The effectiveness of crop loss insurance for 2021 • farmdoc every day

The Risk Management Agency (RMA) recently realized the county’s yield for 2021, thereby allowing payments to be made on area insurance plans, including the Supplemental Coverage Option (SCO) and the Enhanced Coverage Option (ECO). With these payments made, we estimate the overall loss performance of Federal Crop Insurance for 2021. Overall, loss payments relative to total premiums were low in the US. Loss payments were particularly low in Illinois and the Midwest because corn and soybean payments were few.

A general overview of crop insurance in the United States and Illinois

Loss ratios are used to assess the effectiveness of crop insurance. The loss ratio equals the crop insurance benefit payments divided by the total premiums paid for crop insurance. Total premiums include those paid by farmers and risk support provided by the federal government. A loss ratio of 1.0 means that crop insurance payments are equal to the total premium. Loss ratios above 1.0 mean payouts exceed premiums and vice versa. When setting premiums, the Risk Management Agency (RMA) aims to maintain a loss ratio of just under 1.0, thereby building a loss buffer into the ratings. The Congressional Budget Office currently uses a loss factor of 0.80 when projecting future crop insurance costs.

For the US, the total loss ratio in the 2021 crop insurance program was 0.68, below the 1.0 break-even point (see Figure 1). Over the last ten years, the loss ratio exceeded the benchmark of 1.0 in only three years: 1.57 in 2012, 1.02 in 2013, and 1.05 in 2019. The 2021 loss ratio of 0.68 is below the ten-year average from 2012 to 2021 of .84 and the five-year average from 2017 to 2021 of .77. RMA began reporting loss ratios in its Business Summary in 1989. From 1989 to 2021, the loss ratio averaged 0.93. In 2021 and recent years, loss ratios are low.

Illinois had an extremely low loss ratio in 2021 of 0.13 (see Figure 1). The 2021 loss ratio of .13 is the lowest since 2006, when Illinois had an average loss ratio of .10. Over the past ten years, Illinois’ loss ratio has averaged 0.84. The 0.84 average includes the drought year of 2012, when Illinois’ loss ratio averaged 4.55. Over the past five years, the loss ratio has averaged 0.37. Few insurable losses have occurred in the previous five years. The last five years include 2019 when a large amount of prevented planting occurred. The loss ratio in 2019 was 1.09, not particularly high given the significant problems with hindered planting. From 1989 to 2021, Illinois’ loss ratio averaged 0.64, below the US average of 0.93.

Iowa and much of the eastern Corn Belt also have low loss ratios for 2021 (see Figure 2). Areas with loss ratios above 1.0, indicating that losses exceed premiums, stretched from Montana through parts of North Dakota, South Dakota and Minnesota. The drought caused mining difficulties in the upper Great Plains.

In Illinois, county loss ratios ranged from .01 to .69 (see Figure 3). The five counties with the highest losing ratios are Cook (.69), DuPage (.53), Greene (.52), Hardin (.49) and Union (.48) counties. The five counties with the lowest odds are Douglas (0.01), Moultrie (0.02), Piatt (0.03), and Champaign (0.03) and Coles counties.

Performance in corn and soybeans

The low losses in Illinois and the Midwest had a lot to do with the low losses in corn and soybeans. Two reasons contribute to the low losses:

  1. Crop prices were above forecast prices. Most farmers purchase Revenue Protection (RP) to insure corn and soybeans (see Table 1 c farmdoc every day, 25 January 2022). RP is revenue insurance with an increase in guarantee. When crop prices are above forecast prices, insurance payments are primarily due to yield losses. In Midwestern states, the price for the 2022 corn crop was $5.37, well above the forecast price of $4.58. Similarly, the soybean crop price of $12.30 was well above the forecast price of $11.87.
  2. Yields were at or above trend across much of the Midwest, resulting in few yield requests.

As a result, loss rates were low for corn and soybeans, particularly in Illinois. The loss ratio for corn was .37 for the US and .12 for Illinois (see Table 1). The loss ratio for 2021 US corn of .37 was well below the five-year average of .60 and the ten-year average of .88. The Illinois corn loss rate of .12 in 2021 is well below the five-year average of .36. and a ten-year average of 1.03.

The US loss ratio for soybeans in 2021 was .44, well below the .57 five-year average and .55 ten-year average. Illinois had lower losses than the U.S. Illinois had a loss ratio of 0.12 in 2021, below the five-year average of 0.38 and the ten-year average of 0.42.

By comparison, losses in corn and soybeans in 2021 are less than those in wheat. In 2021, the loss ratio of 1.60 for wheat was above the reference value of 1.0 and well above the loss ratios for corn and soybeans. Again, drought in the northern Great Plains contributed to greater losses.

Summary

Prices rose for both corn and soybeans in 2021. Also, yields were mostly above trend for corn and soybeans across much of the Midwest. As a result, federal crop insurance payments were relatively low in 2021. Crop payments were particularly low in Illinois and the Midwest.

References

Schnitkey, G., C. Zulauf, N. Paulson, and K. Swanson. “Crop Insurance Solutions in 2022.” farmdoc every day (12):10, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, January 25, 2022.

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