - day session of hands-on media training the industry initiative of promoting the pos - ment education activities. conducted by a trained media specialist itive story of crop insurance. To accomplish each of these objectives, every committee member and elected chairman play an important role. Participants from each company need to 2011 Regional/State Chairmen make a substantial contribution in terms of sharing their experience and skills. California/Nevada Minnesota Individuals (loss supervisors, territory man - – David Grogan, RCIS – Midge Boettger, Hudson Crop Ins. agers, claim managers) with an under - Colorado/Wyoming Missouri standing and working knowledge of crops – Steve Short, RCIS – Al Taylor, Farmers Mutual Hail Ins. throughout the different regions are critical East Montana to the success of these committees. – Freddy Beach, ProAg – Nancy Garoutte, RCIS Throughout the leadership training ses - Gulf States Nebraska – Willie Capers, ProAg – Ted Cremers, NAU Country Ins. sion, NCIS staff, most who also serve as committee liaisons, instructed on topics Illinois/Wisconsin North Dakota – John McMartin, Rain and Hail – Kent Kroshus, RCIS such as: Indiana/Ohio/Michigan Northwest • NCIS organizational structure; – Sharon Shock, Great American – Teri Fellon, Rain and Hail • Compliance with anti-trust laws; Iowa South Dakota • Operating in accordance with NCIS – Jeff Cameron, ProAg – John Boomsma, RCIS bylaws; Kansas/Oklahoma Southeast • Presentation of the NCIS Regional/State Crop – Lindsey Schneider, RCIS – Kenny Young, RCIS Insurance Committee Manual/Guidelines; Kentucky/Tennessee Southwest • How to make an effective recommen - – Brett Lehman, American Farm Bureau – Rocky Blair, ProAg dation to the NCIS Board of Directors; TODAY crop insurance

2010 US CROP-HAIL LOSS RATIO BY STATE All Crops • All Losses • All Policies

WA 69 VT 0 ME MT ND 0 58 115 MN OR NH 0 105 62 ID WI NY MA 0 SD 45 77 64 34 MI WY 31 RI 0 102 IA PA CT 0 NE 39 48 NJ 0 NV OH 109 IN 0 UT IL 48 DE 3 0 to 35 CO 39 32 WV MD 0 CA 85 VA 70 KS M0 0 99 KY 65 58 33 102 36 to 65 NC TN 19 AZ OK 80 NM 49 AR SC 66 to 100 250 75 30 28 AL GA MS 25 29 101 and up 40 TX LA 60 22 FL 8

Data Source: NCIS 6-B Adjusted Verified Totals as of 04/04/2011. © National Crop Insurance Services 04/2011.

TOP 20 STATES FOR NCIS MEMBERS

STATE PREMIUMS LOSSES LOSS RATIO % Nebraska 103,598,768 113,196,680 109.26 Iowa 79,361,928 30,827,314 38.84 North Dakota 73,708,365 42,396,977 57.52 Texas 63,370,489 37,860,156 59.74 Minnesota 59,562,281 62,535,822 104.99 Kansas 58,851,435 33,986,399 57.75 Illinois 55,142,950 21,770,210 39.48 South Dakota 37,725,863 24,246,446 64.27 Montana 22,357,508 25,754,317 115.19 Indiana 13,991,202 4,515,660 32.27 Missouri 11,811,537 3,931,904 33.29 Wisconsin 11,411,122 3,900,471 34.18 Colorado 11,064,670 7,782,183 70.33 Idaho 10,552,590 8,105,453 76.81 Washington 9,977,023 6,929,294 69.45 Oklahoma 9,944,369 4,845,147 48.72 North Carolina 9,056,280 1,748,836 19.31 Arkansas 7,488,458 2,216,893 29.60 Ohio 7,032,526 3,409,496 48.48 Michigan 5,345,169 1,644,530 30.77 All State Totals 680,896,913 459,970,569 67.55 Data Source: NCIS 6-B Adjusted Verified Totals as of 04/04/2011. © National Crop Insurance Services 04/2011. 40 MAy 2011 TODAY crop insurance

2010 MPCI LOSS RATIO BY STATE All Crops • All Losses • All Policies

AK 0 WA 46 VT 38 ME MT ND 27 66 28 MN OR NH 84 15 33 ID WI NY MA 78 SD 89 39 100 22 MI WY 40 RI 8 48 IA PA CT 45 NE 58 75 NJ 87 NV OH 33 IN 161 UT IL 24 DE 82 0 to 35 CO 51 34 WV MD 127 CA 63 VA 29 KS M0 194 48 KY 250 26 99 143 36 to 65 NC TN 125 AZ OK 89 NM 33 AR SC 66 to 100 57 20 73 53 AL GA MS 94 97 101 and up 92 TX LA 37 42 HI 56 FL 61

Data Source: RMA Summary of Business as of 04/04/2011. Prepared by National Crop Insurance Services 04/2011.

TOP 20 STATES FOR MPCI

STATE PREMIUMS LOSSES LOSS RATIO % North Dakota 664,605,436 437,229,391 65.79 Texas 626,287,786 229,204,576 36.60 Iowa 592,276,164 344,059,397 58.09 Illinois 566,407,600 288,462,907 50.93 Kansas 543,628,516 142,472,202 26.21 Minnesota 524,797,874 79,009,391 15.06 South Dakota 482,171,936 483,748,327 100.33 Nebraska 465,712,237 155,911,169 33.48 Indiana 305,382,690 104,754,804 34.30 Missouri 250,337,186 248,974,812 99.46 Ohio 221,787,602 52,771,794 23.79 California 217,755,497 105,595,859 48.49 Wisconsin 188,201,445 40,936,412 21.75 North Carolina 155,274,626 193,406,243 124.56 Colorado 148,146,794 43,561,664 29.40 Montana 137,002,624 38,280,495 27.94 Michigan 134,892,936 53,714,429 39.82 Oklahoma 132,588,363 43,296,939 32.66 Georgia 122,685,001 118,559,087 96.64 Arkansas 110,066,375 80,391,927 73.04 All State Totals 7,586,791,209 4,097,754,713 54.01 Data Source: RMA Summary of Business as of 04/04/2011. Prepared by National Crop Insurance Services 04/2011.

CROP INSURANCE TODAY ® 41 TODAY crop insurance In Memo ry Oscar Deardorff

Wheat Growers merged into Farmers recipient of the NAMIC Merit Award in Mutual Hail, and Oscar moved to Des 1998. He most recently served on the Moines where he joined the Reinsurance Legislative Committee for the Iowa Department as the executive assistant. Insurance Institute. When FMH entered the MPCI business in Oscar was a member of Living Faith Oscar Deardorff, executive assistant of 1999, he transferred to the new department. Lutheran Church and the Des Moines Golf corporate relations, Farmers Mutual Hail He was later promoted in 2002 to executive and Country Club. He was the ultimate Insurance Company of Iowa, passed away administrator of government affairs, the gentleman with style and class who had a on Wednesday, February 9, 2011, at the age position he held at the time of his passing. passion in life for red wine, fine food, and of 52 at his home surrounded by his fami - Active in many associations, Oscar elaborate Christmas lights and fireworks. ly after a courageous fight with cancer. served as the Crop Insurance Reinsurance Oscar is survived by his wife, Angie of Oscar was born and raised in Cimarron, Bureau (CIRB) Governmental Affairs Urbandale, Iowa; daughter, Dianna Kansas, studied business administration at Committee Chairman in 1999. He also Deardorff of Waukee, Iowa; two sons, Kansas University, and graduated from St. served as the chairman of the National David Deardorff of Iowa City, Iowa, and Mary’s of the Plains Catholic College in Association of Mutual Insurance Payne Hoyt of Urbandale, Iowa; two sis - Dodge City, Kansas. Oscar spent the first Companies (NAMIC) Crop Insurance ters, Susie (Scott) Flood of Cumming, Iowa, part of his career working for Wheat Conference in 1990 and 1991, a member of and Jane (Rick) Crockett of Houston, Growers Mutual Hail Insurance in CIRB’s Executive Committee from 1991 to Texas, and many loving nieces and Cimarron, Kansas, where he served as an 1994, president of the Kansas Association nephews. He was preceded in death by his adjuster, fieldman, director, and vice presi - of Property & Casualty Insurance daughter, Rebecca, and parents O.L. and dent for the company. In November 1994, Companies in 1993 and 1994, and was a Ruth Deardorff.

Gary Schmidt

University. He taught American History at reading. He had a keen sense of humor and Bloomington Junior High School for 10 was an animated story teller, as well as an years before a career change in 1981 took attentive listener. His generosity, kindness him and his family to Chicago where he and thoughtfulness are traits he has long worked for the Crop Hail Insurance been known and appreciated for. Actuarial Association (CHIAA). Gary and his Preceding him in death were his father, family moved to Kansas in 1988 when infant brother, and his son, Jeffrey. CHIAA moved its office to Overland Park. In Surviving are his mother, Louise Schmidt, Gary Schmidt, 62, passed away on 1989, CHIAA merged with the National Crop 1450 Lincoln #204, Louisville, Colorado; son, February 4, 2011, in Overland Park, Kansas. Insurance Association (NCIA) to form Thomas of Hollywood, California; two sis - Gary was born to Irvin W. and Louise National Crop Insurance Services (NCIS). ters and their husbands, Barbara and Sam (Porter) Schmidt on February 21, 1948, in Gary served as the Vice President of Wood of Boulder, Colo., and Laura and Jeff Bloomington, Illinois. On November 26, Administration at NCIS until 1992. Shortly Glaves, of Denver; Colo.; nephew and his 1971, he married Nancy Brown, and two after leaving NCIS, he began working for wife, James and Alison Rapp of Westminster, sons were born, Thomas and Jeffrey. They Rural Community Insurance Services before Colo.; niece, Sarah Wood of Boulder; long - divorced in 1991. retiring in March 2010. time friend, Richard “Dick” Whitmore of Gary was a 1966 graduate of Gary enjoyed traveling to historical land - Overland Park; and, ex-wife Nancy White of Bloomington High School and received his marks, Presidential Museums and Civil War Missouri as well as numerous aunts, uncles, B.A. and M.A. in History from Illinois State sites. He also loved dancing, movies and and cousins.

42 MAy 2011 E L C A N N A IO R T U S A S E IC N IN V P R O E R S C

www.cropinsuranceinamerica.com CROP INSURANCE TODAY ® 43 Continued from President’s Message our mission has never been more impor - has become an annual event, the 2010 Comparing demand and supply we tant and more fundamental to agriculture Year in Review . This series, which began find agricultural economists stress the crit - and the farmers and ranchers we serve and in 2009, summarizes the crop year and ical thresholds we have been trending to the people of the world who cannot sur - insurance results. It highlights the major toward in recent years. They summarize vive without food, fiber and fuel. weather conditions that impacted agricul - the supply-demand relationship by using Our mission must be our message to tural production, as well as a summary of the ratio of stocks on hand at the end of Congressional leaders who are now hard the commodity markets, which ultimately the year relative to total use of the crop. A at work trying to put the government’s determine the performance of revenue low stocks-to-use ratio indicates higher financial house in order. After just complet - products. Readers will also find an article levels of demand relative to supply, and ing a tough process to fund the govern - on volatility factors. Despite the industry’s typically high prices. A high stocks-to-use ment for fiscal year 2011, attention has familiarity with the Revenue Assurance indicates adequate supplies relative to turned to 2012 and the new Farm Bill. program, the use of volatility factors in the demand. For corn, the stocks-to-use ratio Twice now, once in 2008 and again in calculation of the revenue add-on compo - is as low as it has been in over 80 years. 2010, Congress has looked to reductions in nent of the new COMBO policy is a fairly Let’s re-emphasize, we are currently at agriculture as an answer to deflect cuts technical issue and not universally well peak production capacity, with high plant - from other programs. In both cases, the understood. Although technical in nature, ed area and record or near record yields crop insurance program, which has met we hope this article helps our readership over the past several years. This has been both its actuarial and participation goals, develop an improved understanding of and hopefully, for all of us, will continue has been weakened the most. Where is this important component of the revenue to be an amazing run. And yet, to meet the the logic in that? programs. needs of nine billion people, we will have The Crop Insurance Program took its Laurence Crane continues his series of to find even more productive ways to first major funding reduction in 2008, to articles on the Steps of Farm Business expand agricultural production. the tune of $6.4 billion over 10 years. In Planning with a discussion of human Again, what is it we do? Well, reading 2010, crop insurance was again looked to resources. Producers are encouraged to from Risk Management Agency’s webpage, for another $6 billion in cuts. read this article to help determine their we, the private sector delivery system, Both times, agriculture was called on interests and skills, which are as important including crop insurance agents, crop for major contributions to deficit reduction. to the success of the farm business as adjusters, company staff, in conjunction Both times agriculture stood largely alone other resources, such as land, capital, etc. with the RMA staff, provide coverage on in the sacrifice. And after both times, law - Lastly, we feature a “changing of the over 350 different crops and plans of insur - makers came back for more. The new guard” in our industry leadership. At the ance. Insurance liability for 2010 was House Budget Resolution for fiscal year NCIS annual meeting in February, the approximately $78 billion, with 1.14 million 2012 has $30 billion more in additional “baton of leadership” was passed from policies and 256 million acres covered. For cuts slated for crop insurance and farm Steve Harms, Rain and Hail LLC, to Steve 2011, with the dramatic uptick in commod - programs. Add all of these cuts together Rutledge, Farmers Mutual Hail. Mr. Harms ity prices, liability could increase in the and you have about $42.4 billion in possi - has served our industry in various capaci - range of 35-40 percent. To me, that sounds ble cuts in less time than a single term for ties over the years, and although he’ll like we do a lot. It’s a lot to do, a lot of risk, a U.S. Senator. no longer be the chairman, Steve will and a great deal of responsibility. It is far too early to know how agricul - continue to serve on the NCIS Board of Inevitably, there will be a severe ture will fare in the budget process now Directors. weather event, and at some point, the unfolding. But now, today and every day, Stepping into the role of NCIS chair - commodity markets will turn down. In we need to remind our leaders that if cuts man is Steve Rutledge. Steve began as an either case, our industry will be called to crop insurance leave the program dys - adjuster in the crop insurance business upon and expected to deliver on the functional or ineffective, who exactly will and has moved through the ranks in his insurance policies we have sold to the rescue the farmers of America should dis - career, acquiring the business operations, American farmer. The crop insurance pro - aster strike? Who will protect the collateral reinsurance and financial analytical skills gram is the first line of defense for both that enables farmers to get the credit need - that will serve NCIS and the industry well the farmer and the taxpayer. ed to produce a crop? Who will provide as we go forward. So, at the end of the day when we the safety net that encourages new invest - With that, we hope you enjoy this issue parse the words of our respective ment that will provide the increased pro - of TODAY ® magazine. We believe Congressional testimonies or we agonize ductivity needed to feed 9 billion people? TODAY ® provides both technically rele - over the nuances in our “message,” our “... What is it we d o.. .so simple and so vant information and places a positive face story and our task is quite simple and vital: important an adult should be able to on our industry. It gives perspective to the “we help farmers grow the food we ea t.. ..” understand it and a child explain it.” important work our industry does by serv - In the world we find ourselves in today, This issue of TODAY ® contains what ing agriculture in these uncertain times.

44 MAy 2011 Protect your investment for generations to come.

Because you’ve trusted your farm to Great American, it can stay in your family for your children and grandchildren to plow, plant and harvest — just like you did, just like your dad did. With roots that date back to 1872 with the founding of Great American Insurance Company, we’ve helped generations of America’s farmers secure their legacy for generations to come. www.GreatAmericanCrop.com Great American Insurance Group is an equal opportunity provider. I 301 E Fourth Street I Cincinnati, OH 45202 I GreatAmericanInsurance.com PRSRT. STD. U.S. POSTAGE PAID Permit No. 1155 LIBERTY , MO

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