Crop

Insurance and the Drought

Who Will Pay the Losses in Iowa?

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1.0 billion to 1.6 billion 1.6 billion to 2.2 billion to Greater than 2.2 billion 5.0 billion 5.0 billion Indemnities Paid Out in Iowa Assumes $1 billion in premium

Company share
Taxpayer share

Who Paid the Losses Last Year in Texas?

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1.1 billion to 1.76 billion to 2.42 billion to Greater than 1.76 billion 2.42 billion 5.5 billion 5.5 billion Indemnities Paid Out in Texas

Texas had $1.1 billion in premium Company share

Taxpayer share

Texas in 2011
Indemnies paid = $2.6 billion Premium = $1.1 billion Underwring Loss = $1.5 billion Assuming companies put all Texas premium in the commercial fund and retained 100% of premium for themselves Companies took $421 million of the loss Taxpayers took on $1.075 billion of the loss

Who Will Pay the Losses in Iowa in 2012?

4.50 4.00 3.50 3.00

$ billion

2.50 2.00

Company responsibility
Taxpayer responsibility

1.50
1.00 0.50 0.00 0.00 2.00 4.00 6.00 8.00 Total Indemnities to be Paid in Iowa in 2012 ($ billion)

How Bad Can it Get?

In 1993, Iowa underwring losses were 3.65 mes as large as premiums A repeat of these losses with todays premium would mean indemnies of almost $5 billion But losses might be much higher than this because 80 percent of Corn Belt corn policies will value yield losses at the higher fall harvest price: $8.00 per bushel versus $5.68 per bushel.

An Example
Farmer with an average yield of 180 bu/ac buys an 80% Revenue Protecon policy Springme price = $5.68 per acre FARMER GUARANTEE: $818 per acre FARMER EXPECTED REVENUE : $1022/acre Farmer harvests 100 bu/ac Harvest price = $8.00 per acre (assumpon)

Indemnies
Yield insurance (YP):
$5.68*(0.8*180 100)= $250/acre

Cheap revenue insurance (RPHPE): Expensive revenue insurance (RP):

$8.00*(.8*180 100) =$352/acre

0.8*$5.68*180 $8.00*100 = $18/acre

Final Post-Harvest Revenue

No insurance: $800 YP: $800 + $250 = $1050 RPHPE: $800 + $18 =$818 RP: $800 + $352 = $1152

Why RP?
Suppose farmer forward contracted 80% of his ancipated producon at $5.68. Farmer sells 100 bushels at $8.00 for $800 Farmer lost $334 on his forward contract Farmer gains an indemnity of $352 from RP Total revenue = $818/acre same as RPHPE with no forward contract With YP, total revenue = $716 With RPHPE, total revenue = $484