Summary of Yield Exclusion Rating Methodology, Contracted Review, External Reviews, Response to 

External Reviews, and Changes for 2016

(June 2015)

Background:

As required by the 2014 Farm Bill, RMA implemented the Yield Exclusion (YE) option for several of the 

primary insured crops for 2015. This option will be expanded to other crops for 2016. The YE allows 

growers the option to exclude certain yields from their Actual Production History (APH), effectively 

increasing their level of coverage. The yields that may be excluded are from years where the county 

yield is less than 50 percent of the preceding 10-year average, or when this occurs in an adjacent county.

For 2015, RMA developed a methodology for determining the additional premium rate needed to 

account for the increased coverage from the use YE. This methodology is the based on the approach 

that has been used for the several years for APH Trend Adjustment (TA), which increases a grower’s 

level of coverage in a similar manner to YE.

RMA contracted for a review of the YE rating methodology, which was completed in December of 2014. 

Based on the results of that review, RMA implemented the methodology for the 2015 crop year. In 

January of 2015, the YE rating methodology and contracted review were sent out to five external 

reviewers and to National Crop Insurance Services (NCIS). Those reviews have been considered, and 

responded to, by the contractor that did the first review.

What follows is a brief overview of the YE rating methodology, a summary of the contracted review, a 

summary of the external reviews, a summary of the responses by the contractor to the external reviews, 

and RMA’s evaluation of all material.

Overview of the YE Rating Methodology:

The rating methodology for YE is based on the concept of charging the same premium for the same yield 

guarantee. Suppose a grower has an APH (or expected yield) of 100 bushels, and selects 75% coverage. 

The yield guarantee would be 75 bushels (100 x 75%). Then suppose that, by the use of YE, the grower’s 

APH increases to 115 bushels. In this case, the grower can choose a reduced coverage level of 65% and 

still end up with the same yield guarantee of 75 bushels as before (115 x 65%). The rating methodology 

charges the same premium for the 75 bushel guarantee (effectively 75% coverage) as the grower would 

have paid before. This is based on the premise that a 75 bushel guarantee is a 75 bushel guarantee – no 

matter what mechanism was used to get to that level of coverage. 

It is expected that YE will generally produce effective coverage levels that do not line up exactly with the 

5-percent coverage increments offered in the crop insurance program. In those cases, the rating 

methodology develops a rate based on the nearby coverage levels through interpolation. For example, 

if the effective coverage level for a grower is 72%, then the premium rate is based on an interpolation, 

or a sort of weighted average, between the 70% and 75% rates.

There will be cases where the effect of YE is large enough that the effective coverage level exceeds 85%, 

or even 100%. In these cases the interpolation approach no longer works because RMA does not have 
premium rates established beyond 85% percent. What is used instead is an extrapolation. A straightline trend is established from the 80% and 85% coverage levels, and then is extended out to the 

effective coverage level. Since RMA does not have historical experience for coverage levels beyond 

85%, not much is known about the risks and producer behavior that may occur at these high levels of 

coverage. A straight-line extrapolation was considered as the midpoint in the range of potential 

outcomes.

Summary of Contracted Review:

The contracted review was generally supportive of RMA’s proposed YE rating methodology. It had 

several recommendations, which were:

 That RMA should follow its proposed methodology for determining effective coverage levels.

 That RMA should follow it proposed methodology for determining premium rates based on 

those effective coverage levels.

 That RMA establish a premium rate cap such that the additional premium charged does not 

exceed the increase in the amount of insurance provided (liability) – this was implemented for 

the 2015 crop year.

 That RMA re-evaluate the coverage level differentials and the behavioral effects of effective 

coverage exceeding 85% after two years of YE experience has been collected, in order to refine 

current actuarial procedures.

RMA implemented the first 3 recommendations for the 2015 crop year. The remaining 

recommendation cannot be undertaken until some experience data has been accumulated.

Summary of External Reviews and Contractor Response:

The reviewers are generally supportive of the interpolation approach used for effective coverage levels 

up to 85%. However, 4 of the 5 reviewers and NCIS are critical of the straight-line extrapolation 

approach used for effective coverage beyond 85%. One reviewer finds the extrapolation approach to be 

reasonable. The reviewers’ concerns, and contractor responses, are summarized by category below:

Rate of Loss Beyond 85% Coverage

Reviewer Comments: The reviewers developed models of how the rate of loss may increase, based on 

assumed yield distributions. Two of the reviewers and NCIS conclude that the extrapolation may 

generally understate premium rates. Another two reviewers conclude that the extrapolation may 

understate rates in some cases and overstate in others, with one of them pointing out that the 

understatement is more likely in low risk areas and overstatement is more likely in high risk areas. One 

reviewer felt that the extrapolation was reasonable.

Contractor Response: The contractor points out that the true yield distribution is unobservable, and 

therefore any potential errors are unknown. If the errors are unknown, then there is no way to correct 

for them in a way that unambiguously improves premium rates. It should also be pointed out that 

coverage level factors for coverage levels from 50% to 85%, derived from RMA historical loss data, are 

generally not consistent with the yield distributions assumed by the reviewers. If the yield distributions 

do not fit historical loss data for coverage levels below 85%, then it brings up the question of how 
reliable they are for coverage beyond 85%, and whether they provide a credible basis for revising 

premium rates in advance of obtaining actual loss data.

The contractors also point out that low-rate areas, where some reviewers suggest that YE rates are 

more likely to be understated, are the very areas where YE will tend to have the least impact on 

effective coverage levels. A low-rate area tends to have less yield variability, making few (if any) years 

eligible for exclusion under YE.

In the higher-rate areas, yields are more variable and more years qualify for exclusion – with a 

correspondingly larger impact on effective coverage levels. But it is in these same higher-risk areas 

where some reviewers suggest that current extrapolation method will tend to, if anything, overstate YE 

premium rates.

If the yield distributions used by the reviewers were accepted as correct, it would suggest that the 

current extrapolation method is most effective in the same higher-risk areas where YE is most likely to 

be used and to have the most impact.

Moral Hazard and Adverse Selection

Reviewer Comments: A couple of reviewers and NCIS express concern that effective coverage levels 

beyond 85%, and especially 100%, may invite moral hazard, which should be accounted for in the 

premium rates. Moral hazard refers to the decreased incentive growers may have to care for their crops 

as the level of their insurance coverage increases. Adverse selection refers to the potential for higherrisk growers to select YE at a greater rate than other growers, harming actuarial performance.

Contractor Response: This is a valid concern, but RMA already applies a proportional load to account for 

moral hazard and adverse selection. As the effective coverage level increases, the amount of the load 

(in absolute terms) similarly increases. There is a question as to whether the load should increase 

disproportionately for effective coverage levels beyond 85 percent, but this question cannot be 

addressed until loss data is accumulated. Without that data there is no basis for revising the load.

With regard to adverse selection specifically, YE will be available to all growers in a county regardless of 

their individual level of risk. If YE is triggered due to a disaster year, then it is likely that a large-scale 

systemic event (i.e. drought) has occurred. Such an event tends to affect all growers, regardless of their 

inherent risk. Because of the general applicability of YE, it is not readily apparent that YE presents an 

increased risk of adverse selection.

Other Issues

Out of all of the reviews, NCIS was the most expansive, raising questions about YE and premium rates 

that are beyond the scope of what the other reviewers addressed. These questions include:

 Whether RMA has “properly identified the primary and contiguous counties” for YE

 Whether RMA’s current rating methodology (outside of YE) “is appropriate across the entire 

population [of insured growers]”

 Whether the rating methodology for YE was sufficiently tested

 Whether the rating methodology for YE is properly programmed into RMA’s cost estimator

 What is the “impact of Yield Exclusion on the program as a whole”
 What is the “impact of the Yield Exclusion on the financial risk of the Approved Insurance 

Providers”

 What options are there to protect AIPs from that financial risk

Changes for 2016

For 2016, RMA is making two revisions in response to the comments received by the contractors and 

reviewers.

First, RMA is updating the coverage level factors for the major crops using recently-accumulated loss 

data. The coverage level factors form the basis for the extrapolation used for YE premium rates and 

therefore will have a direct effect. The amount of accumulated loss data is now sufficient to allow the 

coverage level factors to be determined by level of risk, rather than at a national level as was done 

previously. This generally results increases in YE rates in lower-risk areas and smaller changes 

elsewhere. This incidentally address, at least in part, some of the concern expressed by reviewers about 

YE rates in low risk areas.

Second, RMA is adding an uncertainty load of 5 percent that begins to phase in at effective coverage 

levels over 85 percent and is fully phased in at coverage levels of 100 percent or higher. The uncertainty 

load addresses that fact that there is no data about producer behavior at very high levels of coverage, 

therefore uncertainty. As data on producer behavior at higher coverage levels is accumulated, the 

premium rates for YE will be revised to reflect that data and the uncertainty load will be phased out.