As Insured Acres Increase, Are Farmers Subsidizing High-Risk States?

As a direct result of the Agricultural Risk Protection Act of 2000 (ARPA), more farmers are insuring their cropland. Nationwide, insured acres have increased by 14.6 million acres, and coverage has increased by $12.2 billion during the past five years. In Midwestern states such as Kansas, insured acres have increased by 1.5 million and coverage has increased by $659 million.

Insuring cropland seems like a sound business move because Kansas farmers have suffered recent dramatic crop losses, as confirmed by data compiled by the Risk Management Agency (RMA), part of the United States Department of Agriculture. During the past five years, only 2001 generated a loss ratio under 1.0 in Kansas. RMA’s targeted loss ratio for “actuarial soundness” is 1.07. That means for every dollar collected in premiums, including both farmer-paid premiums and subsidies, RMA expects to pay out $1.07.

In contrast, during the past five years, Iowa has had no loss ratios above 1.0. The largest loss occurred in 2003 with a loss ratio of 0.94, and the smallest loss was in 2002 at 0.25. Although Iowa only had one loss ratio higher than 1.0 during a 17-year period, it was a whopper–in 1993, the loss ratio was 4.65 because of flooding in the state. Events such as that have a significant impact across the country because of the state’s heavily insured acreage: More than $5 billion in coverage of nearly 20 million insured acres in 2004.

During the past five years, the states with the highest net indemnity payments (state aggregate indemnity payments minus state aggregated farmer paid premiums) were located in the Great Plains. Texas ranked first, with an aggregate five-year net indemnity of $1.4 billion; North Dakota $1 billion; Kansas $922 million; South Dakota $599 million; and Nebraska $462 million. The only “top five” state able to meet the RMA actuarially sound target loss ratio of 1.07 was Nebraska, which had a loss ratio of 0.94.

Therefore, in the program, it is better to be small like Nevada with few crop acres, or large like Iowa and Illinois but with very low loss ratios. Texas, Kansas and North Dakota are neither. North Dakota ranks first with more than 20 million acres insured. Kansas growers insured more than 16 million acres. Texas growers insured more than 14 million acres in 2004.

Even with those large Great Plains losses, the national loss ratio for both the 17-year period and the more recent five-year period is a “dead on” actuarially sound 1.0 loss ratio. For the national loss ratio to be sound, other states with underwriting gains must offset underwriting losses in the Great Plains. Thus, many insured farmers wonder whether their crop insurance premium dollars are being sent to high-risk states to cover underwriting losses.

The answer is no for most states. Yet there’s no question that the 19 states with loss ratios under 1.0 have shifted tax revenues to high-risk states. Illinois and Iowa farmers would have the best argument that their premium dollars have been used to pay losses in higher risk states. But 17 years is a very short horizon in which to measure loss ratios, especially in a state such as Iowa where low claims frequencies are typical. Several years were required to recover the underwriting loss of a large, single loss year of 4.65 that occurred in 1993 because Iowa has a low frequency of claims.

However, even within states, there may be differences between irrigated versus dryland, or wheat versus corn. Therefore, you would not want an “across the board” rate change. The other issue is that may be an unusual weather trend that may reverse itself during the next five years.

Of course, this all begs the question, “What impact Hurricane Katrina will have on the nation’s crop insurance system?” The hurricane produced catastrophic crop damage in many counties in Alabama, Louisiana and Mississippi, and in Broward and Miami-Dade counties in Florida.

I recently returned from the Gulf Coast of Texas. Experts are saying they don’t expect large losses from Katrina there because cotton and corn had already been harvested, and much of the ground had already been tilled. However, there may be some fruit and vegetable crops in Florida that suffered hurricane damage–and the hurricane season isn’t over.

RMA, working with its Approved Insurance Providers (AIPs), recently streamlined claims filing processes for farmers in affected areas and cleared the way for AIPs to make payments to farmers without waiting for much of the usual paperwork.

With Katrina’s impact yet to be felt, there is more of a possibility that farmers in low loss-ratio states will have to pickup the slack for the hard-hit Gulf Coast farmers in the months and years to come. If anything, the aftermath of Katrina underlines the importance of the Federal Crop Insurance Corp. (FCIC) to the farmers of America.

G. A. (Art) Barnaby Jr. is a professor in the Department of Agricultural Economics, Kansas State Research and Extension, at Kansas State University.