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

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

This seems like a sound business move, since 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. Over the last 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 the farmer-paid premiums and subsidies, RMA expects to pay out $1.07.

In contrast, over the past five years Iowa had no loss ratios above 1.0. The largest loss occurred in 2003 with a loss ratio of 0.94 and a low in 2002 of 0.25. Although Iowa only had one loss ratio over 1.0 over a 17-year period, it was a whopper–in 1993, the loss ratio was 4.65, due to flooding in the state. Events like this 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.

Over the past five years the states with the highest net indemnity payments (state aggregate indemnity payments minus state aggregated farmer paid premiums) were all located in the Great Plains. Texas ranked first with an aggregate five-year net indemnity of $1.4 billion, North Dakota $1.0 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, with a loss ratio of 0.94.

Therefore, in this 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 over 20 million acres insured, Kansas growers insured over 16 million acres and Texas growers insured over 14 million acres in 2004.

Even with these 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. In order for the national loss ratio to be sound, other states with underwriting gains must offset underwriting losses in the Great Plains. As a result, many insured farmers wonder whether their crop insurance premium dollars are being sent to high-risk states to cover underwriting losses.

For most states, the answer is no. But 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 seventeen years is still a very short time horizon to be measuring loss ratios, especially in a state like Iowa, where low claims frequencies are typical. A large single loss year of 4.65 that occurred in 1993 in Iowa required several years to recover the underwriting loss 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, one would not want to do an “across the board” rate change. The other issue is this may be an unusual weather trend that may reverse itself over the next five years.

Of course, this all begs the question of the impact of Hurricane Katrina 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, where most crops had already been harvested and much of the ground already tilled. Experts are saying they don’t expect large losses from Katrina because cotton and corn had already been harvested. However, there may be some fruit and vegetable crops in Florida that have suffered hurricane damage–and the season still isn’t over.

The Risk Management Agency, 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 pick up the slack for the hard-hit Gulf Coast farmers in months and years to come. And if anything, the aftermath of Katrina underlines the importance of the Federal Crop Insurance Corporation to the farmers of America.

Barnaby is a professor in the Department of Agricultural Economics, Kansas State Research and Extension, Kansas State University.