# Presentation: 923155

## The Role of Climate Science in U.S. Crop Insurance

**Thomas P. Zacharias****www.tomz@ag-risk.org**

## National Crop Insurance Services

- www.ag-risk.org

## Organization of Presentation 

- Overview of U.S. Crop Insurance
- Insurer Perspective
- Climate Science Program Framework
- Climate Science Impacts for Actuarial and Underwriting Considerations
- Conclusion

## 2004 All Crop Insurance Industry Premium

**2004 All Crop Insurance Industry Premium**

**MULTIPLE PERIL **

**CROP INSURANCE**

**55.01%**

**CROP HAIL**

**5.36%**

**INDEXED INCOME**** **

**PROTECTION**

**0.01%**

**REVENUE **

**ASSURANCE**

**19.31%**

**GROUP RISK PLAN**

**1.56%**

**INCOME PROTECTION**

**0.12%**

**ADJUSTED**** ****GROSS **

**REVENUE**

**0.15%**

**GROUP RISK INCOME**** **

**PROTECTION**

**1.04%**

**CROP REVENUE **

**COVERAGE**

**17.43%**

## 2004 MPCI Cause Of Loss 

**2004 MPCI Cause Of Loss**** **

**Cold, Frost, Freeze**

**14.60%**

**Disease**

**2.05%**

**Drought & Heat**

**30.68%**

**Excess Moisture**

**31.69%**

**Hail**

**9.02%**

**Insects and Wildlife**

**0.46%**

**Other**

**5.30%**

**Wind, Hurricane**

**6.19%**

## Crop-Hail and MPCI Experience

- By Region
-  Liability
-  Loss Costs:  Loss/Liability
-  Loss Ratios:  Loss/Premium
- Annual and Cumulative

## Crop-Hail

- Source: NCIS Insured Crop Summary
- As of October 31, 2005
- State Groupings

| Region | States |
| --- | --- |
| Corn Belt | IL, IN, IA, MI, MN, MO, NE, OH, WI |
| Great Plains | KS, ND, OK, SD, TX |
| Northeast | CT, DE, MD, ME, MA, NH, NJ, NY, PA, RI, VT, WV |
| Northwest | ID, OR, WA |
| Mountain | CO, MT, WY |
| Southeast | AL, AR, FL, GA, KY, LA, MS, NC, SC, TN, VA |
| Southwest | AZ, CA, NV, NM, UT |

## Source: NCIS Insured Crop Summary

- As of October 31, 2005

## Source: NCIS Insured Crop Summary

- As of October 31, 2005

## Source: NCIS Insured Crop Summary

- As of October 31, 2005

## Source: NCIS Insured Crop Summary

- As of October 31, 2005

## Source: NCIS Insured Crop Summary

- As of October 31, 2005

## Source: NCIS Insured Crop Summary

- As of October 31, 2005

## Source: NCIS Insured Crop Summary

- As of October 31, 2005

## Source: NCIS Insured Crop Summary

- As of October 31, 2005

## MPCI

- Source: Summary of Business Tables
- As of Oct. 31, 2005
- State Groupings

| Region | States |
| --- | --- |
| Corn Belt | IL, IN, IA, MI, MN, MO, NE, OH, WI |
| Great Plains | KS, ND, OK, SD, TX |
| Northeast | CT, DE, MD, ME, MA, NH, NJ, NY, PA, RI, VT, WV |
| Northwest | ID, OR, WA |
| Pacific | AK, HI |
| Mountain | CO, MT, WY |
| Southeast | AL, AR, FL, GA, KY, LA, MS, NC, SC, TN, VA |
| Southwest | AZ, CA, NV, NM, UT |

## Source: Summary of Business Tables

- As of Oct. 31, 2005

## Source: Summary of Business Tables

- As of Oct. 31, 2005

## Source: Summary of Business Tables

- As of Oct. 31, 2005

## Source: Summary of Business Tables

- As of Oct. 31, 2005

## Source: Summary of Business Tables

- As of Oct. 31, 2005

## Source: Summary of Business Tables

- As of Oct. 31, 2005

## Source: Summary of Business Tables

- As of Oct. 31, 2005

## Source: Summary of Business Tables

- As of Oct. 31, 2005

## Source: Summary of Business Tables

- As of Oct. 31, 2005

## Insurance Company/Insurer Perspective

- Goals of the Insurer
-      Earn a profit
-      Meet customer needs
-      Comply with legal requirements
-      Fulfill duty to society
- For this presentation, focus is actuarial and underwriting tools of the insurer.  Some consideration of business operation.

- Source:
- 	Myhr, A.E. and J.J. Markham, “Insurance Operations, Regulations, and Statutory Accounting.,” American Institute for Chartered Property Casualty Underwriters/ Insurance Institute of America.  2003.

## Climate Science Program Framework 

- 1. Research:  Plan, sponsor, and study changes in climate and related systems.
- 2. Observations:  Enhance observation and data management systems for a comprehensive set of variables needed for research on changes in climate and related systems.
- 3. Decision support: Develop improved science-based decision support resources.
- 4. Communications:  Communicate results to domestic and international scientific and stakeholder communities stressing openness and transparency.

- Source:  Climate Change Science Program Strategic Plan: (http://climatescience.gov/Library/stratplan2003/final/ccspstratplan2003-execsum.pdf)

- Core Approaches

## Climate Science Program Framework Cont.

- Climate Change Science Program can be viewed as a Public Good.
- Public Good: Good or service that can be consumed simultaneously by everyone and from which no one can be excluded.(www.econ100.com/eu5e/open/glossary.html)
- Consequently, the benefits/information from climate science are essentially available to both insurer and the insured.

## Underwriting Considerations

- Loss Exposures:  what Crops to insure in which regions.
- Amount of insurance:  generally dollars per acre of coverage and associated deductibles.
- Price:  premium rate charged to the farmer.
- Conditions:  terms of the policy, farmer’s responsibility – planting and harvesting dates, cultural practices, etc.

- Underwriting:  The process of determining what loss exposures will be insured, for what amount of insurance, at what price, and under what conditions. (Myhr and Markham)

- Crop Insurance Applications

## Slide 30

## 2005 NCIS Crop Research

**Corn**

**Wheat**

**Soybeans**

**Canola**

**Alfalfa Seed**

**Corn**

**Grapes**

**Corn**

**Dry Beans**

**Potatoes**

**Potatoes**

**Soybeans**

**Tobacco**

**Wheat**

**Peanuts**

**Soybeans**

**Cotton**

**Wheat**

## Corn in IL & NE

- Looking at:
- Effects of defoliation during the reproductive stages on newer transgenic hybrids versus traditional hybrids.
- Four levels of defoliation (0, 33, 66, and 100%) at two stages of crop development (R-1 {silking}, and R-3 {milk}).
- Treatments applied on four different hybrids.

## Actuarial Considerations

- Ratemaking Criteria
- Be Stable
- Be Responsive
- Provide for Contingencies
- Promote Loss Control
- Be Simple

- The primary goal of ratemaking is to develop a rate structure that enables the insurer to compete effectively while earning reasonable profit on its operations.

- Source:  Myhr and Markham

## Actuarial Considerations Cont.

- In the mainstream Property Casualty Industry $1.00 of premium is approximately 35 – 40% expenses and profit loading; the remainder 60 – 65% is allocated for expected losses.
- Thus, loss estimates, or loss statistics represent well over half the price of the insurance product.
- Federally supported crop insurance premium does not directly include an expense and profit load.
- Thus, MPCI premium represents 100% annual expected losses for the program.
- Currently, this is about $4 billion annually.

## Actuarial Considerations Cont.

- Expected Losses = Frequency * Severity
- Frequency typically estimated using publicly available historical weather time series data.
- Severity measure incorporate insurance liability measures combined with engineering estimates.
- Property Casualty Insurers currently use sophisticated weather simulation technology.
- Crop Insurance Product Development utilizes both historical crop insurance experience and weather modeling.
- Spatial statistical and econometric techniques in combination with actuarial credibility and Bayesian methods are not uncommon.

- Expected Loss Cost for Iowa Corn (1948-2004)

## Impacts of Climate Science on Associated Technologies

- GIS:  Better automated mapping and overlay technology, both actuarial and underwriting impacts.

- Improvements in Geographic Information Systems

- GPS:  Precision farming, loss mitigation, more efficient claims processing.
- More obvious short run impacts on underwriting
- Long run impacts on rates and premium

- Improvements in Geographic Positioning Systems

## Conclusion

- Crop Insurer’s demand for climate science information will be a derived demand via the farmer’s risk management choices.
- This derived demand will have direct and indirect linkages in the process of insurance company operations.

## Conclusion Cont.

- Insurance Company Operational Linkages.
- Actuarial:  Fairly direct linkage in terms of improved frequency and severity modeling processes.
- Underwriting:  Indirect link via crop science technology and agronomic response to climate change, resulting in modification of insurance policy and conditions of insurability.
- Business Processes:  Adoption of related climate-science “spin-off” technologies such as GIS and GPS for improved claims handling and various quality control functions (fairly direct link).