2009 FCIC 11010 Rate Methodology Handbook Actual Production History (APH) Summary of 

Changes 

Listed below are the changes to the Rate Methodology Handbook that have the most significant 

impact. Minor changes and correction are not included in this listing. Refer to the actual 2008 Rate 

Methodology Handbook to identify clarifications/changes that have been made effective for 2009. 

Reference Description of additions, changes or clarifications:

Cover Page Changed 2008 Crop Year to 2009 Reinsurance Year

Sec. 2(B)(2)(a)(i) Added the APDD Director to the oversight and approval process used for 

the annual rating cycle.

Sec. 2(B)(2)(a)(ii) Added the APDD Director to the oversight and approval process used for 

the implementation of actuarial rate studies.

Sec. 2(B)(2)(a)(iii) Added the APDD Director to the oversight and approval process used for 

the reference yield updates.

Sec. 2(B)(2)(a)(iv) Added the APDD Director to the oversight and approval process used for 

the Rate Methodology Memorandum.

Sec. 3(B)(3) Changed the range of updated target reference yields, for crops with a 

target rate review, to be within a lower and upper boundary of the tyield.

Sec. 3(B)(4) Updated section on coverage level rate differentials for all remaining 

continuously rated crops to say that AB expects to incorporate the 

recommendations beginning with the 2009 crop year. Because the 

change to the coverage level rate differentials may move premium rates 

up or down, they will be updated in conjunction with a full review of 

base rates and reference yields.

Sec. 3(B)(5)(IV) Changed the minimum State Cat Load from 0.010 to 0.0065.

Sec. 3(B)(5)(V) Changed the minimum State Cat Load from 1% to 0.65%.

Sec. 3(B)(5)(VIII) Added that RMA suspended the implemention the variable optional unit 

discount indefinitely with RMA’s eWA system redesign). Clarified that 

the optional unit surcharge factor is 11.1% and the multiplicative 

discount factor is 10%.

Sec. 3(B)(7) Added the Actuarial and Product Design Division Director to the list of

personnel in the APH Business Process and Critical Control Points.

Sec. 4 (Exhibit 2) Added APDD Director to the business process and critical control points.
United States

Department of

Agriculture RATE 

METHODOLOGY

Federal Crop

Insurance

Corporation HANDBOOK

ACTUAL PRODUCTION

HISTORY (APH)

Risk Management Agency

Actuarial Branch

FCIC-11010 (RMH-APH) 2009 and Subsequent Reinsurance Years 
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UNITED STATES DEPARTMENT OF AGRICULTURE

WASHINGTON, D.C. 20250

FEDERAL CROP INSURANCE HANDBOOK NUMBER: FCIC-11010 (RMH-APH)

SUBJECT:

RATE 

METHODOLOGY

HANDBOOK

ACTUAL PRODUCTION HISTORY (APH)

2009 AND SUBSEQUENT CROP YEARS 

OPI: Actuarial Branch

APPROVED: DATE:10/02/2008

/s/ Thomas Worth 10/02/08 

Senior Actuary, DAPM

/s/ Mary Alonzo 10/02/08 

Director, Actuarial and Product Design Division

THIS HANDBOOK CONTAINS THE APPROVED RISK MANAGEMENT AGENCY RATE 

METHODOLOGY FOR APH RATING COMPONENTS FOR 2009 AND SUBSEQUENT CROP 

YEARS. 

SUMMARY OF CHANGES/CONTROL CHART

Major Changes: See changes or additions in text that have been highlighted. 

MARCH 2008 SC 1 FCIC-11010 (RMH-APH)
RATE METHODOLOGY HANDBOOK

ACTUAL PRODUCTION HISTORY (APH)

SUMMARY OF CHANGES/CONTROL CHART

Control Chart For: Rate Methodology - APH Handbook 

SC Page(s) TC Page(s) Text Page(s) Reference 

Material Date Directive Number

Remove

Current

Index SC1-SC2 TC1-TC2 1-87 88-97 3-2008 FCIC-11010 (RMH-APH)

MARCH 2008 SC 2 FCIC-11010 (RMH-APH)
RATE METHODOLOGY HANDBOOK 

ACTUAL PRODUCTION HISTORY (APH)

TABLE OF CONTENTS

1. INTRODUCTION & PURPOSE............................................................................. 1

2. SPECIAL INSTRUCTIONS.................................................................................... 2

A. ABBREVIATIONS AND DEFINITIONS.............................................................................................................. 2

B. BUSINESS PROCESS AND CRITICAL CONTROL POINTS......................................................................... 13

3. RATING METHODOLOGY - APH.....................................................................20

A. RATING GOALS - APH........................................................................................................................................ 20

B. RATING METHODOLOGY - APH COMPONENTS ....................................................................................... 21

(1) INSURANCE EXPERIENCE COMPONENT ................................................................................................. 21

(2) RATE MAKING CONCEPTS COMPONENT ................................................................................................. 48

(3) REFERENCE YIELDS COMPONENT ........................................................................................................... 58

(4) COVERAGE LEVEL RATE RELATIVITIES COMPONENT ....................................................................... 59

(5) TARGET RATE DEVELOPMENT COMPONENT......................................................................................... 62

(6) MANDATED CAPPING REQUIREMENTS COMPONENT......................................................................... 77

(7) APH BUSINESS PROCESS AND CRITICAL CONTROL COMPONENT................................................... 82

4. REFERENCE MATERIAL...................................................................................84

EXHIBIT 1 – CROPS WITH PP/RP/QA PROVISIONS ...................................................................................................... 84

EXHIBIT 2 – APH BUSINESS PROCESS AND CRITICAL CONTROL POINTS ................................................................... 87

MARCH 2008 TC-1 FCIC-11010 (RMH-APH)
RATE METHODOLOGY HANDBOOK 

ACTUAL PRODUCTION HISTORY (APH)

TABLE OF CONTENTS

 

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MARCH 2008 TC-2 FCIC-11010 (RMH-APH)
1. INTRODUCTION & PURPOSE

This handbook provides general instructions, guidelines, and a comprehensive framework for the 

procedures used to determine base premium rates for crops whose insurance guarantee is based on a 

producer’s actual production history (APH). These rates are applicable to policies insured through 

or reinsured by the Federal Crop Insurance Corporation (FCIC) and administered by the Risk 

Management Agency (RMA). This handbook encompasses APH rate making of both permanent 

(regulatory) and pilot crop insurance programs. In addition to procedures, this handbook provides 

history, background, guidance, and understanding with regard to establishing premium rates for 

crop insurance programs and the calculations underlying premium rates. The data used in each of 

the tables in this handbook is for illustration purposes only. The handbook is not intended to be 

either exhaustive or exclusive. 

For crops whose premium rates are based on the producer’s actual production history (APH), this 

handbook: 

(1) Identifies RMA’s role in setting premium rates including the business process and critical 

control points during the process. 

(2) Outlines and details the framework of processes and procedures utilized in calculating and 

establishing actuarially sound premium rates. 

(3) Provides general instructions and guidelines that RMA uses to develop, update, and 

maintain premium rates for insurance programs. 

(4) Identifies and assigns authorities and responsibilities. 

In general, the steps or procedures for rate making covered in this handbook are: 

(1) To focus on the data (insurance experience) used in the rate making process. The logic and 

decisions made with regard to the treatment of the raw data are documented;

(2) To establish target rates in accordance with the approved process with emphasis on longterm rate adequacy and sufficiency; 

(3) To demonstrate how a producer’s approved yield directly affects the individual’s premium 

rate while achieving overall program actuarial soundness; 

(4) To identify and discuss implementation of recent studies and recommendations including, 

but not limited to determination of rate relativities; 

(5) To discuss implementation of the capping process and revision of rate components toward 

targets; 

(6) To identify and describe internal control policies and procedures, critical control points 

used in establishing an APH rate, and supervisory/management oversight as required; and

(7) To provide supporting documentation for the ratemaking process, including, but not limited 

to the periodic review of established rates, ratemaking formulas and calculations, and 

management decisions. 

MARCH 2008 1 FCIC-11010 (RMH-APH)
2. SPECIAL INSTRUCTIONS

This handbook is written and maintained by: 

Office of the Deputy Administrator for Product Management, 

Actuarial Branch

6501 Beacon Drive, Mail Stop 0811 

Kansas City, Missouri 64131 

Telephone: (816)-926-7216 FAX: (816)-926-1307 

If an error is found, notify us in writing at the address given. Outline the error and indicate the 

proposed correction. Errors may be corrected for the current crop year. Proposed changes should 

be submitted in writing through the proper organizational channels to Actuarial Branch for 

consideration. 

This handbook remains in effect until superseded by reissuance of either the entire handbook 

or selected portions (through slipsheets or bulletins). If slipsheets have been issued for a 

handbook, the original handbook as amended by slipsheet pages shall constitute the handbook. 

A bulletin can supersede either the original handbook or subsequent slipsheets. 

A. ABBREVIATIONS AND DEFINITIONS

(1) ABBREVIATIONS: 

AD Actuarial Division

AB Actuarial Branch

ADM Actuarial Data Master

AFS Actuarial Filing System

APH Actual Production History 

CAS Casualty Actuarial Society

CAT Catastrophic Risk Protection

CIH Crop Insurance Handbook 

CRC Crop Revenue Coverage 

CSH Classification Standards Handbook 

DAPM RMA Deputy Administrator for Product Management

FCIC Federal Crop Insurance Corporation

FIPS Federal Information Processing Standards 

GRIP Group Risk Income Protection 

GRP Group Risk Protection

IIP Indexed Income Protection

IP Income Protection

LASH Loss Adjustment Standards Handbook 

MPCI Multiple Peril Crop Insurance 

NASS National Agricultural Statistics Service

RA Revenue Assurance

RMA Risk Management Agency

RO RMA Regional Office

SOW Statement of Work

TO Task Order 

USDA United States Department of Agriculture

MARCH 2008 2 FCIC-11010 (RMH-APH)
(2) DEFINITIONS:

Act The Federal Crop Insurance Act (7 U.S.C. 1501-1524), as 

amended.

Actual Production APH. Coverage based on an insured’s farm production 

History capability and history, as demonstrated by acceptable 

 documentation. 

Actuarial Documents The material for the crop year that is posted on RMA’s 

website at the http://www.rma.usda.gov. These documents 

show the amounts of insurance or production guarantees, 

coverage levels, premium rates, insurable crop production 

practices, insurable acreage, and other related information 

regarding crop insurance for a crop in a county. 

Actuarially Sound A situation in which the premium rates charged to insured 

persons are sufficient to cover the present value of anticipated

losses and to build a reasonable reserve. 

Additional Coverage All levels of insurance coverage greater than Catastrophic 

coverage.

Add-On-Rate The rate associated with the risk of insuring a specific crop 

endorsement that is not included in the base rate of a policy 

for a given coverage level.

Base Rate The rate associated with the risk of insuring the basic policy 

provisions for a given crop, type and practice, in a given 

location, for a given coverage level. 

Basic Provisions The basic (common) policy insurance information.

Basic Unit All insurable acreage of the insured crop in the county on the 

date coverage begins for the crop year. 

Board The Board of Directors of FCIC.

Catastrophic CAT. The minimum level of risk protection coverage offered

Coverage by FCIC (for APH, 50% of the approved yield indemnified at 

55% of the expected market price). 

Capping Calculations that ensure cumulative changes in premium

 rating components fall within a specified range (e.g. -5% to

+15% in the Rate Methodology Memorandum) or within the 

legislatively mandated 20% maximum rate change.

CAT Load A premium amount assigned to account for anomalous 

insurance loss experience. 

MARCH 2008 3 FCIC-11010 (RMH-APH)
Classification CSH. A document denoted by RMA as the Classification 

Standards Handbook Standards Handbook, located at http://www.rma.usda.gov

which provides operating standards for coverage and rate 

classification determinations.

Code of Federal CFR. Proposed and final regulations published in the 

Regulations Federal Register also are considered to be part of the CFR.

Continuous Rating RMA formula-driven rating procedure that generates rates as 

a function of the relationship between APH yield and the 

multi-peril risk. A unique premium rate for each predetermined yield within a crop, state, county, type, practice 

program is developed through a continuous function for each 

unique yield and the generated rate function is relatively 

without interruption rather than being based on pooled yields 

for a single rate or an interrupted rating function. 

County Summary Statplan database tables that contain detailed insurance 

Tables experience at the insurance plan/crop/state/county level. The 

data would differ from the historical databases (policy or 

polsum databases) since the data has been scrubbed and 

purged of certain information (e.g. extreme outliers, etc.). 

Coverage The insurance provided by the policy against loss of a crop 

due to an insured peril. 

Coverage Level Calculated factor applied to premium rates in consideration of 

Relativities differences in expected losses between coverage levels. 

Credibility The measure of the predictive value of the loss experience. 

For RMA rate making, the number of indemnified units over 

time in a defined group or area is used to measure credibility. 

Crop An agricultural commodity insured under authority of the Act. 

Crop Insurance CIH. A document denoted by RMA as the Crop Insurance 

Handbook Handbook, located at http://www.rma.usda.gov. The CIH 

provides underwriting instructions for crop insurance policies.

Crop Insurance Methods approved by RMA to administer approved crop 

Procedures programs. The term includes the Underwriting Guides, the 

CIH, the Loss Adjustment Standards Handbook (LASH), 

Manager’s and PM Bulletins, or other documents that may be 

issued by RMA, refer to http://www.rma.usda.gov. 

Crop Policy The legal documents needed to establish a contract between 

the insured person and the insurance provider, including but 

not limited to the Common Crop Insurance Policy Basic 

Provisions, the Crop Provisions, as published in the CFR or 

MARCH 2008 4 FCIC-11010 (RMH-APH)
by RMA on its website, the Special Provisions, as applicable, 

and the actuarial documents. 

Crop Program The insurance plan or plans whereby the insurable interests of 

a producer of a crop are protected.

Crop Provisions Any specific crop information that may attach to the common 

policy. 

Crop Revenue CRC. A plan of insurance that guarantees a stated amount

Coverage of revenue. This plan covers revenue shortfalls due to low 

price, yield or combination of the two. (NOTE: Plans 

offering gross revenue coverage include Crop Revenue 

Coverage (CRC), Income Protection (IP), and Revenue 

Assurance (RA).

Crop Year The period of time defined by the applicable crop insurance 

policy. For APH, purposes, the term does not include any 

year the crop was not planted, or was prevented from planting 

due to an insurable cause, or was not produced for insurable 

purposes. 

Disaster Reserve A factor used to increase calculated rates by an amount 

Factor intended to meet the Congressional requirement that rates be 

adequate to cover anticipated losses and a reasonable reserve.

Endogenous A factor used to account for differences between actual loss 

Risk Factor costs for a coverage level and the loss cost implied by policies 

from other coverage levels. 

Endorsement An option offered under a Federal crop insurance policy that 

provides additional coverage or benefits to the insured. 

Enterprise Unit A unit that includes all insurable acreage of the insured crop 

in the county in which the insured has a share on the date 

coverage begins for the crop year. 

Exponent A factor used to distribute the rate relativity across yields. 

Filing Year Consists of the 4/30, 6/30, 8/31, 9/30, 10/31, 11/30, 12/31, 

1/31 & 3/15 crop insurance filings. The 4/30 filing includes 

the prior year Raisins; the 8/31 filing includes the following 

year Arizona/California/Texas Citrus, Macadamia Nuts and 

Revenue Coverage Avocados; the 1/31 filing consists of the 

following year Nursery and Florida Fruit Trees; the 3/15 

filing consists of the following year Florida Citrus.

Fixed Rate Load A rate component used in calculating the fixed rate portion of 

the total rate published. 

MARCH 2008 5 FCIC-11010 (RMH-APH)
Group Risk GRIP. A plan of insurance that adds a revenue component 

Income Protection to the Group Risk Plan. A base price and harvest price are 

established based on specified futures contracts. These 

components are used in tandem with the expected and actual 

yield components established under GRP coverage to 

determine if an area-wide revenue shortfall has occurred. 

Group Risk Plan GRP. A plan of insurance that provides protection based on 

an area index. A plan of insurance that bases coverage for all 

insureds in an area (e.g., county) on the area’s actual average 

yield during the given crop year relative to its trend-adjusted 

historical average yield. 

Harvest Price Option HPO is a coverage under the Revenue Assurance plan of 

insurance. It allows the insured to use the greater of the 

projected harvest price or the Fall harvest price to determine 

the per-acre revenue guarantee.

High Risk Land Acreage with identifiable physical limitations to crop 

production that may increase the potential frequency and/or 

severity of loss; or expose a planted or intended crop to perils 

not generally encountered by most insureds. 

Historical Databases (Also referred to as either Policy Database or Polsum 

Database) Databases containing historical crop insurance 

sales and loss information that reflect no adjustments and 

actual amounts received or paid.

Income Protection IP. A plan of insurance that guarantees a stated amount of 

revenue. The plan covers revenue shortfalls due to low price, 

yield, or combination of the two (NOTE: Plans offering gross 

revenue coverage include Crop Revenue Coverage (CRC), 

Income Protection (IP), and Revenue Assurance (RA). 

Indemnity The amount of money that the approved insurance provider 

owes the insured based on the determination of loss. 

Indexed Income IIP. See Income Protection (IP). A plan of insurance that

Protection emulates most features of the Income Protection (IP) 

insurance plan with one exception: IIP is based on an indexed 

yield rather than the standard APH yield.

Informational A document issued by RMA to convey 

Memorandum supplemental information regarding the Federal

Crop Insurance program to insured producers, reinsured 

companies, and other interested parties. Refer to

http://www.rma.usda.gov. 

MARCH 2008 6 FCIC-11010 (RMH-APH)
Insurance Tables that contain the number of policies earning 

Experience premium, policies indemnified, units earning premium, units 

indemnified, net insured acres, liability, total premium, 

producer premium, subsidy, indemnity, loss ratio, earned 

premium rate, and loss cost ratio. 

Insurance Provider A company reinsured by FCIC that provides crop insurance 

coverage to producers participating in any Federal crop 

insurance program administered under the Federal Crop 

Insurance Reform Act of 1994. 

Late Planted The acreage initially planted to the insured crop after the final 

planting date designated in the Special Provisions for the 

insured crop in the county.

 

Liability The total amount that the insurance provider would be 

obligated to pay to the insured if there was a total loss.

Loss Cost Ratio LCR. The ratio of total indemnity divided by total liability.

Loss Ratio LR. The ratio of total indemnity divided by total premium.

Manager’s Bulletin A document issued by RMA’s Administrator to convey 

information that supplements the crop insurance procedures. 

Located at http://www.rma.usda.gov. 

Moral Hazard A situation wherein the insured fails to exercise proper 

management of the insured crop, thereby increasing the 

likelihood of an indemnity payment under the terms and 

conditions of the insurance policy. 

NASS The National Agricultural Statistics Service, an agency of the 

U.S. Department of Agriculture, or a successor agency. 

Option A policy provision chosen by the insured that offers 

additional coverage and benefits beyond those provided by 

the standard insurance policy. 

Optional Unit A unit elected that is on a basis greater than the unit structure 

on which the insurance is based. Land that would otherwise 

be one basic unit may be divided into optional units according 

to the optional unit definition contained in the Crop's Basic 

Provisions, Crop Provisions and/or Special Provisions. 

Optional units may be available for acreage located in 

separate, legally identifiable sections, section equivalents, or 

Farm Service Agency Farm Serial Number's (whichever 

applies). Some perennial crops allow optional units for 

acreage of the crop grown on non-contiguous land and/or for 

different types/varieties. Most crops allow optional units for 

irrigated and non-irrigated practices.

MARCH 2008 7 FCIC-11010 (RMH-APH)
Optional Unit Factor A factor to reflect the fact that indemnity is not computed for 

an entire farm, but rather for each division of a farm. 

Plan of Insurance A general structure of insurance that may be extended to one 

or more crops (e.g., actual production history and revenue 

coverage).

Policy or Polsum See “Historical Databases”. 

Databases 

Prevented Planting Due to a covered cause of loss, failure to plant the insured 

crop with the proper equipment by the final planting date 

designated in the Special Provisions for the insured crop in 

the county. 

Price Election The amount that is the value per pound, bushel, ton, carton, or 

other applicable unit of measure for the purposes of 

determining premium and indemnity under the policy.

Producer Premium The amount of premium paid by the insured. 

Production Guarantee The number of pounds, bushels, tons, cartons, or other 

applicable units of measure determined by multiplying the 

approved yield per acre by the coverage level percentage 

elected by the insured.

Production to Count Harvested and unharvested production in the insured field or 

area. 

Production Ratio PR. The unit’s production to count divided by the unit’s 

average historic production. 

Production Ratio Tables that contain summarized experience from units with

Table liability.

Program Materials Basic Provisions, Catastrophic Risk Protection Endorsement, 

crop provisions, Special Provisions of Insurance, loss 

adjustment handbook, loss adjustment manual, all applicable 

actuarial documents, Appendix III, Crop Insurance Handbook, 

underwriting requirements, and other forms necessary to 

deliver the program.

Quality Adjustment Damage which lowers the quality of the crop due to insurable 

causes.

Rate Relativity The ratio of the rate at a given coverage level to the rate at the 

65% coverage level.

MARCH 2008 8 FCIC-11010 (RMH-APH)
Record Types a) Type 9 – Used to identify which reinsurance fund into 

which a policy has been designated and thus the amount of 

loss or gain borne by RMA or by a reinsured company on a 

policy. 

b. Type 10 - Used to establish a policy and provide 

information regarding the policyholder and entities with a 

significant business interest. A Type 10 record requires at 

least one Type 14 record to be submitted with it. 

c) Type 11 - Used to establish premium and liability for each 

acreage line. The record also identifies the land location and 

allows reporting of common USDA information. 

d) Type 14 – Used to establish the crop, county, plan code 

and reports the contract data determined at Sales Closing. 

e) Type 15 - Used to record/report APH yield information for 

designated crops. 

f) Type 20-22 - The Type 21 and 22 Records are used to 

establish the loss amounts for a given policy and the Type 20 

Records are used to identify the application or disbursement 

of loss payments. Type 20 records are linked by Claim 

Number to corresponding Type 21/22 records. Therefore, all 

Type 20 and 21/22 records for a policy from the transaction 

file replace all Type 20 and 21/22 records for the policy on 

the policy database.

Reference Rate A rate component used in calculating the continuous base rate 

that is intended to estimate the unloaded base rate at the 

county average yield.

Reference Yield Average yield of a group of growers often reflected at the 

crop-county level and calculated from NASS data. The 

relationships between unit APH yields and the reference yield 

are used to assign premium rates, with higher premium rates 

assigned to units with APH yields that fall below the 

reference yield and lower premium rates assigned to units 

with APH yields above the reference yield.

Reinsurance Year RY. Year designation defined in the Standard Reinsurance 

Agreement (SRA) to include 3 crop years: the current crop 

year (equal to the RY), the prior crop year (RY minus 1), or 

the upcoming crop year (RY plus 1). The prior year includes 

raisins and the upcoming year includes Macadamia Nuts, 

Arizona/California/Texas Citrus, Nursery, Florida Fruit Trees,

and Revenue Coverage Avocados.

Replanting Performing the cultural practices necessary to prepare the land 

to replace the seed or plants of the damaged or destroyed 

insured crop and then replanting the seed or plants of the same 

crop in the insured acreage with the expectation of producing 

at least the yield used to determine the production guarantee. 

MARCH 2008 9 FCIC-11010 (RMH-APH)
Replanted Crop The same agricultural commodity replanted on the same 

acreage as the first insured crop for harvest in the same crop 

year (if replanting is specifically made optional by the policy).

Product PM Memoranda is issued by the DAPM to convey 

Management information that supplements the crop insurance procedures.

Bulletins Refer to http://www.rma.usda.gov. 

Revenue Assurance RA. Protects a producer’s crop revenue whenever low prices 

or low yields, or combination of both, causes the crop revenue 

to fall below the guaranteed revenue level. (NOTE: Plans 

offering gross revenue coverage include Crop Revenue 

Coverage (CRC), Income Protection (IP), and Revenue 

Assurance (RA).

R-Span A set yield interval published in the actuarial documents and 

often established at a county-crop level. Each r-span interval 

corresponded to a premium rate. The r-spans were used to 

assign premium rates based on insureds’ individual APH 

yields. Insureds with individual APH yields that fell in a low 

r-span interval were assigned a high premium rate while 

insureds with individual APH yields that fell in a high r-span 

interval were assigned a low premium rate. Use of r-spans 

was discontinued after the continuous rating process was 

implemented. 

Small Grains Crop provisions established specifically for Barley,

Crop Provisions Oats, Rye, Wheat, Flax, and Buckwheat (insurable crops 

when planted for harvest as grain.)

Statement of Work SOW. Statement of Work, a traditional Government-prepared 

work statement that describes the work in terms of "what" is 

to be the required output, in addition to "how" the work is to 

be accomplished. 

Special Provisions SPOI. The part of the policy that contains specific

Of Insurance provisions of insurance that may vary by geographic location. 

Dates listed include the sales closing, initial and final 

planting, acreage reporting, and premium billing dates. This 

document also displays statements pertaining to insurance 

coverage, price elections, premium discounts, adjustments, 

and insurance availability. 

Stage Code Used to identify the average stage of growth and variability of 

potential production and plant damage for prevented planted 

and replanted acreage 

StatPlan Statistical Database Planning system developed to provide a 

standardized, normalized, and reliable actuarial database. 

MARCH 2008 10 FCIC-11010 (RMH-APH)
Subject Matter Individuals and entities used to obtain specialized technical 

Experts information or feedback on the crop program including, but 

not limited to, the following: CSREES personnel; university 

personnel; FSA office personnel; growers association 

representatives; state, regional, and national crop association 

representatives; insured and non-insured producers (including 

limited resource farmers); insurance provider representatives; 

agents; and loss adjusters. 

Subsidy The amount of total premium paid by the FCIC on behalf of 

the insured. 

Target Rate The rate calculated assuming that a unit yield is equal to the 

reference yield. 

Target Reference The "expected" yield for a given crop, type, and 

Yield practice within a county/State location from which all 

producer individual yields are measured.

Total Premium The total amount of premium for an insured’s coverage that is 

determined by multiplying liability by the unsubsidized 

premium rate.

Transitional Yield T-Yield. An estimated yield provided in the Actuarial Table

used in calculating average/approved yields when less than 

four years of actual, temporary and/or assigned yields are 

available on a crop by county basis. 

Type-Practice Factor A rating factor used to approximate the appropriate rating 

relationships between types/practices for a given crop on a 

regional or statewide basis.

Unit The insurable acreage of the insured crop in the county used 

when determining the approved APH yield.

Unit Division Load A factor to reflect the fact that indemnity is not computed for 

an entire farm, but rather for each division of a farm. 

Unloaded Base Rate The premium rate exclusive of any additional charges related 

to extra coverage, such as quality protection, or special 

reserves, such as catastrophic loads.

Whole Farm Unit All insurable acreage of 2 or more insured crops planted in the 

county in which the insured has a share on the date coverage 

begins for each crop for the crop year.

Written Agreement A document that alters designated terms of a crop policy as 

authorized under the basic provisions, the crop provisions, or 

the special provisions for the insured crop. 

MARCH 2008 11 FCIC-11010 (RMH-APH)
Written Agreement WAH. A document denoted by RMA as the Written 

Handbook Agreement Handbook which provides specific information 

regarding written agreements, refer to

http://www.rma.usda.gov. 

MARCH 2008 12 FCIC-11010 (RMH-APH)
B. BUSINESS PROCESS AND CRITICAL CONTROL POINTS

(1) BUSINESS PROCESS: 

a. Actuarial Branch Staff Structure

i. The Actuarial Branch (AB) is located in RMA’s Kansas City office under 

the direction of the Deputy Administrator for Product Management (PM). 

The AB Chief reports to the Director of the Actuarial Product Design 

Division (APDD). The AB is organized into three work teams: 1) Rates 

Team; 2) Prices Team, and 3) Filing Team. Each team is composed of 

Specialists in their respective areas and is led by a Senior position. The 

Rates Team Senior Statistician (RT Leader), the Prices Team Senior 

Economist (PT Leader), and the Filing Team Senior Risk Management 

Specialist (FT Leader) report to the AB Chief (AB Chief). The RT Leader

coordinates the efforts of statisticians and actuaries within AB for all 

aspects of rate maintenance, development, and updates. Statisticians and 

actuaries within AB are assigned specific crops for which they are 

responsible to ensure that rates are: 1) established in an actuarially sound 

manner; 2) properly determined and calculated based on agency direction, 

policies, and protocol; and 3) distributed to the crop insurance industry for 

the calculation of premium for crop insurance policies. 

b. In an effort to maximize federal efficiency and reduce the federal work force, 

support for all automated systems has been contracted out to the private sector for 

several years.

i. Under the private sector contract for automation services, federal 

employees in AB provide contractors with specifications (for changes 

requiring system modifications) and specific direction for any ongoing 

operations related to the rate development and maintenance functions. In 

some cases, statisticians and actuaries will directly provide necessary 

technical guidance for contractors; in other cases, such direction will come 

from the RT Leader or the AB Chief. 

ii. Federal employees in AB provide necessary technical guidance, review, and 

approve/disapprove the work performed by the contractors. In the past, 

direction to contractors has taken on two forms: 1) formal, and 2) informal. 

Formal refers to written directions ranging from detailed written 

specifications to emails directing actions to be taken. Informal refers to 

non-written directions such as phone calls providing direction to the 

contractors as to specific actions to be taken. For 2005 and succeeding 

years, RMA initiated and fully implemented standardized configuration 

management protocols such that all requests for change and actions are

tracked and documented through the use of the approved Configuration 

Management software. In accordance with the established Configuration 

Management Policy, RMA has established Configuration Control Boards 

(CCBs) that approve all action(s) that impact the automated systems, 

databases, and applications. The mandatory implementation of this process 

has formalized all direction to contractors by AB staff.

iii. When system changes, enhancements, or replacements have been 

programmed by contractors according to RMA specifications, contractors 

conduct unit testing (use of small amounts of developed test data or actual 

historical data to confirm the success of intended change) and make any 

required changes. When these changes have been implemented, the 

MARCH 2008 13 FCIC-11010 (RMH-APH)
modified code is ready for Quality Assurance (QA) testing. The purpose of 

QA testing is two-fold: 1) confirm the correction/implementation of 

specific scenarios as authorized in specifications; 2) apply new 

programming code to a larger volume of data and scenarios to ensure no 

negative or unintended impact has resulted. Contractors may do some QA

testing and provide the results to AB Rate Specialists for review and 

approval; however, generally, AB Rate Specialists directly conduct QA

testing. After review and analysis of QA testing, AB Rate Specialists 

confirm test results and recommend approval or disapproval of the 

proposed program/system change(s) to RT Leader. AB Rate Specialists and 

RT Leader apprise the AB Chief of the results and their recommendation(s). 

If no concerns or issues are raised by these individuals, the RT Leader will 

approve test results and notify the RMA Production Support Team that the 

change can be moved to the production environment; consequently, the 

move is conducted by the RMA Production Support Team. In the event of 

disapproval, the configuration management process would start over again. 

These actions are captured through the use of approved configuration 

management software and through the actions of the CCB. 

c. Regional Office involvement 

i. Although AB is ultimately responsible for (and the final approving official 

of) all rates, Regional Office staff are directly involved in the rate 

development process. In cases where data sources have high levels of 

longevity and credibility, direct reliance on data-driven rates almost always 

occurs. In cases where data sources are limited and lack either longevity or 

credibility, greater reliance on judgment rating is necessary and may be 

utilized. Regional Office staff play a significant role in facilitating 

judgmental rating determinations since they are closer to the impacted area, 

have specific knowledge about the area and related information, and may 

have sources for additional objective or subjective data sources. 

ii. Regional Office staff are also directly involved in the final rate review and 

approval process. For all premium rates, regardless of credibility, Regional 

Offices review every target rate generated and work directly with AB staff 

to arrive at the final target rate. In addition, Regional Office staff also 

review the final rate documents to ensure that the final published rate 

components are consistent with the agreed-to target rate components. 

iii. Regional Offices play a substantial role in rate development and oversight. 

To facilitate communication between AB and each Regional Office, the 

Rates Work Group (comprised of AB rates personnel, two Regional Office 

Directors, and representatives from each of the ten regional offices) hold 

regular conference calls and meetings to review rating protocol, to improve 

rating procedures and applications, to generate overall process 

improvement, and to provide updated information/training. 

MARCH 2008 14 FCIC-11010 (RMH-APH)
(2) CRITICAL CONTROL POINTS: 

a. Throughout the rate calculation process, several critical control points occur. At 

each critical control point, decisions must be made and RMA employee(s) are 

responsible for making rate-related decisions and for ensuring successful 

completion of rate-related activities. Critical control points, oversight, and 

approval are detailed in Exhibit 2 in flowchart diagrams and are also discussed 

below in narrative form. The process outlined is indicative of the oversight and 

approval process used throughout the rating process. 

i. Annual Rating Cycle 

1. As the first step in the rating process, the RT Leader loads the most 

recent years’ information into the StatPlan Database. 

2. After verifying that the most up-to-date data has been loaded, RT 

Leader directs the process to run the normalization process that 

yields an adjusted data file used exclusively for rating purposes. 

3. After reviewing output from the normalization process, the RT 

Leader initiates the annual rating cycle routine yielding a list of 

county/crop programs recommended for rate review for the 

upcoming year.

4. AB Rate Specialists review the output from the annual rating cycle 

routine for completeness and accuracy. They also analyze the 

recommended results for reasonableness and analyze outliers and 

unexpected results as a means of validation. 

5. AB Rate Specialists combine the results from the annual rating 

cycle routine with their own knowledge of the crop and areas to 

determine whether additional crops or areas should be added to the 

generated list for review in the upcoming year. A crop or area could 

be added based on a number of actuarial considerations, regional 

office recommendations, or management recommendations.

6. AB Rate Specialists provide final recommendations for rate review 

for each crop to the RT Leader who summarizes all 

recommendations, approves recommendations for the upcoming 

year, and presents to the AB Chief. Results from the annual rating 

cycle review may be modified to reflect resource constraints and 

other actuarial priorities.

7. AB Chief reviews and approves recommendations and presents to 

the APDD Director. 

8. The APDD Director reviews and concurs on recommendations and 

presents to the Senior Actuary. 

9. Senior Actuary reviews and approves recommendations and 

presents to Deputy Administrator for PM. 

10. Final approved list of recommendations for rate reviews for the 

upcoming year will be included in the Rate Methodology 

Memorandum submitted to the Agency Administrator for signature. 

a. Additional rate reviews could be conducted (if requested) for 

documented cause subsequent to approval of the Rate 

Methodology Memorandum. 

11. Following approval of the Rate Methodology Memorandum, AB

moves forward with implementation efforts.

MARCH 2008 15 FCIC-11010 (RMH-APH)
ii. Implementation of Actuarial Rate Studies

1. When the final deliverables from the contract for an actuarial rate 

study has been received by AB, it is evaluated by AB Rate 

Specialists for soundness, implementation impacts and 

considerations, and an assessment of time required for 

implementation. 

a. Regional Office staff may be consulted and provide 

feedback to AB. 

2. Based on recommendations from the AB Rate Specialists, the RT 

Leader will review and approve/disapprove recommendations and 

apprise the AB Chief.

3. The AB Chief will review and approve/disapprove 

recommendations and apprise the APDD Director.

4. The APDD Director will review and concur/nonconcur on 

recommendations and apprise the Senior Actuary. 

5. The Senior Actuary will review and approve/disapprove 

recommendations and apprise Deputy Administrator for PM. The 

DAPM has the discretion to apprise the Administrator and/or the 

FCIC Board.

6. Final approved list of recommendations for actuarial studies to be 

implemented in the upcoming year will be included in the Rate 

Methodology Memorandum submitted to the Agency Administrator 

for signature. 

7. Following approval of the Rate Methodology Memorandum, AB

moves forward with implementation efforts.

iii. Reference Yields

1. Based on the final approved list of recommendations for target rate 

reviews for the upcoming year that resulted from the Annual Rating 

Cycle, reference yields will be updated in all cases that target rates 

are reviewed. 

a. Reference yields can be updated more frequently (if 

requested) and for documented cause. 

2. AB Staff update reference yields based on updated T-yields

a. Regional Office staff may be consulted and provide 

feedback to AB. 

3. RT Leader will review and approve/disapprove the recommended 

list of reference yields to be updated and apprise the AB Chief.

4. The AB Chief will review and approve/disapprove 

recommendations and apprise the APDD Director, Senior Actuary

and Deputy Administrator for PM. 

5. The list of reference yields recommended to be updated is included 

in the Rate Methodology Memorandum submitted to the Agency 

Administrator for signature.

6. Following approval of the Rate Methodology Memorandum, AB

moves forward with implementation efforts.

iv. Rate Methodology Memo 

1. Recommendations (for the upcoming year) for crops and areas to be 

rated (from annual rating cycle process), actuarial studies to be 

implemented, reference yields to be updated, and other rate loads 

(e.g. Prevented Planting, etc.) to be reviewed/updated are 

MARCH 2008 16 FCIC-11010 (RMH-APH)
incorporated into a document called the Rate Methodology 

Memorandum. 

a. Other rate loads are reviewed/updated on a periodic basis 

and are often included in the Rate Methodology 

Memorandum. The frequency of review for other rate loads 

varies. 

2. The RT Leader will draft the Rate Methodology Memorandum in 

the form of a decision memorandum to be ultimately approved by 

the Agency Administrator.

a. Regional Office staff (through the Rates Work Group) 

review portions of or the entire draft and may provide 

feedback to AB.

3. The AB Chief will review and approve/disapprove the Rate 

Methodology Memorandum and apprise the APDD Director.

4. The APDD Director will review and approve/disapprove the Rate 

Methodology Memorandum and apprise the Senior Actuary.

5. The Senior Actuary will review and approve/disapprove the Rate 

Methodology Memorandum and apprise the Deputy Administrator

for PM for approval. 

6. The Deputy Administrator for PM will sign the final Rate 

Methodology Memorandum and forward to the Agency 

Administrator for signature

7. Once signed by the Agency Administrator, the Rate Methodology 

Memorandum becomes the actuarial work plan for the coming year. 

8. Following approval of the Rate Methodology Memorandum, AB

moves forward with implementation efforts.

v. Target Rates

1. Once the StatPlan Database has been loaded with up-to-date data, 

the RT Leader directs the contractors to run the target rate 

calculation routine. 

2. AB Rate Specialists review the system-generated target rates for 

completeness and overall reasonableness. Then RT Leader notifies 

Regional Office staff that target rates are available for their review.

3. Regional Office staff review the system-generated target rates. If 

they agree with the target rates, they are approved and move 

forward in the system. If they disagree with the system-generated 

target rates, they can recommend rates derived through an 

alternative rating methodology and provide supporting 

documentation. If AB Rate Specialists agree with the alternative 

rates, they move forward in the system. 

4. If AB Rate Specialists and the RO Staff can not agree on rates, even 

after considerable consultation and collaboration, then the issue is 

raised to the AB Chief and the Regional Office Director. If 

agreement at that level can not be reached, the issue is raised to the 

Deputy Administrator for PM and the Deputy Administrator for 

Insurance Services (IS) for final resolution. 

5. Once all rates have been agreed to in the system, the RT Leader 

notifies the AB Chief that target rates have been established and 

ready to move to the next stage of the rate development/publication 

process.

MARCH 2008 17 FCIC-11010 (RMH-APH)
vi. Publication of Rates

1. Rating Components 

a. Target Rates

i. For crops undergoing a current year target rate 

review, the target rates have been agreed to by AB

Rate Specialists and RO Staff. These rates are ready 

for use in the Capping Process (See Below).

ii. For crops not undergoing a current year target rate 

review:

1. If their target rates have been reached, the 

target rates are ready for use in the Capping 

Process (See Below).

2. If their target rates have not been reached, the 

published rates will be revised by moving 

toward the target rate during the Capping 

Process (See Below).

b. Target Reference Yields

i. Crops undergoing a current year target rate review 

will also undergo a reference yield review and target 

reference yields will be updated accordingly for use 

in the Capping Process (See Below). 

1. Target Reference Yields are 

reviewed/updated when Target Rates are 

reviewed/updated, but can be 

reviewed/updated more frequently, if needed. 

ii. For crops not undergoing a current year target rate 

review:

1. If the target reference yield has been reached, 

the target reference yields are ready for use in

the Capping Process (See Below). 

2. If the target reference yield has not been 

reached, the published reference yields will 

be revised by moving toward the target 

reference yield during the Capping Process 

(See Below). 

c. Target Coverage Level Relativities

i. Crops undergoing a current year coverage level 

relativity review will have coverage level relativity 

targets updated for use in Capping Process (See 

Below). 

1. Target Coverage Level Relativities are 

reviewed/updated when Target Rates are 

reviewed/updated, but can be 

reviewed/updated more frequently, if needed. 

ii. For crops not undergoing a current year coverage 

level relativity review:

1. If target coverage level relativities have been 

reached, the target coverage level relativities 

are ready for use in Capping Process (See 

Below).

MARCH 2008 18 FCIC-11010 (RMH-APH)
2. If target coverage level relativities have not

been reached, the published coverage level 

relativities will be moved toward the target 

coverage level relativities during the Capping 

Process (See Below). 

d. Target Rate Exponents 

i. Crops undergoing a current year rate exponent 

review will have rate exponent targets updated 

accordingly for use in the Capping Process (See 

Below). 

1. Target Rate Exponents will generally be 

reviewed/updated when Target Rates are 

reviewed/updated, but can be 

reviewed/updated more frequently, if needed. 

ii. For crops not undergoing a current year rate 

exponent review: 

1. If target rating exponents have been reached, 

the target rating exponents are ready for use 

in the Capping Process (See Below).

2. If target rating exponents have not been 

reached, the published rating exponents will 

be revised by moving toward the target rating 

exponents during the Capping Process (See 

Below). 

e. Other Rate Loads

i. Other rate loads (e.g. Prevented Planting, etc.) are 

reviewed/updated on a periodic basis. The frequency 

of review for other rate loads varies. 

2. Capping Process 

a. When the four rating components (target rates, target 

reference yields, target coverage level relativities, and target 

rate exponents) are ready for use in the Capping Process, the 

RT Leader initiates the Capping Process program.

3. Loading AFS Database

a. Following the Capping Process, RT Leader initiates the 

loading of final rating components to the Actuarial Filing 

System (AFS) Database.

4. Generation of Documents 

a. RT Leader notifies the FT Leader that rates are loaded into

the system and rate documents can now be generated.

b. FT Leader initiates the generation of rate documents and 

notifies Regional Office staff that documents are available 

online for their review. 

c. Regional Office staff and AB staff review documents, 

validate calculations, and make any necessary 

corrections/updates. 

i. Regional Offices concur on final documents. 

ii. Any and all changes to rating components must be 

approved by the RT Leader and the AB Chief. 

5. Publication of Documents 

MARCH 2008 19 FCIC-11010 (RMH-APH)
a. When all final rate documents have been concurred upon by

AB Rate Specialists and by RO staff, the AB Chief

authorizes publication of all documents and notifies all

customers via RO Server Release memorandum.

3. RATING METHODOLOGY - APH

The accuracy of an established rate is one of the benchmarks used to determine whether a 

regulatory (approved existing crop) program should be modified or whether a pilot crop program 

should be modified, terminated, or converted to a permanent program. 

The Act contains the following provisions pertinent to rate making. 

(1) Sec. 508(i) (2) states “Review of rating methodologies. To maximize participation in the 

Federal crop insurance program and to ensure equity for producers, the Corporation shall 

periodically review the methodologies employed for rating plans of insurance under this 

chapter consistent with section 507(c)(2) of this title.”1 

(2) Sec. 508(i) (3) states “Analysis of rating and loss history. The Corporation shall analyze the 

rating and loss history of approved policies and plans of insurance for agricultural 

commodities by area.”

(3) Sec. 508(d) (2) states “the amount of the premium shall be sufficient to cover anticipated

 losses and a reasonable reserve.” 

The following instructions specify activities leading to the final published county rates by crop 

program. 

A. RATING GOALS - APH

Rate Methodology Memorandum: Annually, a decision memorandum (memo) is written by AB

(located in the RMA Deputy Administrator for Product Management (DAPM) office) identifying 

the planned rate and coverage objectives for the upcoming year. Issues outlined in the memo may 

be the direct result of legislative initiatives, policy changes, implementation of actuarial studies, or 

routine reviews based on updated experience. This memo must be approved by the Administrator 

before AB will make rate changes.

The rate and coverage strategies outlined in this memorandum remain generally consistent with the 

rate and coverage strategies employed by the Risk Management Agency (RMA) for the past several 

years. RMA maintains underlying data records in its databases to support its rating calculations 

and statistical analysis related to rate determination and decision support for the Rate Methodology 

Memorandum. The strategies are a normal and accepted standard practice used in the insurance 

industry to achieve certain ratemaking objectives, principally to promote stability while remaining 

sufficiently responsive to reflect changes in the underlying risk insured. Any ratemaking process 

attempts to capture potential future costs, but may not be a perfect prediction of the future costs that 

MARCH 2008 20 FCIC-11010 (RMH-APH)
will be incurred. Rate and coverage strategies reflecting these considerations are a normal and 

accepted part of the regulatory environment in which insurance operates. 

As indicated by the model adopted from the Analysis of Rating Cycle for Multiple Peril Crop 

Insurance report, RMA will conduct county level rate reviews by crop/state combination as listed 

in the annual memorandum. For these crop/state combinations undergoing county level rate 

reviews, RMA will update transitional yields and establish new targets for reference rate, fixed rate, 

and reference yields for the county/crop/type/practice. 

Changes in premium rates for all crops will generally range from –5% to +15%. In accordance 

with legislative mandate, in the extreme cases, premium rate increases will be capped at 20% 

compared to what the insured would have paid the previous year for the same coverage. Beginning 

in the 2007 crop year a premium rate decrease of more than 20% was allowed if the target rate 

could not be reached in three years or if the rate change was due to a change in the program (i.e. a 

new practice was offered). This is accomplished through reinsured company premium quoting 

software and validated through RMA acceptance/validation systems.

B. RATING METHODOLOGY - APH COMPONENTS 

The Rating Methodology for APH includes eight (8) primary components. Each component 

will be examined and explained below in this Handbook. 

(1) INSURANCE EXPERIENCE COMPONENT 

STATPLAN DATABASE/DATA RETRIEVAL and COMPILATION 

 

(A) STATPLAN

Objectives: (1) Standardize the multiple policy databases into a single database with multiple 

years of data under a single standard format, (2) Filter the data to include only data that is 

relevant to the risk analysis, (3) Stabilize the database so multiple analysts will be evaluating 

identical historic data, and (4) Summarize the producer experience whereby it is user friendly and 

provides quicker data access. 

Statplan was developed to provide a reliable database from which sound actuarial decisions could 

be made. Prior to its development, historic records were retained in multiple databases where key 

fields did not abide by a single standard. The first step in the development of the Statplan database 

was to merge all historic records, dating back to 1948, to create a single database with common key 

fields between years. The development of a common database simplified the analysis of data while 

eliminating large amounts of detailed information unnecessary for making actuarial decisions. 

The second step in the development of the Statplan database was to selectively eliminate historic 

records whose premium rates were based on alternative methods other than the actual production 

history rating methodology, such as group insurance policies. Additionally, there are historic 

records that require pre-identified loss information be segregated from losses that are directly 

related to crop yield production risks. In the following components, each of these scenarios will be 

reviewed and analyzed in detail. 

The third step in the development of Statplan was to create a stable environment from which to 

operate. The policy databases are constantly being updated with transactions. This prevented 

MARCH 2008 21 FCIC-11010 (RMH-APH)
statistical figures derived prior to an update from being accurately compared with statistical figures 

completed after an update. An automated reconciliation report (referred to internally as the Audit 

Report) compares pre-load data with data loaded into Statplan to ensure that all appropriate data has 

been loaded. The output report serves as reference documentation and is reviewed by AB Rate 

Specialists for reasonableness and appropriateness and any issues/concerns are raised to the RT 

Leader and AB Chief. Statplan data loads are periodic (twice a year) and updates are only applied 

to the past two or three years (depending on the completeness of the prior years’ data). Static data 

will shorten the timeframe needed to update the historic data in Statplan. 

The fourth step in the development of Statplan was to summarize selected detail information and 

store it into tables that could be easily utilized for premium rate analysis. Given that RMA 

develops county rates and not individual insured rates, most Statplan users would find summarized 

crop unit data suitable for their needs. They would not require the individual insured’s experience; 

therefore, it would not be necessary to track individual data between crop years to develop 

summarized data. The Statplan database consists of a number of tables that serve as a depository of 

policy unit experience. The two main tables that will be referred to often in this document are the 

production ratio tables and the county summary tables. These two tables are currently the two 

primary components used in RMA’s rate programs. 

The production ratio tables can be defined as tables that contain summarized experience from units 

with liability and excluding those units as outlined in Sections III through VI in this chapter. (Note: 

Section II, VII-IX modifies the liability but do not eliminate it from the table). The production ratio 

is the units’ production to count divided by the units’ average historic production. 

For example, if a unit is expected to produce 100 bushels of grain but the production to count was 

53 bushels then the production ratio is simply .53. More details surrounding the production ratio 

table will be discussed toward the end of this component. 

The first major table is the production ratio table which is the foundation from which RMA’s base 

rates are determined. These tables provide data which may be used: to normalize past experience 

into a common coverage level; to identify which insurance plans are utilized; and to determine 

which county/crop programs are reviewed. This chapter will outline the process used to partition 

the policy data into individual tables for further rate analysis, and to filter the data so that only 

experience relevant to the establishment of a base rate remains.

The second major table is the county sum table. This table becomes a depository for all data that is 

summarized to a county level risk. Independent analysis and ad-hoc studies of county level data 

fields can be used for calculating specific risks, such as replant or prevented planting, which are not 

directly related to a production ratio. 

This document contains detailed logic flows, examples, and detail reports of how Statplan

adjusts and eliminates data from selected tables. It explains data appearance as received 

from the Policy Database, adjustments made, and final Statplan appearance after loaded. 

The data in this component flows in the following order:

I. Data Extract 

II. Winter Kill Experience

III. High Risk Experience

IV. Whole Farm Units 

V. Prevented Planting 

MARCH 2008 22 FCIC-11010 (RMH-APH)
VI. Written Agreements 

VII. Late Planted/Planting 

VIII. Replants

IX. Revenue Adjustments

X. Additional Revenue Adjustment Issues

XI. Production Ratio Calculations 

XII. Database Tables

I. Data Extract 

Data in Statplan is based on crop insurance experience extracted from yearly policy databases. 

Each re-insurance year’s policy data is stored in this database, so extractions are completed on an 

annual basis. The data is extracted from the acreage record (CU_LINE_ITEM) table and the loss 

record (CLAIM_LINE_ITEM) table of each policy year database. 

The initial selection is on a crop code basis in order to control the amount of data being extracted 

from each year’s policy database. Only data fields pertinent for rate making or decision making 

processes are extracted.

As a general rule, only plans of insurance whose experience can support the rate making process of 

the APH plan of insurance are utilized in Statplan. For example, the Group Risk Plan (GRP) of 

insurance experience is not utilized to establish rates for the Actual Production History (APH) 

program, so the data is not captured in Statplan. The insurance plans (and their respective codes) 

included are as follows: Peanuts (10), Revenue Assurance-RA (25), Tobacco Guaranteed 

Production (30), Crop Revenue Coverage-CRC (44), Yield Based Dollar Amount of Insurance (55), 

Tobacco Quota (70), Grower Yield Certification Span-GYC Span (84), Grower Yield CertificationGYC (86), and Actual Production History-APH (90). 

II. Winter Kill Experience

Optional Winter wheat and barley coverage is offered in selected counties where BOTH a Fall final 

planting date and a Spring final planting date are provided. The endorsement, Option A or Option 

B attaches to the Small Grains Crop Provisions and provides coverage for Fall-seeded wheat or 

barley between the Fall final planting date and the Spring planting date. If Option A or B coverage 

is elected an additional rate is added to the base rate paid by the insured. 

Statplan separates insurance losses covered under the base policy verses those covered under the 

optional coverage. The Option A and Option B experience is aggregated in the county sum table 

and is excluded from the experience data deposited in the production ratio tables. An automated 

file containing excluded Option A and Option B records is produced and retained for validation 

purposes. For additional validation, the information is available via query against the historical 

databases.

Identifying losses that occurred during the Fall and Spring planting dates is difficult. The primary 

and secondary causes of loss reported on the loss record are used to identify the Option A and 

Option B losses or Winter kill losses. All records with a cause of loss (primary and secondary) 

code of frost (41), freeze (42), cold Winter (43), and cold wet weather (44) are identified as Winter

kill causes of loss. Counties with Fall final planting dates only and Winter kill cause of loss codes 

will be unaffected because Winter kill is a covered peril under the basic provisions. 

MARCH 2008 23 FCIC-11010 (RMH-APH)
III. High Risk Experience

High-risk land is described as “acreage with identifiable physical limitations to crop production that 

may increase the potential frequency and/or severity of loss; or expose a planted or intended crop to 

perils not generally encountered by most insureds”. Such acreage may consist of flood plains, 

poorly drained areas, high sand content soils, high aluminum toxicity soils, high sodium content 

soils, high alkali soils, peat soils, soils with high or low pH, soils that are highly erodible, etc. 

High-risk land is identified or classified with the use of legal descriptor documents or listings. This 

classification code is then utilized on the actuarial documents to publish adjustments to transitional 

yields and/or base rates. High-risk rate adjustments may be an add-on rate, a multiplicative rate 

factor, or a fixed rate to cover the additional risk. 

Given that high-risk land does not represent the basic production risk of the county, all high-risk 

experience is excluded from the production ratio tables. An automated file containing excluded 

high risk records is produced and retained for validation purposes. For additional validation, the 

information is also available via query against the historical databases. The exclusion is 

accomplished in the loading of the policy data into Statplan by matching the classification code on 

Rate_class_option

_cd = ‘A’ or ‘B’ and 

type_cd = 011

Next Step

Pri_col_cd = 

41, 42, 43, 44

Sec_col_cd = 

41, 42, 43, 44

False

True

Winter Kill 

indemnity=

indem x Pri%

True

True Winter Kill 

indemnity=

indem x (1- Pri%)

False

Accumulate 

Winter Kill 

Indemnity

Continue Processing

False

MARCH 2008 24 FCIC-11010 (RMH-APH)
the policy records against a table in Statplan that contains all high-risk classifications.

Additional information on the insurability of high-risk land can be found in the Classification 

Standards Handbook and the Crop Insurance Handbook.

IV. Whole Farm Units

Whole farm units are defined as “all insurable acreage of 2 or more insured crops planted in the 

county in which the insured has a share on the date coverage begins for each crop for the crop 

year”. 

Whole farm units are excluded from all Statplan tables. Currently, whole farm units are only sold 

under insurance plan 25, revenue assurance. The experience recorded under a whole farm unit can 

not be partitioned into individual crops on the loss record; therefore, all experience is excluded 

from all tables in Statplan. An automated file containing excluded whole farm unit records is 

produced and retained for validation purposes. For additional validation, the information is also 

available via query against the historical databases.

V. Prevented Planting

Prevented planting is defined as “a failure to plant the insured crop with proper equipment by the 

final planting date designated in the Special Provisions for the insured crop in the county”. The 

insured may also be eligible for a prevented planting payment if he/she failed to plant the insured 

crop with the proper equipment within the late planting period. The insured must have been 

prevented from planting the insured crop due to an insured cause of loss that is general in the 

surrounding area and that prevents other producers from planting acreage with similar 

characteristics.

ADM high risk 

areas

Is this a high-risk 

area?

Is match found in 

database?

StatPlan High-risk 

table

Continue Processing

Accumulate 

High-risk 

experience

No

No

Yes

Yes

MARCH 2008 25 FCIC-11010 (RMH-APH)
Prevented planting was first added to the basic crop policy provisions in 1994 for 11 crops. In 

2005, there are 29 crops with prevented planting coverage. Base coverage for prevented planting is 

not consistent across crops and has also increased since its inception in 1994. Beginning with 

Spring crops of 1998, insureds were also allowed to purchase additional prevented planting 

coverage above the basic coverage for an optional premium. Refer to Target Rate Development to 

see the crops with prevented planting coverage and the percentage coverage amount by year. 

For those crops with prevented planting provisions, indemnities are based on the policy provisions 

of a crop and are expressed as a percent of the initial liability. Most major crops are indemnified at 

60%; however some crops have a basic coverage as low as 25% (ref. M13 Exhibit 21-6). Both 

prevented Planting Option with 5% buy-up option (PF) and Prevented Planting Option with 10% 

buy-up option (PT) increase the coverage provided by the basic provisions by the respective 

amounts. 

Prevented planting indemnities are not considered production losses since the crop is not planted 

and the expected production is zero. Therefore, all experience related to prevented planting is 

excluded from the production ratio tables, but experience is included in the county sum tables. 

Statplan will: 1) exclude the prevented planting indemnities and associated liability from the 

production ratio tables; 2) capture the prevented planting indemnities and associated liability and 

acreage for prevented rate reviews; 3) store the basic, PF and PT information in separate fields for 

option factor review; and 4) re-determine the initial liability at the time of sale using the guarantee 

reduction percent. If only part of the unit acreage was prevented from being planted, the remaining 

acreage is included in the production ratio tables. 

Step #1: Prevented planting indemnities are identified by stage code on the claim record. A 

matching acreage record will provide the reduced liability, premium and acreage for the portion of 

acreage that was prevented. Stage codes for prevented planted acres have changed considerably 

since payments began in 1994. 

Therefore, adjustments may be needed depending on the year: 

‘PT’ 1998 -- (Basic coverage plus 10%) 

‘PF’ 1998 -- (Basic coverage plus 5%) 

‘P2’ 1994 -- (Basic coverage)

‘P1’ 1996 –1998 (black dirt – treat same as basic coverage)

‘U3’ 1996 –1998 (substitute crop, partial pmt. – exclude from all tables

‘H3’ 1996 –1998 (substitute crop, partial pmt. – exclude from all tables

‘P3’ 1994 --1995 

 ‘P4’ 1994 --1995 

Step #2: For 1998 and subsequent crop years, prevented planting liability, indemnities and 

acreage are segregated based on type of coverage. Basic coverage is accumulated under 

field names of PP, while prevented planting losses coded as PF or PT are divided into 

the portion that was paid for basic and the portion that was paid for the add-on option. 

To illustrate, a PT stage loss would be calculated as follows: 

PT Liability = Liability * .10 / Guarantee Reduction Percentage

PP Liability = (Liability / Guarantee Reduction Percentage) – PT Liability

MARCH 2008 26 FCIC-11010 (RMH-APH)
PT Indemnity = Indemnity * .10 / Guarantee Reduction Percentage

PP Indemnity = Indemnity – PT Indemnity.

It should be noted that the Liability is divided by the Guar. Reduction Pct. because the recorded 

liability in the policy database has been reduced to the indemnity value, and is no longer the 

liability from which it was originally rated.

An automated file containing excluded adjustments (through Steps #1 and #2) is produced and 

retained for validation purposes. For additional validation, the information is also available via 

query against the historical databases.

MARCH 2008 27 FCIC-11010 (RMH-APH)
Prevented Planting processing 

logic prior to 2001

If stage code = a valid 

prevented planting code

Flag as Prevented 

planting

Continue Processing

False

Adjust Liability 

based on stage 

code

True

Accumulate 

prevented 

planting 

experience

Prevented Planting processing 

logic since 2001

If guar reduction code 

= ‘P’ or ‘E’ Flag as Prevented 

planting

Continue Processing

False

Adjust Liability 

based on guar 

reduction code

True

Accumulate 

prevented 

planting 

experience

If stage code = a valid 

prevented planting code

False

True

MARCH 2008 28 FCIC-11010 (RMH-APH)
VI. Written Agreements

Written Agreements are defined as: “a document that alters designated terms of a crop policy as 

authorized under the basic provisions, the crop provisions, or the special provisions for the insured 

crop”. In addition, the written agreement is used to provide insurance for insurable crops when 

coverage and/or rates are not available.

The written agreement acreage on the policy database is identified by reviewing the written 

agreement processing flag field (writn_agmt_flg). If the written agreement processing flag is 

positive, then the acreage is designated as a written agreement. 

For the purpose of ratemaking, all written agreements are eliminated from Statplan because the 

individual rating methods used to evaluate the risks that underscore most written agreements are 

not consistent with the rating methods used to set county rates. An automated file containing 

excluded written agreement records is produced and retained for validation purposes. For 

additional validation, the information is also available via query against the historical databases. 

For additional information, see Section 4 of the Crop Insurance Handbook or the Written 

Agreement Handbook at the following website: 

www.rma.usda.gov/FTP/Publications/directives/24000/pdf/01_24020.pdf

Written agreement records are excluded from Statplan with the following logic:

VII. Late Planted/Planting Adjustments

Late planted acreage is defined as “acreage initially planted to the insured crop after the final 

planting date designated in the Special Provisions for the insured crop in the county”. 

Late planting provisions provide reduced coverage for insurable acreage planted during any 

applicable late planting period, and for insurable acreage that was prevented from being timely 

planted but was planted to the insured crop during the late planting period for crops with prevented 

planting coverage. The premium for the late planted coverage is the same as for the acreage that 

was planted timely. 

Written Agreement 

Flag

Continue Processing

False

Delete Records True

MARCH 2008 29 FCIC-11010 (RMH-APH)
Late planted coverage is provided by the basic provisions and may be altered by the crop provisions 

or special provisions. For most of the major crops, the production guarantee is reduced 1% per day 

for each day planted after the final planting date, up to a maximum of 25 days. The applicable 

production guarantee reductions by crop and additional information can be found in Section 4 of 

the Crop Insurance Handbook. 

The key to identifying late planted acreage on the policy database is reviewing the guarantee 

reduction code field (guar_red_cd). If the reduction code is equal to L (late) or M (maximum late) 

then the acreage was planted late. For all late planted acreage, the guarantee reduction percentage 

field (guar_red_pct) also needs to be captured. 

For the purpose of ratemaking, all late planted acreage utilized in Statplan will need the liability 

restored to the pre-production guarantee reduction (Liability / guar_red_pct). The reduction in 

liability or the difference between the production guarantee and the guarantee based on the 

approved APH yield is also captured for future analysis of appropriate guarantee reductions in the 

county sum tables. Possible examples of future analysis could include, but not be limited to: 1) 

Late Planting direct impact on loss ratios, overall losses, or premium rates; 2) Accuracy of late-filed 

penalty charges vs. associated risk; etc.)

VIII. Replants

Replanted is defined as: “performing the cultural practices necessary to prepare the land to replace 

the seed or plants of the damaged or destroyed insured crop and then replanting the seed or plants 

of the same crop in the insured acreage with the expectation of producing at least the yield used to 

determine the production guarantee”. 

Any acreage of the insured crop that was damaged prior to the final planting date, to the extent that 

a majority of the growers in the area would not normally further care for the crop, must be 

replanted (unless the Insurance Provider agrees that replanting is not practical) for coverage to 

continue. When it is practical to replant and the crop is not replanted, insurance does not attach (no 

premium or indemnity is due on such acreage). 

Guarantee Reduction Guarantee Reduction 

Code = = L or M

Continue Processing Continue Processing

False False

Adjust Liability and Store in the Adjust Liability and Store in the 

Production Ratio table Production Ratio table

True True

Capture Late Planted Capture Late Planted 

Reduction in County Sum table Reduction in County Sum table

MARCH 2008 30 FCIC-11010 (RMH-APH)
For additional information, see Section 4 of the Crop Insurance Handbook and Part 3, Section 1 of 

the Loss Adjustment Manual. 

The key to identifying replanted acreage in the policy database is reviewing the stage code field 

(stage_cd). If the stage code is equal to ‘R’, ‘OR’, ‘RT’ or ‘RS’, then the loss line is a replant 

indemnity. 

For the purpose of ratemaking, the risk of replant will be analyzed separate from yield production 

losses. Therefore all replant indemnities are subtracted from the unit indemnity and stored in the 

county sum tables. All remaining unit indemnity that is associated with production either from 

additional acreage within the unit or from the replanted acreage is utilized in the production ratio 

tables of Statplan. 

IX. Revenue Adjustments

The Federal Crop Insurance Reform Act of 1994 directed the Federal Crop Insurance Corporation 

(FCIC) to develop a pilot crop insurance program that provides coverage against reduced gross 

income as a result of a reduction in yield or price. Two plans were privately developed: Crop 

Revenue Coverage (CRC) and Revenue Assurance (RA); and a third plan Income Protection (IP) 

was developed by FCIC. These three plans of insurance were approved by the Board of Directors 

and sales began on a limited basis beginning with the 1996 crop year. 

The three plans are very similar but have some distinctive features. All plans guarantee revenue by 

combining yield and price variability. Indemnities are paid when any combination of yield and 

price result in revenue that is less than the revenue guarantee. CRC, RA, and IP plans are similar in 

that they use the policy terms and conditions of the Actual Production History (APH) plan as the 

basic coverage. 

Revenue protection for all three products is provided by extending traditional APH protection to 

include price variability. The price component common to CRC, RA, and IP uses the commodity 

futures market for price discovery. Price discovery occurs twice; first, before the insurance period 

to establish the revenue guarantee (base price) and second, at harvest time (harvest price). All 

revenue insurance plans pay the insured producer an indemnity when the revenue production to 

count is less than the revenue guarantee. 

Stage Code = Replant

Continue Processing

False

Exclude Replant Indemnity 

from the Production Ratio table

True

Capture Replant Indemnities in 

County Sum table

MARCH 2008 31 FCIC-11010 (RMH-APH)
While the plans are similar there are differences that are coverage related. CRC includes coverage 

for the harvest price being greater than the base price (increasing the guarantee) while RA offers 

this coverage as an option. IP coverage is for a single enterprise unit per crop per county, while 

CRC and RA allow for optional and basic units. IP does not allow for an increase in guarantee.

Initially, revenue insurance was offered for limited crops and in a limited number of counties and 

states; but over time, it was expanded to 9 crops and into most areas where APH is offered. In 

addition, it has grown in popularity and garnered a significant proportion of RMA’s total book of 

business. 

After data has been extracted from the historical databases, Statplan utilizes virtually all CRC and 

RA records. Revenue adjustments must occur and are accomplished in an automated routine by 

converting these records into equivalent APH records for use in APH rate evaluations. An 

automated file containing adjusted revenue records is produced and retained for validation 

purposes. For additional validation, the information is also available via query against the 

historical databases.

Statplan does not capture IP and IIP records because these data are on an enterprise basis and not 

compatible with establishing APH rates on an optional unit basis; however, this does not represent 

a significant omission since IP and IIP sales represent a negligible share of insurance sales volume. 

The resulting equivalent APH records from CRC or RA are stored by their original insurance plan 

code. 

The primary data fields needed in the conversion process are the discovery prices for the revenue 

products and the APH price election. Statplan will query the yearly Actuarial Data Master (ADM) 

for the revenue and APH price data fields prior to adjusting the policy data being evaluated. The 

adjustment process for all revenue policy records is as follows: 

The revenue base price, which is embedded in the revenue liability, is replaced by the APH price 

election to give a recalculated policy liability based on the APH price election. 

The indemnity conversion is more complicated than exchanging prices to those that would have 

occurred under an APH policy. First, it should be determined if the policy has upside price 

protection (CRC or RA-HPO). That is, if the harvest price is greater than the base price, the lost 

production is paid at the harvest price. Under that scenario the loss guarantee is based on the 

harvest price and not the original liability. All CRC polices cover upside price protection, while 

RA policy holders may or may not have the coverage depending on their election of the harvest 

price option. 

If the RA harvest price option is NOT elected, (no upside price protection) then the loss guarantee 

is equal to the revenue liability.

venueRe Base Price

APH PriceElection StatPlanLiability = venueRe Liability×

MARCH 2008 32 FCIC-11010 (RMH-APH)
Step 1A:

If the RA harvest price option is elected or the policy is a CRC policy, then the loss guarantee is 

equal to the revenue liability adjusted to the higher of the base price or the harvest price.

Step 1B: 

The revenue production to count on the unit is then calculated by simply subtracting the revenue 

indemnity from the determined revenue loss guarantee (Step 1A or 1B). The production to count 

will never be less than zero. 

Step 2: 

The Statplan Indemnity (APH equivalent) is calculated by adjusting the production to count from 

the revenue unit by the revenue harvest price and the APH price election and subtracting that 

quantity from the unit liability (APH equivalent). 

Step 3: 

This resulting calculation has the potential to be negative when all or part of the loss is due to price 

declines. If the result is negative, the Statplan indemnity is set to 0 (zero) since no indemnity 

would have been paid under APH. 

Step 4: 

In summary, the liability and indemnity fields stored in Statplan under the revenue insurance plans 

(25 or 44) represent the liability and indemnity that would have occurred under an APH program. 

No adjustments are made to the revenue acreage fields. 

X. Additional Revenue Adjustment Issues

All revenue adjustments take place after procedures in Sections II through Section VIII are 

completed. This order is important for the following reasons: 1) Revenue replants are based on the 

base price and not on a harvest price; and 2) units with multiple types of losses, (for example, 

prevented and harvested) should be dealt with before the revenue adjustment is completed. 

Loss Guarantee = Revenue Liability

Base Price

(BaseMax Price,HarvestPrice) Loss Guarantee = Rev.Liability×

Production To Count (PTC) = Loss Guarantee − Indemnity Rev.





 



 = ×−

Revenue Harvest Price

APH Price Election Indemnity StatPlan Liability PTC

StatPlan Indemnity = Max ( 0,Indemnity )

MARCH 2008 33 FCIC-11010 (RMH-APH)
Replant losses on revenue products are handled like all other replant losses as described in Section 

VIII. However, because these are revenue policies they will be converted to an equivalent APH

product. The liability conversion for replant losses is analogous to that described in Section IX. 

Since the acreage was replanted, the liability will remain in the production ratio tables. The 

conversion of the indemnity on the revenue replant is slightly different than described in Section 

IX. For replants, the indemnities are based on the base price and not on a harvest price; therefore,

the calculation is as follows:

When there are multiple types of losses within a unit, the general rule of thumb is as follows: if the 

unit indemnity cannot be partitioned and assigned to the proper acreage and liability then the 

attribution should be based on the part of the unit with the highest acreage. The following are two 

such scenarios where this could occur: 

Scenario #1: Part of the acreage in the unit is identified as high risk and part of the insured acreage 

is “normal”. As a result, it is not known for certain if any loss is on the high risk acreage. The 

majority of the acreage will determine whether the unit is treated as “normal” or high risk.

Scenario #2: Part of the acreage is replanted, for which payments are based on the base price, and 

part not replanted within a unit. Enough information should be given to help distinguish the two 

acreages to make the proper adjustments.

XI. Production Ratio Calculations

Following the data clean-up process used in the prior sections, all acreage, liability and indemnity 

are summarized to a policy unit level. Unit production to count is determined by subtracting the 

unit indemnity from the unit liability. 

The production ratio is defined as the unit’s production to count divided by the expected 

production. It is known that the true production to count is unknown in cases where there is zero 

indemnity. That is, the production to count is at least as large as or larger than the liability or unit 

guarantee. It is for that reason that there are separate production ratio tables by coverage level. 

The subject of adjusting data when the production to count is unknown will be covered in greater 

detail later in this component. 

Since,

or 

venueRe Base Price

APH PriceElection StatPlanRplt Indemnity = RpltvenueRe Indemnity×

Production to Count (PTC) Liability −= Indemnity

Liability = Expected Production ×Coverage Level

Coverage Level

Liability Expected Production =

MARCH 2008 34 FCIC-11010 (RMH-APH)
Then it follows that:

or 

XII. Database Tables

The key to establishing actuarially sound county base rates depends on the data populated in the 

production ratio tables of Statplan. An automated reconciliation report (referred to internally as the 

Audit Report) compares pre-load data with data loaded into Statplan to ensure that all appropriate 

data has been loaded. The output report serves as reference documentation and is reviewed by AB

Rate Specialists for reasonableness, appropriateness, and to ensure that calculated production ratios 

accurately reflect programmed calculations and any issues/concerns are raised to the RT Leader and 

AB Chief. The following is an example taken from the production ratio summary table for Adams 

County, Iowa. The key fields and data fields utilized in the rate making process are defined below 

the following table. 

Table 1

crop st co yr ip cg cvl pr d ind d liab d ac d ut d ui c ind c liab c ac c ut c ui

0041 19 3 2001 90 A 0.65 0 1621 1628 13 2 1 1621 1628 13 2 1

0041 19 3 2001 90 A 0.65 0.11 3867 4664 35 2 1 5488 6292 48 4 2

0041 19 3 2001 90 A 0.65 0.12 942 1154 8 2 1 6430 7446 56 6 3

0041 19 3 2001 90 A 0.65 0.14 4331 5543 47 2 1 10761 12989 103 8 4

0041 19 3 2001 90 A 0.65 0.45 1006 3330 23 2 1 11767 16319 125 10 5

0041 19 3 2001 90 A 0.65 0.46 1023 3553 24 2 1 12790 19872 149 12 6

0041 19 3 2001 90 A 0.65 0.48 700 2620 18 2 1 13490 22492 167 14 7

0041 19 3 2001 90 A 0.65 0.62 292 7176 48 3 3 13782 29668 215 17 8

0041 19 3 2001 90 A 0.65 0.65 0 454190 2752 125 2 13782 483858 2967 142 8

Title, Statplan field name, Definition, Selection criteria used above 

crop, (crop_cd), Crop code, “0041” ( Corn) 

st, (state_cd), FIPS State Code, 19 (Iowa) 

co, (county_cd), FIPS County Code, 3, (Adams County) 

yr, (crop_year_id), Crop year, “2001” 

ip, (ins_plan_id), Insurance Plan, 90 

cg, (coverage_cat_cd), Coverage Category 

cvl, (cov_lvl_pct), Coverage Level Percent, .65 

pr, (prod_ratio), Production Ratio 

Production ratios are limited to those that are observed and will range from 0 to the coverage level 

percent. In this example, only 9 production ratios were observed in crop year 2001 based on the 

Expected Production 

Production to Count Production Ratio (PR) =

Coverage Level

Liability

PTC Production Ratio (PR) = ×

MARCH 2008 35 FCIC-11010 (RMH-APH)
listed data keys. 

Data fields are of two types; discrete and cumulative. In this case, discrete production ratio values 

represent total values for that unique production ratio value while the cumulative values for that 

production ratio represent the totals for that production ratio as well as all production ratios less 

than that value. There are a number of data fields populated in the production ratio tables. The 

following fields are utilized in the county rate worksheets: 

Discrete indemnity (cps_d_indem_amt) and cumulative indemnity (cps_c_indem_amt) contain 

the discrete and cumulative indemnities of the associated production ratio. For example, 

production ratio .14 in the above example contains discrete and cumulative indemnity totals from 

all units with the established key fields (crop, state, county, etc.) of $4,331 and $10,761, 

respectively. The discrete indemnity of $4,331 represents all units in the identified group with 

production ratios between .135+ and .145 inclusively while the cumulative indemnity of $10,761 

represents all units in the identified group with production ratios between 0 and .145 inclusively. 

Discrete liability (cps_d_liab_amt) and cumulative liability (cps_c_liab_amt) contain the discrete 

and cumulative liabilities of the associated production ratio. For example, production ratio .14 in 

the above example contains discrete and cumulative liability totals from all units with the 

established key fields (crop, state, county, etc.) of $5,543 and $12,989, respectively. 

The production ratio can be verified using the formulas given is Section XI in the above example: 

PTC = $5543-$4331 or $1212 and PR = ($1212 / $5543) x .65 or .142125 or .14 

Discrete net acres (cps_d_n_ac_qty) and cumulative net acres (cps_c_n_ac_qty) contain the 

discrete and cumulative net acres of the associated production ratio. For example, production ratio 

.14 in the above example contains discrete and cumulative net acreage totals from all units of 47 

acres and 103 acres, respectively.

Discrete unit count (cps_d_unit_ct) and cumulative unit count (cps_c_unit_ct) contain the 

discrete and cumulative unit counts of the associated production ratio. For example, production 

ratio .14 in the above example contains discrete and cumulative unit counts of 2 and 8, respectively. 

Discrete units indemnified count (cps_d_unit_indem_ct) and cumulative units indemnified 

count (cps_c_unit_indem_ct) contain the discrete and cumulative indemnified units of the 

associated production ratio. For example, production ratio .14 in the above example contains 

discrete and cumulative unit indemnified totals of 1 and 4, respectively. 

If the table includes a row where the production ratio is equal to the coverage level, then (in most 

cases) this row would represent all units which did not sustain a loss and the production to count is 

assumed to be greater than or equal to the liability. On a rare occasion when a unit has a very 

minor indemnity, the calculated production to count will be less than the liability and the 

production ratio will round up to the coverage level. Therefore, it is possible to have discrete 

indemnity present in the row where the production ratio is equal to the coverage level. 

The summarized row data in the production ratio tables of Statplan can now be utilized in the rating 

models. From these tables, data can easily be summarized further to include multiple insurance 

plans, multiple years, multiple counties and, most importantly to the analysts, the ability to combine 

the table data into a common coverage level. The common coverage level adjustment process will 

MARCH 2008 36 FCIC-11010 (RMH-APH)
be discussed in the Rate Making Concepts Component. 

(B) DATA RETRIEVAL AND COMPILATION

Objective: to extract historic insurance experience from the Statplan database; to compile the raw 

experience; and to adjust all experience to a common coverage level. 

The extraction/retrieval step in the rate generation process begins with; 1) the identification of 

which insurance programs are to be reviewed, and 2) the identification of data elements that are 

necessary to complete the rate review process. In the identification of which programs to review, 

the decisions made within the yearly rating methodology memorandum are incorporated. 

Historically, the rating structures within RMA have been developed on a crop/county basis. This 

will be discussed further in a later component. The identification of which crops and which 

state/county programs to be reviewed are key elements in both the identification process and its 

inclusion in the actuarial rate structure of AFS. 

I. Data Identification

 

 Key Elements (Key Data Fields):

Crops: 

Based on the direction given in the Rate Methodology memo and the output from the 

Annual Rating Cycle (to be discussed under another component), specific crops/states are 

identified for rate review and are included as an attachment (Attachment H) to the Rate 

Methodology memo. Additional crop/states may be subjectively added to the list for review 

if documented evidence can be generated that would justify the additional reviews. 

Automated load files created through the Statplan load routine are date-stamped and serve 

as a record of the most recent data loaded for rate review and evaluation. In addition, when 

rates are reviewed/updated, the rate application assigns a run identification number denoting 

the date and time it was run.

State/County:

Generally, this level of selection is based on output from the Annual Rating Cycle; 

however, additional crop/states may be subjectively added to the list for review if 

documented evidence can be generated that would justify the additional reviews. Given that 

the catastrophic fixed rate load will be determined at the State level, it is unlikely that an 

independent rate review would be selected for an individual county (but it would not 

prevent a review).

Insurance Plans: 

The Statplan database is used primarily to aide in the development of APH rates. Other 

insurance plans such as revenue plans of insurance can be converted to an APH basis as 

discussed earlier. However, specific insurance plans may be excluded if justified in the 

Rate Methodology Memorandum. The default in the data extract would include all 

insurance plans in the Statplan database in a crop review.

Types/Practices:

The default in the data extract would include all types and practices in the rate review. 

Currently systems would require that all types and practices be run concurrently even if 

only one type or practice was being reviewed.

MARCH 2008 37 FCIC-11010 (RMH-APH)
In addition to the key data fields (listed above), three sub-key data fields are established in the 

selection of data. These three sub-key data fields are listed below: 

 Sub-Key Elements (Sub-Key Data Fields): 

Coverage Categories 

The default in the data extract would include all coverage categories except for Catastrophic 

Risk Protection “CAT” policies. 

Coverage Level

The 65% coverage level has widely been used as the coverage level of choice to which all 

other coverage levels are adjusted. For ad hoc analysis, there is the option of selecting an 

alternate coverage level to adjust the raw experience; however, care must be exhibited in the 

selection of the common coverage level. If the adjustment is to a lower coverage level, 

some essential information may be lost while an adjustment to a higher coverage level 

requires some estimation of unknown observations. 

Crop Years:

The default in the data extract would include all insurance experience beginning with and 

including crop year 1975. Historically crop year 1975 has been the benchmark year used 

for the compilation of insurance experience. There is the option to select an alternative 

starting crop year for analysis purposes if it is reasonable and the decision can be justified. 

The crop years of insurance utilized in the rate making for a given crop/county program 

begins with crop year 1975 and ends with the most recent year of complete experience 

(generally one lag year from crop year whose target rate is being established).

II. Rate Worksheets

Objective: To compile data elements stored in the Statplan database that will be used in the rate 

review worksheets for the identified rate unit (state/county/crop).

The RMA rate review process begins with the generation of rate review worksheets. These 

worksheets serve as reference documentation and are reviewed by AB Rate Specialists for 

reasonableness, appropriateness, and to ensure that calculated values accurately reflect programmed 

calculations and any issues/concerns are raised to the RT Leader and AB Chief. These worksheets 

are generated based on Key Elements and Sub-Key Elements established above, including crop, 

state, county. Several other data elements reside in the Statplan database that are used in the 

development of rates. The two most important data elements are liability and indemnity (to be 

discussed in more detail) which are used to derive the Loss Cost Ratio (LCR). 

The following table is an example of the data that is compiled from the Statplan database. Specific 

line items shown in this table are explained in detail in upcoming sections related to target rate 

development. These are actual observations from Table A: Bond County, Illinois for Corn from

1975 to 2002. References will be made throughout this chapter to this worksheet as each cell of 

data is reviewed. The basis of years being 1975 through 2002 is for illustration purposes. The 

actual years used in the rate calculations are dependent upon the crop year in which the target rate 

is set.

MARCH 2008 38 FCIC-11010 (RMH-APH)
Table 2: County Report - CORN (0041), ILLINOIS (17), Bond (005), APH (90) 

Year Indemnity Liability LCR

Avg 

Cov 

Level

Adj Indem Adj Liab Adj 

LCR

LCR 

After 

80th 

Pct

Cat Indem Net 

Acres

Units 

Indem

Cat 

Units 

Indem

1975 $0.00 $35,196.00 0.000 0.650 $0.00 $35,196.00 0.000 0.000 $0.00 593.0 0 0

1976 $14,135.00 $55,918.00 0.253 0.620 $16,094.69 $58,623.71 0.275 0.129 $8,541.47 744.0 2 3

1977 $899.00 $53,111.00 0.017 0.620 $1,023.64 $55,680.89 0.018 0.018 $0.00 699.0 1 0

1978 $1,125.00 $28,589.00 0.039 0.620 $1,280.97 $29,972.34 0.043 0.043 $0.00 405.0 1 0

1979 $0.00 $38,029.00 0.000 0.620 $0.00 $39,869.11 0.000 0.000 $0.00 465.0 0 0

1980 $9,021.00 $56,726.00 0.159 0.699 $7,330.33 $52,452.67 0.140 0.129 $576.98 625.2 4 0

1981 $4,543.00 $153,273.00 0.030 0.739 $3,542.47 $134,544.07 0.026 0.026 $0.00 1193.1 2 0

1982 $1,521.00 $70,525.00 0.022 0.712 $1,272.60 $64,271.27 0.020 0.020 $0.00 640.1 2 0

1983 $12,705.00 $31,511.00 0.403 0.724 $11,600.73 $28,394.33 0.409 0.129 $7,944.73 297.2 2 5

1984 $69,670.00 $541,248.00 0.129 0.668 $69,020.03 $526,103.00 0.131 0.129 $1,262.65 3767.1 42 1

1985 $36,946.00 $1,328,642.00 0.028 0.654 $37,290.33 $1,319,407.07 0.028 0.028 $0.00 8592.8 18 0

1986 $19,628.00 $1,696,428.00 0.012 0.655 $18,968.00 $1,682,306.80 0.011 0.011 $0.00 12910.1 18 0

1987 $19,437.00 $1,320,109.00 0.015 0.653 $19,437.00 $1,313,927.00 0.015 0.015 $0.00 11668.8 15 0

1988 $393,646.00 $1,481,032.00 0.266 0.650 $390,692.53 $1,481,117.20 0.264 0.129 $199,950.82 12667.1 117 122

1989 $11,560.00 $2,199,835.00 0.005 0.649 $11,560.00 $2,197,549.53 0.005 0.005 $0.00 15424.8 16 0

1990 $51,228.00 $1,242,892.00 0.041 0.652 $51,144.39 $1,239,387.50 0.041 0.041 $0.00 9342.8 42 0

1991 $30,714.00 $2,013,155.00 0.015 0.649 $30,714.00 $2,015,168.87 0.015 0.015 $0.00 14799.8 26 0

1992 $4,241.00 $1,819,433.00 0.002 0.649 $4,241.00 $1,821,071.23 0.002 0.002 $0.00 13138.1 9 0

1993 $15,046.00 $1,472,578.00 0.010 0.649 $14,727.47 $1,475,610.50 0.010 0.010 $0.00 10037.8 6 0

1994 $41,608.00 $3,210,935.00 0.013 0.647 $41,608.00 $3,224,592.33 0.013 0.013 $0.00 18954.9 30 0

1995 $509,876.00 $2,639,252.00 0.193 0.649 $508,440.27 $2,645,601.00 0.192 0.129 $167,731.10 18564.5 131 64

1996 $83,975.00 $5,270,138.00 0.016 0.651 $83,328.00 $5,259,563.72 0.016 0.016 $0.00 25675.6 26 0

1997 $62,808.00 $5,122,012.00 0.012 0.648 $62,808.00 $5,136,881.24 0.012 0.012 $0.00 27010.9 36 0

1998 $326,618.00 $5,218,469.00 0.063 0.650 $330,108.72 $5,216,581.57 0.063 0.063 $0.00 25891.9 64 0

1999 $104,620.00 $5,464,923.00 0.019 0.663 $91,660.96 $5,358,164.73 0.017 0.017 $0.00 32056.4 84 0

2000 $43,583.00 $6,353,656.00 0.007 0.671 $44,023.66 $6,149,585.44 0.007 0.007 $0.00 40201.7 21 0

2001 $115,581.00 $8,136,318.00 0.014 0.688 $94,041.47 $7,655,440.11 0.012 0.012 $0.00 63266.5 57 0

2002 $1,145,296.00 $7,877,382.00 0.145 0.696 $933,308.22 $7,339,766.69 0.127 0.127 $0.00 60227.5 367 0

Summary $3,130,030.00 $64,931,315.00 0.069 0.660 $2,879,267.47 $63,556,829.92 0.068 0.046 $386,007.76 15352.2 1139 195

 

MARCH 2008 39 FCIC-11010 (RMH-APH)
III. Data Compilation

Objective: to compile data elements stored in the Statplan database that will be used in the rate 

review worksheets for the identified rate unit (state/county/crop).

Before discussing the worksheet further it is important that the structure of the data stored in 

Statplan is understood. Table 3 is an example of how liability is stored in the Statplan database for 

a specific insurance plan (CRC), for a specific year (2002) and for a specific coverage level (65%). 

For Bond County, Illinois there may exist up to 22 corn tables just for year 2002, covering 3 

insurance plans, 8 coverage levels (5 for RA), plus one table for catastrophic policy data. The latter 

table may be just a small part of the total picture. In addition, each crop year will vary depending 

on the availability of insurance plans, coverage levels, type of insurance plans and producer 

participation. 

TABLE 3 

There are a number of properties about Table 3 that need to be fully understood before the 

compilation process is addressed. 

Production 

Ratio

Discrete 

Liability

Cumulative 

Liability

Coverage Level

65%

....

0.45 7,548 434,677

0.46 13,082 447,759

0.47 5,635 453,395

0.48 18,078 471,473

0.49 20,562 492,035

0.50 13,376 505,411

0.51 0 505,411

0.52 0 505,411

0.53 1,613 507,024

0.54 19,827 526,851

0.55 0 526,851

0.56 25,840 552,690

0.57 42,613 595,303

0.58 27,263 622,566

0.59 7,830 630,396

0.60 5,894 636,291

0.61 20,887 657,177

0.62 7,924 665,101

0.63 19,467 684,569

0.64 16,336 700,905

0.65 436,718 1,137,623

MARCH 2008 40 FCIC-11010 (RMH-APH)
First, the above table contains both discrete and cumulative liability totals. In short, the discrete

values are the sum of all observations that have a unique production ratio value as listed. For 

example, all units in the 2002 CRC Corn at the 65% coverage level with a production ratio of .57 

have a combined liability of $42,613. 

For the purpose of combining similar units into a single discrete value, the production ratio of .57 

would include all observations with a calculated production ratio between .5650 and .574999. 

Second, the cumulative totals are the summation of all production ratios less than or equal to the 

given production ratio. For example, the cumulative liability at production ratio .57 is $595,303 

which is the summation of all units with production ratios from 0 to .574999. 

Third, the Statplan database contains only production ratio values that were observed. For 

example, the production ratios of .51 and .52 would have the implied values as shown, but they do 

not in fact exist in the table.

Fourth, the values found in the discrete column may not add up to the cumulative column for all 

production ratios for CRC and RA due to rounding. This is only the case for CRC and RA where 

the original liability, in whole dollars, has been converted to a resulting APH liability in dollars and 

cents. No intermediate level rounding was done when calculating the cumulative totals.

RMA offers various coverage levels of insurance (to be discussed in a later component). Generally, 

these coverage levels range from 50% to 85% in 5% increments. In addition, several crops have 

multiple insurance plans from which one can extract the yield risk independent of the price risk. 

Combining the data into a common coverage level and a simulated APH product gives the analyst 

the maximum amount of insurance exposure possible. 

MARCH 2008 41 FCIC-11010 (RMH-APH)
The following is a subset of the 2002 Corn data from Bond County, Illinois. Insurance plans (APH, 

CRC, RA) have been combined into a common coverage level in the table. 

TABLE 4 

Coverage Level

65 Percent 70 Percent

Production Discrete Discrete Cumulative Cumulative Discrete Discrete Cumulative Cumulative

Ratio Indem Liability Indem Liability Indem Liability Indem Liability

0.47 1529 5635 266580 527564 4380 13344 427618 813626

0.48 5199 19733 271779 547297 4977 15743 432595 829369

0.49 11534 47659 283313 594956 19443 65185 452038 894554

0.50 3583 15291 286896 610247 7433 25962 459471 920516

0.51 286896 610247 9894 36699 469365 957215

0.52 286896 610247 4984 19722 474349 976937

0.53 288 1613 287184 611860 4985 20273 479334 997210

0.54 3395 19827 290579 631687 6642 28578 485976 1025788

0.55 290579 631687 12514 57870 498490 1083658

0.56 3515 25840 294094 657527 8986 45661 507476 1129319

0.57 5304 42613 299398 700140 9939 53329 517415 1182648

0.58 2979 27941 302377 728081 17901 103413 535316 1286061

0.59 1815 19155 304192 747236 11219 69944 546535 1356005

0.60 600 8100 304792 755336 6146 41951 552681 1397956

0.61 1285 20887 306077 776223 10089 77318 562770 1475274

0.62 370 7924 306447 784147 4540 40076 567310 1515350

0.63 709 19467 307156 803614 630 6584 567940 1521934

0.64 330 16336 307486 819950 2465 30436 570405 1552370

0.65 0 802661 307486 1622611 481 6320 570886 1558690

0.66 188 3641 571074 1562331

0.67 1061 27527 572135 1589858

0.68 1144 37072 573279 1626930

0.69 875 46935 574154 1673865

0.70 49 3007937 574203 4681802

The above information will be utilized to further understand the basis of the rate worksheet, similar 

to Table A of this chapter. 

 

Indemnity and Liability, the second and third columns on the rate worksheet, are simply the total 

of the maximum cumulative values for each coverage level. Using the above data and assuming 

that only coverage levels 65% and 70% were sold, then the total indemnity for 2002 would be 

recorded as $307,486 + $574,203 or $881,689 and the total liability for 2002 would be recorded as 

$1,622,611 + $4,681,802 or $6,304,413. (The total is less than what is recorded for 2002 on the 

worksheet, which suggests that other coverage levels were also sold in addition to 65% and 70%). 

LCR, the fourth column on the rate worksheet, represents the Loss Cost Ratio which is derived 

from dividing column 2 by column 3 or the total indemnity by the total liability. In this example, 

divide $881,689 by $6,304,413 for a LCR of .13985 or .140. 

Avg. Cov. Level, the fifth column on the rate worksheet, is the average of all coverage levels 

weighted by the net acres insured. The information in this column serves two purposes; 1) to aid in 

the adjustment process for data prior to 1980, and 2) to provide information regarding the average 

insured in a county. 

MARCH 2008 42 FCIC-11010 (RMH-APH)
Adj. Liability, the seventh column on the rate workbook, represents total liability (column three) 

after the data has been adjusted to a common coverage level. That is, the total liability if re-stated

at a single or common coverage level. The general formula used for calculating the adjusted 

liability is as follows:

The summary sign represents instances where there are multiple coverage levels sold. For example

if the data from Table 2, shown previously in this chapter, were used and RMA adjusted the data to 

a 65% common coverage level, then the following would be observed: 

Adjusted Liability = (Max Cumulative Liability at 65% cov. lev. x .65 /.65) + 

(Max Cumulative Liability at 70% cov. lev. x .65 /.70) 

OR

Adjusted Liability = ($1,622,611 x .65/.65) + ($4,681,802 x .65/.70) 

= $5,969,999 

In short, the total liability of $6,304,413, when re-stated at the common coverage level of 

65% equates to $5,969,999. The same process could be used to adjust the liability to 

another common coverage level. For example, adjusting to a 75% coverage level would 

produce an adjusted liability of $6,888,460 ($1,622,611 x 75/65 + $4,681,802 x 75/70). 

Adj. Indemnity, the sixth column on the rate workbook, represents total indemnity (column two) 

after the data has been adjusted to a common coverage level, i.e., the total indemnity if re-stated to 

a single or common coverage level. Unlike the liability adjustments, the indemnity adjustment 

process is dependent on the crop year from which the data is retrieved. 

Prior to 1980 

For years prior to 1980, crop insurance was sold at a single coverage level by county/ 

type/practice. It was not uncommon to have multiple types or practices within a county 

where each type or practice had a different coverage level. In addition, the coverage levels 

were not standardized to 5% coverage level increments. For example, it would not be 

uncommon to find a county with one practice with a coverage level of 67% and another

practice with a coverage level of 62%. For this reason a simple quadratic equation is used 

to estimate the losses that would have occurred at the chosen common coverage level. The 

quadratic equation was derived from the coverage level rate relatives for 50%, 65% and 

75% that were used when crop insurance was made available at multiple coverage levels 

beginning in 1980. For corn and a number of other major commodities the quadratic 

equation for adjusting to a common coverage level of 65% is: 

0.00141 x2 + (-0.1439) x + 4.38 

where x equals the average coverage level expressed as a percentage, such as 62% or 67%. 

∑ 



















 



 = × a observed coverage level

common coverage level Adjusted Liability Maximum Cumulative Liability

MARCH 2008 43 FCIC-11010 (RMH-APH)
The above equation yields the relative adjustment needed to equate the indemnities to a 

common coverage level. Therefore, if the recorded indemnity is divided by the adjustment 

factor the result is the expected indemnity at 65% coverage level. 

For example, the rate worksheet for Bond County, Illinois (Table A) indicates there were 

indemnities of $14,135.00 in 1976 and the average coverage level was 62.0%. Using the 

quadratic equation with an average coverage level of 62.0%, the following adjustment 

factor is determined:

 = 0.00141 (62)2 + (-0.1439) * (62) + 4.38 

 = 5.42004 – 8.9218 + 4.38 

 = .87824 therefore,

Adjusted Indemnity = $14,135.00 / .87824 = $16,094.69

The increase in indemnities of $1,959.69 ($16,094.69-$14,135.00) is partially due to the 

difference in the liability, the adjusted liability and the LCR. In 1976 the LCR was rather 

significant at the 62% coverage level so one would expect that the losses would be more 

significant at a higher coverage level. 

It is possible, in extreme cases, to over-estimate or under-estimate the indemnities using the 

quadratic equation, therefore two limits are also utilized in the calculation.

1) The minimum value for the adjusted indemnity is $0 

2) The maximum value for the adjusted indemnity can not exceed the increase in the 

estimated change in liability.

For example, in 1976 the liability was $55,918 (column 3) and the adjusted liability is 

$58,623.71 ($55918 x 65/62) or an increase of $2,705.71. Thus, a maximum increase in 

adjusted indemnity is established at $2,705.71. 

 $1,959.69 < $2,705.71 

Crop Years Since 1980 

Beginning in 1980, RMA began offering crop insurance at three standard coverage levels of 

50%, 65% and 75%. Coverage levels were further expanded in 1996 to include all 5% 

increments between 50% and 75% and further expanded, on a limited basis, to 80% and 

85% in 1998. 

Adjusting indemnities to a common coverage level involves: 1) adjusting higher coverage 

levels down to the common coverage level, and 2) adjusting lower coverage levels up to the 

common coverage level. This will be discussed further in the Rate Making Concepts 

Component. 

MARCH 2008 44 FCIC-11010 (RMH-APH)
Case 1 – Adjusting higher coverage levels down to the common coverage level 

The production ratio is defined as the ratio of the actual value of production to the liability. 

Thus an indemnity is paid only when the production ratio is less than the coverage level. 

Therefore, when adjusting a higher coverage level to a common (lower) coverage level the 

only concern is with indemnities related to production ratios less than the common coverage 

level. 

In Table 5, the data for the 70% coverage level was provided. By definition, indemnity 

payments would not be made if the production ratio exceeded the common coverage level 

(assume 65%). 

Therefore, to make the adjustments, first identify the maximum production ratio that is less 

than or equal to the common coverage level. Once identified, obtain the cumulative 

indemnity and the cumulative liability.

Table 5 

 

Adjusting the 70% coverage level data found in the above table to the equivalent 65% 

coverage level requires the following steps; 

Step 1: Cumulative Indemnity (I@65) = $570,886 

Step 2: Cumulative Liability (L@65) = $1,558,690 

Step 3: Cumulative Liability re-stated at 65% (L65) = L@65 × 65/70

 = $1,447,355 

Step 4: Reduction in Liability = L@65 – L65 = $1,558,690 - $1,447,355 

 = $111,335 

Coverage Level

70 Percent

Production Discrete Discrete Cumulative Cumulative

Ratio Indem Liability Indem Liability

0.60 6146 41951 552681 1397956

0.61 10089 77318 562770 1475274

0.62 4540 40076 567310 1515350

0.63 630 6584 567940 1521934

0.64 2465 30436 570405 1552370

 0.65 481 6320  570886  1558690

0.66 188 3641 571074 1562331

0.67 1061 27527 572135 1589858

0.68 1144 37072 573279 1626930

0.69 875 46935 574154 1673865

0.70 49 3007937 574203 4681802

MARCH 2008 45 FCIC-11010 (RMH-APH)
Step 5: Adjusted Indemnity (I65) = I@65 – Reduction in Liability 

 = $570,886 - $111,335 

 = $459,551 

A similar adjustment process would be used on all other coverage levels when adjusting the 

indemnities from a higher coverage level to a lower coverage level.

Case 2 – Adjusting the lower coverage levels up to the common coverage level 

Under this scenario, the process used to estimate losses at a higher coverage level will be 

reviewed. The issue is more difficult given that no information on production ratios greater 

than the coverage level is readily available. This will be discussed further in the Rate 

Making Concepts Component. 

The following example utilizing Statplan data from Table A: 2002 Corn crop in Bond 

County, Illinois will illustrate the adjustment process to a higher coverage level.

 Table 6

Based on the above information, a minimum and a maximum indemnification can be 

determined at all higher coverage levels. To obtain a minimum estimate, one assumes that 

no additional policy units will be indemnified as the coverage level increases. To obtain a 

maximum estimate, one assumes that all additional policy units will be indemnified as the 

coverage level increases. Realistically, neither estimate has a high probability of occurrence 

and therefore, neither is a good estimate of the expected losses at a higher coverage level, 

but they do serve as bounds to a loss cost estimator below. 

Lower bound 

Let L<60 equal the liability of all policy units at the maximum production ratio less than

the coverage level. In the example above, that line would be for production ratio .58 for the 

60% coverage level. Since how much loss has already been paid out is known, the only 

adjustment is to those same policy units in order to account for greater losses due to higher 

coverage.

Coverage Level

60 Percent

Production Discrete Discrete Cumulative Cumulative

Ratio Indem Liability Indem Liability

0.04 2330 2516 2330 2516

0.25 5083 8812 7413 11328

0.37 1530 4069 8943 15397

0.47 854 3978 9797 19375

0.58 174 4293 9971 23668

0.60 0 17750 9971 41418

MARCH 2008 46 FCIC-11010 (RMH-APH)
Min I65 = [ L<60 × 65/60 ] – L<60 + I60

Min I65 = [ $23,668 × 65/60 ] - $23,668 + $9,971

Min I65 = $1,972.33 + $9,971 

Min I65 = $11,943 

Upper bound 

Let L60 equal the liability of all policy units at the maximum production ratio less than or 

equal to the coverage level. In short, it is assumed that all policy units have production 

ratios less than the common coverage level. Since the amount of loss that has already been 

paid out is known, the only adjustment is to add all remaining policy units to the loss pool 

due to higher coverage. 

Max I65 = [ L60 × 65/60 ] – L60 + I60

Max I65 = [ $41,418 × 65/60 ] - $41,418 + $9,971

Max I65 = $3,451.50 + $9,971 

Max I65 = $13,423 

Adjusted Indemnity Estimate

Let L60 equal the liability of all policy units at the maximum production ratio less than or 

equal to the coverage level and Let L<60 equal the liability of all policy units at the 

maximum production ratio less than the coverage level. The difference between these two 

observations will be the discrete liability where the production ratio is equal to the coverage 

level if one such observation exists. Additional losses can be estimated based on the loss 

cost ratio of the population. 

)/()]()60/65()[( 65 65 60 LLMinII <60 60 <60 ×−−×−+= LILL 6060

I65 = $11,943 + [(( $41,418 - $23,668 )x(65/60)) – ($41,418 - $23,668)]x($9,971/$41,418) 

I65 = $11,943 + [$1,479 x 0.24074] 

I65 = $11,943 + $356 

I65 = $12,299 

Adjusted Indemnity = Min I65 < I65 < Max I65

MARCH 2008 47 FCIC-11010 (RMH-APH)
 = $11,943 < $12,299 < $13,423 

 = $12,299 

 

Adj. LCR, the eighth column on the rate worksheet, represents the Adjusted Loss Cost Ratio which 

is derived from dividing column 6 by column 7 or the total adjusted indemnity by the total adjusted 

liability. Using the policy and adjusted data in the calculations from above for 60%, 65%, and 70% 

coverage levels, the following is produced: 

 Table 7

Policy Policy Adjusted Adjusted

Indemnity Liability Indemnity Liability

L60 $9,971 $41,418 $13,423 $44,870

L65 $307,486 $1,622,601 $307,486 $1,622,601

L70 $574,203 $4,681,802 $459,551 $4,347,388

Total $891,660 $6,345,821 $780,460 $6,014,858

LCR 0.141 0.130

This same routine is completed for each year, each coverage level and each insurance plan that is 

being evaluated on the worksheet for which data is available. For a specific crop, Statplan is loaded 

no more frequently than on an annual basis and is reconciled via automated reconciliation routines. 

AB Rate Specialists review the automated reconciliation output reports in comparison to the rate 

application data for reasonableness, appropriateness, and to ensure that values have been calculated 

properly. 

The following data fields and field names are then written to the rates database into the adjusted 

county data table (adj_cnty_data);

crop code crop_cd 

experience year exper_yr_id 

insurance plan ins_plan_id 

coverage level percent cov_lvl_pct 

state code state_cd

county code county_cd 

unadjusted indemnity amount unadj_indm_amt 

unadjusted liability amount unadj_liab_amt 

adjusted indemnity amount adj_indm_amt 

adjusted liability amount adj_liab_amt 

net acres net_acres

units indemnified units_indm 

(2) RATE MAKING CONCEPTS COMPONENT

The purpose of the rate making concepts portion of this handbook is to identify structural 

components for the APH crop programs. Although rate making concepts do vary to some degree 

between various APH crop programs, most concepts are quite similar. The sources for much of the 

content for this section will be (1) annual rating; (2) crop production and utilization data; and (3) 

MARCH 2008 48 FCIC-11010 (RMH-APH)
subject matter experts knowledgeable about the industry. 

The following section includes the RMA approved ratemaking concept/methodology/process. It is

based on input from the actuarial firm of MILLIMAN & ROBERTSON, INC. (aka MILLIMAN USA) 

and the paper Actuarial Documentation of Multiple Peril Crop Insurance Ratemaking Procedures, 

which was presented in November 2000. The entire paper can be found at the following website: 

www.rma.usda.gov/-/media/RMA/Publications/MPCI_Ratemaking.pdf

RATEMAKING – ACTUARIAL CONCEPTS

The development of rates for property and casualty insurance companies has long been the 

province of Casualty Actuaries. There is a vast body of literature that has been developed on

ratemaking topics; much of it is incorporated into publications of the Casualty Actuarial Society 

(“CAS”). In this report, two documents will be referred to when addressing actuarial ratemaking

concepts. The first document is the Statement of Principles Regarding Property and Casualty

Insurance Ratemaking (“Statement of Principles”). The purpose of this document (which was 

developed by the CAS Committee on Principles of Ratemaking and adopted by the CAS Board of 

Directors in 1988) is to “identify and describe principles applicable to the determination and review 

of property and casualty insurance rates”. The second document is a textbook, developed by the 

CAS Textbook Steering Committee in 1989, titled Foundations of Casualty Actuarial Science

(Foundations). The text “is intended as an introduction to casualty actuarial concepts and 

practices”. Foundations has one chapter dedicated to ratemaking. For many of the steps in the 

MPCI ratemaking process, these two documents will be referred to in order to identify the actuarial 

basis for the calculation. 

It is important to understand that there is no single ratemaking approach that will apply to all 

insurance coverages. Foundations states that “...manual rates are estimates of average costs based

upon a combination of statistical methods and professional judgment”. For MPCI, as is the case for

most insurance coverages, the ratemaking process has evolved over time as information and 

research have become available. For each of the steps in the process, there may be alternative

approaches that could be used and which could produce reasonable results. It is not the intent to try

to identify all possible alternatives to the current approach. However, in many cases alternatives

are discussed that may be appropriate. RMA’s rationale for choosing an alternative approach over 

the primary approach would be documented either within the automated system or via hardcopy 

documentation maintained in AB or in the regional office. Alternative or subjective rating is an

accepted insurance practice.

A third reference, which provides additional background and discussion of MPCI ratemaking 

procedures, is the paper “Ratemaking Procedures for Multiple Peril Crop Insurance”, which was

published in the Winter 2000 edition of the CAS Forum. (This paper can be downloaded from the 

CAS website, www.casact.org.)

MARCH 2008 49 FCIC-11010 (RMH-APH)
DETERMINATION OF EXPOSURE, LOSS, AND PREMIUM

Before discussing the ratemaking process, two important values are introduced that are used in the 

MPCI rate development. These values are liability and indemnity. 

Liability is a measure of the insurer’s exposure to loss for a given producer or group of producers. 

Liability represents the total insured value of the crop, calculated as: 

Liability = Acres planted x Expected Yield (called APH Yield) x Selected Coverage Level 

 x Base Price x Price Election Percentage. 

Indemnity is the amount paid under MPCI coverage for a producer suffering a covered loss. 

Indemnity is paid when the value of production is less than the liability purchased. 

In this case, the amount of indemnity paid is equal to the liability minus the value of the production 

where the latter is calculated as: 

Value of Production = Acres Planted x Actual Yield x Base Price x Price Election Percentage. 

The premium paid by a producer is derived as follows: 

Premium = Liability x Rate x Adjustment Factor. 

The ultimate objective of the ratemaking process is to derive the premium rate used in the above 

formula. Derivation is discussed further in the next section. 

MPCI RATEMAKING OVERVIEW

The Statement of Principles identifies a fundamental principle of insurance ratemaking as: “A rate 

is an estimate of the expected value of future costs.” Typically, the largest component of the rate is 

the provision for losses. While there are other, non-trivial considerations in rate development, most 

of the actuarial foundations of ratemaking are intended to provide a framework for estimating the 

expected loss component of the rate. 

For MPCI rates, other expenses and capital costs are provided for in separate agreements. 

Therefore, the ratemaking procedure deals strictly with deriving the expected loss component. This 

component is represented by the Loss Cost Ratio (LCR), which is derived by dividing indemnity by 

liability. The LCR is a measure of loss per unit of exposure. Thus, one of the objectives of MPCI 

ratemaking is to derive LCRs that are representative of the expected losses for a given unit of 

exposure. 

Because different crops are subject to different perils and, therefore, varying loss costs, the MPCI 

procedure establishes rates for each crop separately. It is rare that a single insured, for any 

insurance coverage, will be sufficiently large such that expected losses can be derived solely from 

the insured’s own loss history. Thus, it is common and appropriate to consider the aggregate 

experience of a group of similar risks in developing rates. For MPCI the aggregation is done 

geographically. Rates are developed by geographic area, usually county. Thus, for each crop, the 

MPCI ratemaking process typically derives LCRs (and consequently rates) by county. There are 

other determinants used to tailor the rate to an individual producer, depending on utilization of 

certain farming practices. These will be discussed further in later components. 

MARCH 2008 50 FCIC-11010 (RMH-APH)
The MPCI ratemaking procedure can be broken into five steps: 

1. Adjusting the Loss (Indemnity) and Exposure (Liability) to a common coverage level; 

2. Derivation of County Unloaded Base Rates; 

3. Base Rate Loading;

4. Capping Rate Changes; and 

5. Updating the Type/Practice and Group factors. 

COUNTY RATING – DISCUSSION

As noted above, MPCI rates are most commonly developed by county. County rating is an 

historical element of the MPCI ratemaking process; federal crop insurance evolved as a county 

based program. As will be discussed later in this report, county loss costs are often unstable with 

high levels of variability; consequently, the ratemaking process includes several steps intended to 

smooth some of the fluctuation. This instability and variability could suggest that an alternative 

geographical rating unit, larger than county, might be considered in such cases. 

However, in addition to its historical basis there are other reasons for maintaining the county as the 

basic ratemaking unit. In the Foundations text, chapter 5 discusses risk classification and identifies 

several criteria for selecting rating variables. These include (pages 235-244) Actuarial Criteria, 

Operational Criteria, Social Criteria and Legal Criteria which support the use of county loss costs to 

satisfy actuarial criteria except in situations that are highly unstable and highly variable. 

County rating addresses certain operational criteria that must be considered for the successful 

delivery of the crop insurance program. The Foundations text identifies operational criteria such as 

objectivity, ease of administration, and exclusive and exhaustive, all of which are met by the use of 

county. In addition, social criteria would also support county rating. In addition to being 

historically accepted, the county is a benchmark for many other agricultural activities. For 

example, farm programs are often administered by county and crop yields are generally reported by 

county (and used in MPCI rating for producers without an actual production history). 

It should be noted that while the classification unit is the county information, as will be illustrated

in later chapters, information from broader units may be used in deriving the county rates. It is the

opinion of AB that there are other areas of the ratemaking process that may lend themselves to 

more fruitful research than alternatives to county rating. 

ADJUSTING LOSS AND EXPOSURE TO A COMMON COVERAGE LEVEL

MPCI is offered at various coverage levels, generally ranging from 50% to 75%. In order to make 

the greatest use of the historical data; one of the first steps in the ratemaking process is to adjust the 

data to a common coverage level. With this adjustment, liability and indemnity data of producers 

with different coverage levels can be combined to develop the rates. For most crops, data is 

adjusted to the most commonly purchased coverage level of 65%. 

For coverage levels other than 65%, indemnity and liability are adjusted to reflect the values that 

would have been reported had the coverage been purchased at the 65% level. (As will be discussed 

below, the rates for the other coverage levels are derived from the rates developed at the 65% 

level).

MARCH 2008 51 FCIC-11010 (RMH-APH)
Adjusting the liability is fairly simple. For any specific coverage level, the aggregate liability at 

that coverage level is multiplied by the ratio of the common coverage level to that specific coverage 

level. For example, to adjust the liability from a 75% coverage level to a common coverage level 

of 65%, multiply all liability at the 75% coverage level by the ratio 0.65/0.75. Sub-Exhibit 1 

indicates that this produces the correct value. 

Two separate cases of adjusting indemnity need to be considered; adjusting the higher coverage 

levels down to the 65% coverage level (Case 1), or adjusting the lower coverage levels up to the 

65% coverage level (Case 2). Indemnity amounts obtained at the 65% coverage level need no 

adjustment.

Case 1 – Adjusting indemnity from a higher coverage level down to the 65% coverage level 

As described above, indemnity is paid when the value of production is less than the liability. RMA 

defines production ratio as the ratio of the actual value of production to the liability. Thus, 

indemnity is paid only when the production ratio is less than the coverage level. Due to adjusting 

to the 65% coverage level, there will be no indemnity at this coverage level when production ratios 

are greater than 65%. Therefore, for Case 1 only consideration for the indemnity related to 

production ratios less than 65% is needed. 

For production ratios less than the common coverage level of 65%, every dollar decrease in 

coverage (liability) would have reduced the amount indemnified by one dollar. For example, 

suppose a producer had purchased a 75% coverage level that implied $100 of liability. If this 

producer’s actual production was $60, the indemnification would be $40. If that producer had 

purchased a coverage level of 65%, the liability would have been $87 = $100 * (0.65/0.75) and the 

indemnification would be $27 = $87 - $60. In going from the 75% coverage level to the 65% 

coverage level, both the liability and indemnity went down by the same dollar amount, $13. 

Sub-Exhibit 2 presents a hypothetical example which illustrates that, for all production ratios less 

than 65%, the adjusted indemnity (in going from 75% coverage to 65% coverage) is equal to the 

unadjusted indemnity minus the reduction in liability. For production ratios exceeding 65%, the 

adjusted indemnity will be $0. The RMA adjustment process is based on the above relationships. 

Case 2 – Adjusting from a lower coverage level up to the common coverage level 

Case 2 is more difficult since the indemnity is being increased to the amount that would have 

applied had a higher coverage level been chosen. Case 2 has two components. The first is for 

indemnity related to production ratios up to the lower (50%) coverage level. This adjustment is 

relatively straightforward, and analogous to the Case 1 example above. Specifically, for production 

ratios up to 50%, the adjusted indemnity is equal to the unadjusted indemnity plus the increase in 

liability. This is illustrated in Sub-Exhibit 3. 

 

Sub-Exhibit 3 also displays the adjusted indemnity for production ratios above 50%. However, 

since no indemnification is made for these production ratios at the 50% coverage levels, RMA does 

not actually capture the production value information required to make this adjustment. In actual 

RMA data, the production value column of Sub-Exhibit 3 would be blank for production ratios 

above 50%. Therefore, these indemnity adjustments need to be approximated. 

RMA’s current approach to handling this problem is to develop minimum and maximum bounds to 

the adjusted indemnity and interpolating between the two. The minimum adjustment assumes that 

MARCH 2008 52 FCIC-11010 (RMH-APH)
there are no production ratios between 50% and 65%. The minimum is then derived by adding the 

liability adjustment calculated based only on the liability related to production ratios less than 50% 

to the unadjusted indemnity. It is known that at least this much indemnity at the higher common 

coverage level would have been obtained, the question is how much more would result from 

production ratios of 50% to 65% (for which no indemnification was paid and therefore no yield 

information collected). For these production ratios, the maximum adjustment would occur if all 

non-indemnified production ratios were at 50%. Thus, to derive the maximum adjustment it is 

necessary to calculate the total liability adjustment regardless of production ratio (since it is 

assumed that all production ratios between 50% and 65% are at 50%). This adjustment would then 

be added to the unadjusted indemnity to get the maximum adjusted indemnity. 

In order to interpolate between the maximum and minimum indemnity, the indemnity is totaled

over all production ratios less than or equal to the specific coverage level that is being adjusted 

from. The liability is totaled in the same way and the LCR is calculated. This ratio is applied to the 

liability that was not subject to a loss under the lower coverage level (i.e., liability related to 

production ratios greater than 50%) to determine the related additional indemnity at the higher 

coverage level. Adding this amount to the minimum indemnity approximates the adjusted liability. 

This approximation of the adjusted indemnity is then subject to the maximum bound as determined 

above. Sub-Exhibit 4 illustrates the indemnity adjustment using this approximation technique. 

The concept of adjusting exposures and losses to a common coverage level is valid and appropriate. 

Without adjustment, combining the data for different coverage levels would produce rates nonrepresentative of any single coverage level. Rates would reflect the past mixture of various 

coverage levels and would not be appropriate in the future if the distribution of coverage levels 

changes. 

An alternative would be to treat each coverage level separately and develop rates for each. This 

may be appropriate if there are differences in loss experience for producers who select different 

coverage levels. For example, if producers who have better experience insure with lower coverage 

levels in order to save on premiums, and producers with poor experience insure to higher levels of 

coverage in order to protect against persistent losses, loss cost ratios may vary by coverage level. 

On the other hand, segregating the data by coverage level can result in less stability and 

predictability of expected losses due to the greater statistical variation. In addition, the 

consideration of differences in expected losses between coverage levels is considered in the 

coverage level relativities, which are discussed later. 

There are two actuarial concepts involved here: homogeneity and credibility. Homogeneity refers 

to the degree to which data has been segregated into similar groupings. The Statement of Principles 

discusses homogeneity as follows: “Ratemaking accuracy often is improved by subdividing 

experience into groups exhibiting similar characteristics... subdividing or combining the data so as 

to minimize the distorting effects of operational or procedural changes should be fully explored”. 

Credibility is defined as follows: “Credibility is a measure of the predictive value that the actuary 

attaches to a particular body of data. Credibility is increased by making groupings more 

homogeneous or by increasing the size of the group analyzed.” 

The two criteria for increasing credibility often conflict. The data can be refined into increasingly 

homogeneous groups; as it is refined there is less data in each separate group, resulting in greater 

statistical variation and a lesser degree of confidence in the predictive value of the data. 

MARCH 2008 53 FCIC-11010 (RMH-APH)
Adjusting the data to a common coverage level allows RMA to utilize as large a base as possible 

while also maintaining the homogeneity of the data. It is the opinion of AB that the concept 

utilized by RMA is actuarially sound.

The Indemnity Coverage Level Adjustment was discussed in the Milliman & Robertson, Inc. report 

titled “Federal Crop Insurance Corporation Ratemaking Overview” dated June 14, 1996. In that 

report, possible alternatives to that adjustment approach were discussed. The current RMA 

approach differs from that used at the time of the earlier study. However, it still requires a fairly 

significant approximation in going from a lower to higher coverage level. Although it is believed 

this approximation to be reasonable given the current availability of data, additional analysis is 

recommended on a continual basis to determine feasible alternatives. As stated in the June 14, 

1996 report, two possible approaches would be to convert all data to a 50% coverage level or to 

examine a distribution of yield data to evaluate an approximation approach. The “Federal Crop 

Insurance Corporation Ratemaking Overview” dated June 14, 1996 is available upon request to AB. 

Sub-Exhibit 1 

ADJUSTING LIABILITY TO COMMON COVERAGE LEVEL

1) Liability (L) = Acres x APH x Price x Coverage Level

2) Define : Value = Acres x APH x Price

3) Then : L = Value x Coverage Level

4) At 75% Coverage Level : L75 = Value x .75

5) At 65% Coverage Level : L65 = Value x .65 

6) Therefore : L65 = Value x .75 x (.65/.75) 

L65 = L75 x (.65/.75)

MARCH 2008 54 FCIC-11010 (RMH-APH)
Sub-Exhibit 2 

ADJUSTING INDEMNITY FROM A HIGHER

TO A LOWER COVERAGE LEVEL

Coverage Level 75% 65% Difference

Liability* $9,000 $7,800 $1,200

Indemnity* 

Yield per

Acre

Production

Ratio

Production

Value

Coverage Level

75% 65% Difference

0 0. 0% $0 $9,000 $7,800 $1,200

15 12.5 1,500 7,500 6,300 1,200

30 25.0 3,000 6,000 4,800 1,200

45 37.5 4,500 4,500 3,300 1,200

60 50.0 6,000 3,000 1,800 1,200

75 62.5 7,500 1,500 300 1,200

78 65.0 7,800 1,200 - 1,200

85 70.8 8,500 500 - -

90 75.0 9,000 - - -

105 87.5 10,500 - - -

* Acres = 100

APH = 120

Price = $1.00

MARCH 2008 55 FCIC-11010 (RMH-APH)
Sub-Exhibit 3 

ADJUSTING INDEMNITY FROM A HIGHER

TO A LOWER COVERAGE LEVEL

Coverage Level 50% 65% Difference

Liability* $6,000 $7,800 $1,800

Indemnity* 

Yield per

Acre

Production

Ratio

Production

Value

Coverage Level

50% 65% Difference

0 0.0% $0 $6,000 $7,800 $1,800

15 12.5 1,500 4,500 6,300 1,800

30 25.0 3,000 3,000 4,800 1,800

45 37.5 4,500 1,500 3,300 1,800

50 41.7 5,000 1,000 2,800 1,800

55 45.8 5,500 500 2,300 1,800

60 50.0 6,000 - 1,800 1,800

65 54.2 6,500 - 1,300 1,300

70 58.3 7,000 - 800 800

75 62.5 7,500 - 300 300

78 65.0 7,800 - - -

85 70.8 8,500 - - -

90 75.0 9,000 - - -

105 87.5 10,500 - - -

* Acres = 100

APH = 120

Price = $1.00

MARCH 2008 56 FCIC-11010 (RMH-APH)
Sub-Exhibit 4 

ADJUSTING INDEMNITY FROM A HIGHER

TO A LOWER COVERAGE LEVEL

(APPROXIMATION TECHNIQUE)1 

Adjusting Indemnity to Higher Coverage Level (50% to 65%)

Production Ratios Liability Indemnity Adjusted Liability2

<50% $150,000 $30,000 $195,000

>=50% 400,000 0 520,000

1) The above values are created to illustrate the calculation. They are not true RMA data. 

2) Liability x (.65/.50) 

Adjusted Indemnity Calculation

The minimum adjusted indemnity is equal to the unadjusted indemnity plus the liability adjustment 

for production ratios less than 50%. 

Minimum Adjusted Indemnity = $30,000 + ($195,000 - $150,000) = $75,000 

The maximum adjusted indemnity is equal to the unadjusted indemnity plus the liability adjustment 

for all production ratios. 

Maximum Adjusted Indemnity =

$30,000 + ($195,000 - $150,000) + ($520,000 - $400,000) = $195,000 

The loss cost ratio used in the interpolation is based on the liability and indemnity for production 

ratios less than 50%. 

Loss Cost Ratio = $30,000 / $150,000 = 20% 

The interpolated adjusted indemnity is then the minimum indemnity plus 20% of the liability

adjustment for production ratios greater than or equal to 50%. 

Interpolated Adjusted Indemnity = $75,000 + .20 * ($520,000 – $400,000) = $99,000 

If necessary, the interpolated adjusted indemnity would be subject to the maximum adjusted 

indemnity.

MARCH 2008 57 FCIC-11010 (RMH-APH)
ANNUAL RATING CYCLE

Crop year 2005 marked the initial year for implementing the annual rating cycle study. Prior to 

2005, generally all crops were reviewed annually. The rating cycle study titled: “Analysis of 

Rating Cycle for Multiple Peril Crop Insurance” completed by Milliman USA (A.K.A Milliman 

and Robertson, Inc.) introduced an objective selection process and provided a decision tree for 

determining which crop and state combinations should have county level rate reviews. After 

receiving the study, RMA began implementing the recommended rating cycle beginning with the 

2005 crop year as authorized in the Rate Methodology Memorandum. NOTE: This report is 

documented and maintained by AB on-file for examination.

The study recommended that RMA establish a maximum number of years that a crop/state 

combination can go without a full review. Initially, they suggested a maximum of 5 years between 

reviews of crop/states with credible historic experience and a maximum of 3 years between reviews 

for crop/states with less than credible experience. Credibility for this purpose was determined to be 

20 or more years of experience at the crop/state level. For 2005, an abbreviated version of the 

decision tree in the study was applied: All crop/states with 20 or more years of data with no rate 

review in the past 5 years and all crop/states with less than 20 years of data with no rate review in 

the past 3 years would have a full county rate review. Based on those criteria a list of crop/states 

was identified by AB for a full county rate review.

In addition, Regional Offices can recommend additional crop/county/state programs to be added to 

the list of crops recommended for a complete rate review. Regional Office recommendations will be 

in writing and will include supporting justification and documentation. 

(3) REFERENCE YIELDS COMPONENT

A study completed by the actuarial firm of Milliman and Robertson, Inc. in 1983, brought about 

several significant changes to how rates were quoted. Implementation of these changes began with 

the introduction of the APH insurance plan in 1985. Corn, grain sorghum, peanuts and tobacco 

were the first crops to be converted followed by wheat, oats, and barley in 1986. There are two 

critical components of the APH plan of insurance; 1) the growers guarantee was based on their 

actual production history (APH), 2) the growers premium rate was based on their actual production 

history (APH yield) relative to other growers in the same geographic area. 

The distribution of rates under the APH program is based on the assumption that each grower’s 

APH can be rated relative to their peers or a homogenous group of growers. The formula for 

comparison was: 

Where yi represents the growers yield and y bar represents the 

homogenous group or the center point of the range. 

The NASS crop reporting district was chosen to be the basis of y bar, or reference yield, as the 

measuring stick from which all growers in the defined group would be evaluated. It was felt that 

the crop reporting district represented a broader group of growers and the NASS history for the 

prior ten years was summarized by crop reporting district and a simple average planted yield was 

calculated across the ten years. In areas where types and practices were considerably different, a 

relational factor was applied to the data to determine reference yield values by type and practice. 

y

yi

MARCH 2008 58 FCIC-11010 (RMH-APH)
The reference yields remained at the levels determined when converted to APH until 1990 or 1991, 

depending on the crop, when the reference yields were updated using the most current ten years of 

NASS data. Rates were also adjusted to remove the affects of a yield adjustment on rates (a rate 

neutral adjustment). 

The reference yield remained unchanged for most areas until 2001, when the APH plans were 

converted to the continuous rating system. At that time reference yields were established by 

calculating the center point of the high and low yields of the center r-span. It should be noted that 

this calculated reference yield should be similar to the calculated district yield determined in the 

early 1990’s but may not be exact. 

The 2005 rate methodology memo outlined efforts to update the reference yields. These efforts 

were prompted by yield trends that suggested the reference yields were too low. In addition, if 

counties within a NASS crop reporting district were not considered to be homogeneous, the district 

yield could be a poor representative of the county reference yield. 

Target reference yields are established as needed as outlined in the rate methodology memorandum 

or subsequent informational memorandum. For crops whose target rates are being reviewed, 

beginning in 2008 and subsequent years, the reference yields are updated by establishing target 

reference yields using the following steps: 

1. The transitional yield (t-yield) is multiplied by two factors to create limits of movement.

2. If the reference yield was within the boundaries calculated in step 1, no change was made 

to the reference yield. 

3. If the reference yield was outside the boundaries calculated in step 1, the reference yield 

was updated to equal the t-yield boundary. 

In short, all target reference yields, for crops with a target rate review, are updated to be within a 

lower and upper boundary of the t-yield. 

(4) COVERAGE LEVEL RATE RELATIVITIES COMPONENT

Prior to 1980, only one coverage level was available to insureds. The coverage level did vary over 

time and by region, crop, and even types and practices; however, the insured had no choice of 

multiple coverage levels. 

The Federal Crop Insurance Corporation (FCIC) Act of 1980 created a significant change in this 

system by specifying that three levels of coverage may be elected by the insured based on appraised 

or recorded yields. The coverage levels of level 1 - 50%, level 2 – 65% and level 3 – 75% were 

standardized across all crops and regions. Initially, FCIC had no empirical data with which to 

evaluate the loss costs between coverage levels. Therefore, the pricing for level 3, in particular, 

was based on a theoretical model that was largely untested and whose results were tempered

significantly due to marketing considerations. As a result, the rate “spread” between the three 

coverage levels was substantially increased by FCIC for crop year 1983. 

In the Fall of 1983, the actuarial firm of Milliman and Robertson, Inc. was contracted with to 

review the coverage level experience of 1981 and 1982 and make recommendations. A number of 

changes were made to the rate models as a result on these studies beginning in crop year 1985. 

MARCH 2008 59 FCIC-11010 (RMH-APH)
Among the many changes was the creation of constant coverage level relativities across most APH 

crops. These coverage level relativities were: 

Coverage Level Rate Relativity

75% 1.00

65% .65

50% .47

Milliman and Robertson, Inc. was retained by the Economic Research Service to evaluate the 

coverage level relativities for the Federal Crop Insurance Corporation in 1995. The scope of the 

initial study was to produce one set of relativities for the major crops. Later studies attempted to 

recognize differences between regions, crop types, and cropping practices. 

The 1996 Federal Agricultural Improvement and Reform Act (FAIR) brought about sweeping 

changes to U.S. agricultural policy. Among those changes was the addition of three new coverage 

levels in 5% increments, resulting in six coverage levels: 50%, 55%, 60%, 65%, 70% and 75%. 

The quadratic equation based on the best fit of the previously-existing three coverage levels was

determined as shown below: 

Where C equals the coverage level.

From this equation the rate relativities were derived for the three new coverage levels (55%, 60% 

and 70%) as follows:

Coverage Level Rate Relativity

75% 1.00

70% .79

65% .65

60% .57

55% .51

50% .47

In 1998, for selected areas and crops, coverage levels 80% and 85% were offered. Coverage level 

relativities for these new levels of insurance were primarily based on an extension of the quadratic 

equation. 

Coverage Level Rate Relativity

85% 1.60

80% 1.22

75% 1.00

70% .79

65% .65

60% .57

55% .51

50% .47

[ ] 0938.086.2 [ 00092.0 ] 2 C C ×+×−

MARCH 2008 60 FCIC-11010 (RMH-APH)
Two revenue plans of insurance were introduced in 1996 and 1997; one based on the fixed rate 

relativities from the APH product, and one based on a simulated probability model. The exposure 

and overlap was limited to selected crops but the difference in rates quoted at different coverage 

levels was quite apparent. RMA sub-contracted with Coble, Goodwin, Ker, and Knight in 2002, to 

review the rate relativities for three major crops (Corn, Soybeans, and Wheat) which were common 

to both insurance plans. The empirical data suggested that the rate relativities should be different 

than the current relativities for each of the three crops. RMA began incorporating the new 

relativities into the CRC plan of insurance beginning with the Spring 2003 crop year.

New rate relativities were also incorporated into the APH plan of insurance beginning with crop 

year 2004. It should be noted that some rate relativity changes were not fully implemented into the 

APH plan in a single year because they resulted in rates that exceeded the mandated 20% rate 

increase (discussed further in a later component). In such cases, multiple years are used to 

incorporate the rate relativities. NOTE: The report is on-file with AB. 

In addition, the study determined that behavior characteristics of insureds exist that are influential 

in determining the coverage level purchased. RMA incorporated an endogenous risk factor into the 

rate process to overcome this temperament. The endogenous risk component in the premium rate 

reflects the changes in producer behavior from changes in their coverage level.

A contract was let to review the rate relativities of the remaining revenue crops in 2004. This group 

of six crops (barley, canola, cotton, grain sorghum, rice, and sunflowers) included the remaining 

crops that were covered by at least one of the revenue plans of insurance. The results of the study 

were very similar to the results found in the previous study. NOTE: The entire report is on-file and 

available by request to AB. 

Target coverage level rate differentials (including endogenous risk factors) were updated for the 

APH and CRC plans of insurance for 2004 corn, soybeans, and wheat, consistent with the first 

contract and the Expert Reviews for this report conducted for the FCIC Board of Directors. The 

2004 actuarial document reflected movement toward the target coverage level rate differentials. 

The 2005 and subsequent years’ actuarial documents reflect additional movement toward the target 

coverage level rate differentials if not completely captured in 2004 and subsequent years. 

For 2005, target coverage level rate differentials (including endogenous risk factors) were updated 

for the APH and CRC plans of insurance for barley, canola, cotton, grain sorghum, rice, and 

sunflowers consistent with the second contract (Coble, Goodwin, Ker, and Knight, Implied Rate 

Relativities). The 2006 and subsequent crop years’ actuarial documents for these crops will reflect 

movement toward the target coverage level rate differentials. RMA contracted for the review of 

coverage level rate differentials for all remaining continuously rated crops. The final 

recommendations were recently completed and differentials were recommended for all remaining 

continuously rated crops. AB expects to incorporate these recommendations beginning with the 

2009 crop year. Because the change to the coverage level rate differentials may move premium 

rates up or down, they will be updated in conjunction with a full review of base rates and reference 

yields. Annual movement toward target levels is documented within rate application runs that are 

date-stamped and serve as a record of application runs through automated assignment of run 

identification numbers. When rates are reviewed/updated, the rate application assigns a run 

identification number denoting the date and time it was run. Capping of the target values for final 

publication is covered in both the Critical Control Points and the upcoming Mandated Capping 

sections of this handbook. 

MARCH 2008 61 FCIC-11010 (RMH-APH)
(5) TARGET RATE DEVELOPMENT COMPONENT

Objective: to develop actuarially sound County Target Rates based on historic experience. 

As previously noted, the Statplan insurance experience was gathered and adjusted to a common 

coverage level for each year of exposure for each crop / state / county report entity. In this 

component, target rates will be developed and the actuarial concepts and theory behind the process 

of ratemaking will be discussed. 

The following data table developed from Statplan and produced from a typical county program will 

be used as the summary data adjusted to a common coverage level (in this example 65%). 

MARCH 2008 62 FCIC-11010 (RMH-APH)
Table 8 

WHEAT (0011), KANSAS (20), Allen (001)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

Crop

Year

Net

Acres Indemnity Liability LCR

Average

Coverage

Level

Adjusted

Indemnity

Adjusted

Liability

Adjusted

LCR

Capped

Adjusted

Indemnity

LCR

After

80th

Pct

CAT

Indemnity

1975 1,323.0 $77 $40,995 0.002 0.6 $94 $44,411 0.002 $94 0.002 $0

1976 1,475.0 $3,002 $50,575 0.059 0.6 $3,652 $54,790 0.067 $3,652 0.067 $0

1977 981.0 $4,516 $34,060 0.133 0.6 $5,494 $36,898 0.149 $5,494 0.149 $0

1978 130.0 $0 $5,148 0.000 0.6 $0 $5,577 0.000 $0 0.000 $0

1979 839.0 $0 $33,111 0.000 0.6 $0 $35,870 0.000 $0 0.000 $0

1980 634.8 $0 $30,178 0.000 0.654 $0 $29,948 0.000 $0 0.000 $0

1981 2,605.1 $15,828 $163,318 0.097 0.706 $11,693 $148,861 0.079 $11,693 0.079 $0

1982 6,949.7 $124,426 $556,393 0.224 0.714 $101,360 $504,210 0.201 $100,699 0.200 $669

1983 5,039.8 $26,371 $391,155 0.067 0.717 $20,415 $353,563 0.058 $20,415 0.058 $0

1984 2,953.6 $12,043 $232,965 0.052 0.699 $8,601 $216,417 0.040 $8,601 0.040 $0

1985 3,603.4 $71,931 $246,108 0.292 0.669 $66,934 $239,126 0.280 $47,758 0.200 $19,181

1986 1,249.1 $46,553 $78,287 0.595 0.686 $42,563 $74,297 0.573 $14,838 0.200 $27,726

1987 4,521.2 $76,203 $260,520 0.293 0.65 $75,759 $260,076 0.291 $51,942 0.200 $23,822

1988 7,431.6 $26,377 $405,715 0.065 0.655 $25,580 $402,832 0.064 $25,580 0.064 $0

1989 9,419.0 $7,645 $585,152 0.013 0.656 $7,645 $581,233 0.013 $7,645 0.013 $0

1990 11,285.6 $54,647 $830,520 0.066 0.653 $51,942 $826,597 0.063 $51,942 0.063 $0

1991 8,550.6 $19,353 $538,090 0.036 0.655 $17,942 $534,655 0.034 $17,942 0.034 $0

1992 7,697.5 $3,591 $483,767 0.007 0.654 $3,487 $481,409 0.007 $3,487 0.007 $0

1993 6,785.0 $144,081 $446,303 0.323 0.652 $142,997 $445,135 0.321 $88,901 0.200 $54,104

1994 9,327.6 $5,561 $577,999 0.010 0.639 $5,638 $584,322 0.010 $5,638 0.010 $0

1995 7,812.7 $117,191 $431,491 0.272 0.648 $118,263 $432,273 0.274 $86,332 0.200 $31,938

1996 10,192.7 $143,628 $730,932 0.196 0.647 $145,750 $732,989 0.199 $145,750 0.199 $0

1997 8,674.3 $38,911 $529,712 0.073 0.649 $38,911 $530,427 0.073 $38,911 0.073 $0

1998 7,024.9 $24,730 $527,928 0.047 0.648 $24,661 $528,801 0.047 $24,661 0.047 $0

1999 5,509.0 $67,209 $386,478 0.174 0.661 $64,076 $379,485 0.169 $64,076 0.169 $0

2000 11,886.1 $1,670 $783,987 0.002 0.657 $1,670 $774,296 0.002 $1,670 0.002 $0

2001 13,870.2 $44,284 $864,049 0.051 0.668 $44,049 $839,345 0.052 $44,049 0.052 $0

2002 15,958.5 $38,665 $1,180,738 0.033 0.664 $36,064 $1,152,809 0.031 $36,064 0.031 $0

Summary 173,730.0 $1,118,493 $11,425,674 0.114 0.654 $1,065,240 $11,230,652 0.111 $907,834 0.084 $157,439

MARCH 2008 63 FCIC-11010 (RMH-APH)
I. Capped Loss Costs 

Catastrophic loading is an actuarial technique used to account for the fact that insurance rates are 

generally derived from a limited sample of past experience that is subject to sampling error. For 

example, a one-in-100 year event may be included in the history and be weighted, in a short time 

series, with much greater weight than appropriate. Unfortunately, rarely does RMA have 

knowledge of the true underlying probability distribution from which the data are drawn. 

Catastrophic loading is then an applied technique used to deal with this lack of knowledge. It does 

not add information or overcome the sampling problem; rather, it is a decision rule to help mitigate 

the problem. Thus catastrophic loading is intended to remove anomalies from the data but not 

redistribute “normal” loss experience and create unintended subsidies. 

Capped loss costs are reviewed by AB Rate Specialists for reasonableness, appropriateness, and to 

ensure that calculated values accurately reflect programmed calculation specifications and any 

issues/concerns are raised to the RT Leader and AB Chief. 

The adverse affect of a single year, or several years, is not uncommon for property coverage, in 

particular one in which weather can affect loss experience. The Statement of Principles states, 

“Consideration should be given to the impact of catastrophes on the experience and procedures 

should be developed to include an allowance for the catastrophe exposure in the rate”. This step 

removes those losses that are identified as excess from the county experience and builds back into 

the rates the excess losses by spreading them over a broader base. 

The catastrophic procedure used by RMA involves truncation of the loss experience at a point and 

treating any losses above that point as outliers, not representative of the county, with the intended 

result of reducing the impact that a single year will have on the average loss cost of each county. 

The losses above the truncation point will then be distributed across all counties in the state. 

Currently, the RMA procedure truncates the county loss experience at the 80th percentile. This is 

done non-parametrically; that is, no distributional assumptions are made and the percentiles are 

found by ranking the observed loss costs. For example, if 20 years of data are available, then the 

80th percentile of the loss cost is the 16th highest observed loss cost ratio. When the percentile does 

not fall on a discrete observation, such as is the case in Allen County, Kansas where there are 28 

observed loss costs, the 80th percentile falls at 22.4 and linear interpolation between the 22nd and the 

23rd observations is used. 

All observations above the truncation point or calculated truncation point are established at that 

point. The indemnity associated with loss cost ratios below the truncation point remain in the 

county pool and the indemnities associated with loss cost ratios above the truncation are placed in a 

catastrophic pool. 

While the long-term average (shown in the ninth column in the table above) is 0.111, the average is 

adversely affected by a few years with much higher than average LCRs, such as 1986 (.573) and 

1993 (.321). Under this procedure, the adjusted average LCR for any single year is capped at the 

80th percentile LCR of all years. 

MARCH 2008 64 FCIC-11010 (RMH-APH)
In Table 8, the Capped LCR (Column 11) is calculated by linear interpolation to the 80th percentile 

point of the Adjusted LCRs (column 9). In this case with 28 years of data, the 22nd and 23rd highest 

Adjusted LCRs are interpolated. The 22nd Adjusted LCR, if ranked in order, is crop year 1996 

when the loss cost ratio was .1988 and the 23rd Adjusted LCR is crop year 1982 when the loss cost 

ratio was .2010. The interpolated value (80th percentile) or truncation point is 0.1997 (0.200). For 

each year, the Capped LCR is the minimum of the Adjusted LCR and the truncation point of .1997. 

Column 12, identified as Cat Indemnity, is the amount of indemnity that is excluded from the 

counties capped LCR. That is the excess indemnity over and above the capped LCR as determined 

above. The cat indemnity is calculated using the following formula:

For Example, Crop Year 1995 Cat Indemnity = [($118,263 / $432,273)–0.1997] x $432,273.00 = 

$31,938. 

The total indemnity identified as Cat Indemnity for Allen County is $157,439, which can be found 

on the summary line and will be used later in the ratemaking process. 

II. Net Acres Insured

The number of acres insured will aid in the determination of credibility in the ratemaking process. 

The worksheet for Wheat in Allen County, Kansas will again be used to help illustrate how the 

number of acres are captured and determined for further use in the ratemaking process.

The net acres insured (column 2 in Table 8) represents the count of acres insured by year. These 

counts are tabulated and stored in StatPlan within the production ratio tables and are then 

summarized for inclusion on the worksheet. The number of insured net acres is used in the 

decision tree for establishing credibility and with the credibility weight calculation for a given 

county. 

III. County Unloaded Rate Determination

Background:

The target rate calculation is represented by the following equation: 

Historically, the unloaded rate (unlrate) = (county LCR x 0.6) + (circle LCR x 0.4). Historically, 

the circle LCR comprised the data from the target county’s concentric circle, which didn’t include 

the target county itself. RMA contracted with Milliman USA to review RMA’s credibility 

procedures and recommend any refinements to the rating process. 

Based on the recommendations from Milliman USA in the report “An Independent Actuarial 

Capped LCR Adjusted Liability Adjusted Liability

Adjusted Indemnity Cat Indemnity × 



 



 = −

MARCH 2008 65 FCIC-11010 (RMH-APH)
Review of Credibility Theory in Rate Determination, April 2002”, beginning in crop year 2006, 

RMA shifted away from the historical weighting procedure, which establishes credibility based on 

units indemnified. The new procedure for weighting the experience in determining credibility 

weights for the target county and circle is a function of the acres underlying the target county’s data 

and the circle’s data. From this point forward, RMA will now refer to the circle as the county 

group or credibility complement. The only calculation in the equation above that will be changing 

due to this shift in credibility theory will be the calculation of the unloaded rate. The following is a 

summation of the procedural modifications: 

1. The credibility weight to be assigned an individual county be based on the formula

P/(P+K), where P is a measure of exposure and K is a measure of the historical variability

of county losses;

2. The credibility complement (county group) be defined as the overall loss cost ratio of the

combined experience of the target county and surrounding counties.

Procedure:

The following will outline step-by-step the procedure used to calculate the unloaded rate for a 

target county under the continuous rating model: 

1) Work through a decision tree for determining if the county is to be rated empirically or

subjectively. The decision tree is as follows:

2) The following outlines the procedure for calculating the target rate using the Bühlmann

weight:

Does the target county have at least six consecutive most recent years of data, 

at least 5 exposure units, and at least one non-zero indemnity observation after 

applying capping? 

Calculate the credibility weight using 

the Bühlmann method. 

Rate the target county 

using 0% credibility. 

Yes

No

No Yes

Rate subjectively.

Does the county group have at least six consecutive most 

recent years of data, at least 5 exposure units, and at least 

one non-zero indemnity observation after applying capping? 

MARCH 2008 66 FCIC-11010 (RMH-APH)
−+= ZXZR )1( μ

KP

P Z

+ =

where:

R = County Unloaded Target Rate 

Z = Bühlmann credibility factor, ranging from 0 to 1 

X = The sample mean of an individual county to which credibility is 

applied (average of the adjusted capped LCRs for all available years of data 

for the county) 

μ = The underlying mean (average of the adjusted capped LCRs for all 

available years of data for the entire county group) 

P = Exposure units (Total number of net acres for a given crop in the target 

county summed over all available crop years divided by the appropriate α ) 

K = v/a

v = Sample variance of the adjusted capped LCRs for all available years 

of data for the target county

a = Sample variance of the sX from the county group 

Credibility is one of the most complex actuarial concepts. It is sufficiently important to command a 

full chapter in the Foundations text. The Casualty Actuarial Society’s Statement of Principles 

Regarding Property and Casualty Insurance Ratemaking defines “credibility” in an actuarial 

context as:

“Credibility is the measure of the predictive value that the actuary attaches to a 

particular body of data. Credibility is increased by making groupings more 

homogenous or by increasing the size of the group analyzed. A group should be 

large enough to be statistically reliable. Obtaining homogenous groupings requires 

refinement and partitioning of the data. There is a point at which partitioning 

divides data into groups too small to provide credible patterns. Each situation 

requires balancing homogeneity and the volume of data.” 

The groupings applied by the RMA ratemaking process are county-level. The volume of data is 

currently measured by the number of acres insured. This Bayesian credibility approach develops a 

credibility weight as a function of the exposure underlying a county’s experience and the variance 

of the historical data using the ratio P / (P+K), where P is the exposure measure, and K is the ratio 

of the process variance to the variance of the hypothetical means. This new procedure allows for a 

more accurate predictor of future experience as well as allowing counties with a greater amount of 

experience, but relatively few losses, a rate that more accurately reflects their experience.

MARCH 2008 67 FCIC-11010 (RMH-APH)
The unloaded rate calculation uses a “concentric circle” smoothing process applied to the county 

unloaded target rates to smooth rates across neighboring counties. In this process neighboring 

counties are defined as any county that shares a common border. A look-up file is used to define 

each county’s neighbors. For example, for Bond County, Illinois the file would include FIPS 

(Federal Information 

Processing Standards) codes 

for Clinton, Fayette, 

Madison and Montgomery 

counties, IL. There are a 

few exceptions to the 

bordering county rule. 

These exceptions generally 

occur when two counties or 

more are divided by a large 

body of water, such as Lake 

Michigan, or the counties 

include a mountain range, 

such as the Sierra Nevada 

Mountains. Some judgment 

goes into determining if a 

county should be excluded 

from the pool of surrounding 

counties. This judgment 

should be largely driven by 

agricultural similarities or 

dissimilarities between 

counties. Recommendations for exceptions are prepared by AB Rate Specialists. The AB Rate

Specialists and RT Leader apprise the AB Chief of the rationale and their recommendation(s). 

Provided that no concerns or issues are raised by these individuals, the RT Leader approves the 

exception and authorizes implementation. 

The Simple Group LCR is a weighted average of surrounding counties’ Simple Group LCRs 

(weighted by each county’s Total Adjusted Liability), which includes the target county itself. In 

other words, it is the sum of the product of Total Adjusted Liability and Simple County LCR 

divided by the sum of Total Adjusted Liability. 

First the Adjusted Liability and the Adjusted Indemnity minus the Cat Indemnity is established for 

each of the surrounding counties by year. The surrounding county data along with the target county 

is then summarized by year, which results in a group county Adjusted Liability and Adjusted 

Indemnity minus Cat Indemnity totals. These totals are then used to calculate a yearly loss cost 

ratio (LCR) for the group counties. The last step is to determine a simple LCR by summing all the 

yearly LCRs and dividing by the number of years with observations. The automated system 

assigns a run identification number denoting the date and time it was run that can be utilized for 

future review and reference.

MARCH 2008 68 FCIC-11010 (RMH-APH)
Table 9 

Historical Information for County Group - Wheat

Capped Capped

Crop Net Units Adjusted Adjusted Adjusted

Crop Year Acres Indemnified Indemnity Liability LCR

0011 1975 10006.0 51 27,392 391,753 0.06992161

0011 1976 13654.0 69 41,244 552,075 0.07470724

0011 1977 11513.0 72 50,636 476,670 0.10622863

0011 1978 2091.0 19 5,409 90,082 0.06004529

0011 1979 9183.0 14 6,409 427,993 0.01497454

0011 1980 10323.3 16 6,028 549,325 0.01097347

0011 1981 33601.3 158 139,806 1,948,080 0.07176605

0011 1982 63037.9 629 698,143 4,678,061 0.14923769

0011 1983 41291.6 173 107,424 2,926,619 0.03670584

0011 1984 32024.1 185 123,160 2,337,183 0.05269592

0011 1985 32093.9 373 321,827 2,075,130 0.15508763

0011 1986 17629.5 116 161,598 1,047,131 0.15432453

0011 1987 16346.1 117 137,549 824,616 0.16680370

0011 1988 40928.9 81 56,679 1,963,970 0.02885940

0011 1989 56436.4 78 57,297 3,106,543 0.01844397

0011 1990 62548.7 441 283,584 4,137,445 0.06854085

0011 1991 50013.4 187 105,916 2,821,689 0.03753638

0011 1992 42075.6 48 46,130 2,360,327 0.01954390

0011 1993 37460.1 380 289,910 2,195,774 0.13203089

0011 1994 57118.9 175 197,701 3,277,813 0.06031491

0011 1995 47403.6 452 351,487 2,505,000 0.14031417

0011 1996 65108.4 344 462,276 4,382,367 0.10548546

0011 1997 45346.7 126 82,764 3,107,632 0.02663250

0011 1998 40581.6 76 76,808 3,008,414 0.02553106

0011 1999 32278.8 198 333,607 2,332,382 0.14303275

0011 2000 71577.9 25 28,713 4,776,765 0.00601097

0011 2001 84552.0 51 72,670 5,212,208 0.01394227

0011 2002 99398.3 198 240,365 7,339,575 0.03274917

Summary 1125624.0 4,852 4,512,532 70,852,622 0.0708

(Within) 

Variance*: 0.0028

Notes:

1. (*) Sample variance of "Capped LCR" for all available crop years.

In this example, the Group County made up of the seven counties that surround Allen County, 

Kansas has a simple LCR of 0.0708 for wheat. This information can now be added to the 

worksheet summary table in the row called Cnty Group LCR (includes target). 

The final step needed to determine the county unloaded rate is calculating the Z value to apply to 

the county’s insurance experience. This process determines how much weight should be assigned 

to the target county’s experience and the county group’s experience. The following is an example 

from Allen County, Kansas for wheat. 

MARCH 2008 69 FCIC-11010 (RMH-APH)
Table 10 

 

Credibility Weighted Calculation for Capped Loss Cost Ratio - Wheat

Average 

Capped Net P

State County ID LCR Acres Alpha (Net Acres/Alpha)

Kansas Allen Target County 0.0841 173730 10000 17.373

Kansas Anderson Surr County 1 0.0575

Kansas Bourbon Surr County 2 0.0648

Kansas Coffey Surr County 3 0.0629

Kansas Linn Surr County 4 0.0631

Kansas Neosho Surr County 5 0.0786

Kansas Wilson Surr County 6 0.0685

Kansas Woodson Surr County 7 0.0741

Cnty Group Exposure Units: 112.5624

Cnty Group LCR (includes target): 0.0708 *

Variance of Capped LCR (target county only): 0.0062

Variance of County Group (includes target): 0.0001 **

K = Var[Target County]/Var[County Group] = 62

Z = P/(P+K) = 0.2189

Capped LCR: 0.2189 x 0.084 + [1 - 0.2189] x 0.071 = 0.074 = Unloaded Rate

Notes:

1. (*) Calculated by taking the sum of all county's experience each year, calculating a LCR for the group for each year, then averaging the LCRs acr 

2. (**) Sample variance of "Average Capped LCR" from Column (4) including the target county.

3. "LCR" is loss cost ratio.

This represents the Unloaded Rate for the county target rate and is entered in the county summary 

worksheet. Unloaded Rates are reviewed by AB Rate Specialists for reasonableness, 

appropriateness, and to ensure that calculated values accurately reflect programmed calculation 

specifications and any issues/concerns are raised to the Rate Team Leader (Rates TL) and AB

Chief. 

The credibility procedure addresses the concern of representativeness of events in a county’s loss 

history and the variability of county rates over time and space. Incorporating loss history from 

neighboring counties into the target county’s rate determination increases the possibility that all 

possible events are a part of the county pool of events. One should also recognize that events in 

nearby counties are often correlated to events of the target county. 

The credibility procedure in effect results in losses being redistributed from higher historical loss 

areas to lower historical loss years. Such reallocations are valid to the degree that: 1) events that 

occurred in surrounding counties are similar to events that could have occurred in the target county; 

2) such events are under-represented or over-represented in the target county’s loss history. 

MARCH 2008 70 FCIC-11010 (RMH-APH)
IV. State Catastrophic Load.

In Section I of this chapter, the amount of county indemnity that was capped was identified, but 

nothing further was explained on how the capped indemnity would be utilized in the rate making 

process. The State Cat Load or State Excess Load adds a provision for the Excess Indemnity 

excluded from the loss cost in the unloaded rate calculation. The following table is a part of the 

summary of the state excess calculation for Kansas wheat. 

Table 11 

Crop State County Adjusted Liability Cat Indemnity

Allen $11,230,652 $157,439

Anderson $10,830,185 $238,407

Atchison $4,184,325 $139,254

Barber $75,958,064 $2,203,898

Barton $133,922,920 $6,194,010

... ... ...

WHEAT KANSAS ALL COUNTIES $6,669,467,278 $247,858,656

Adjusted liability and Cat indemnity amounts are totaled by state by summing across all counties 

(e.g., the adjusted liability for KS includes $11,230,652 from Allen county; the CAT indemnity 

includes $157,439 from Allen County). For Kansas wheat, the following State Cat Load was 

calculated:

 or

State Cat Load = $247,858,656 / $6,669,467,278 = 0.037163

The State Cat Load is limited to a maximum of .0325 and a minimum of .0065. As a result, the 

state cat load will be capped at .0325 for Allen County, Kansas wheat, with the remaining 

distributed to the County Cat Load. The maximum of .0325 was subjectively determined by FCIC 

senior management. Initially, the maximum was set at .05 based on the 75% coverage level. More 

recently, it was modified to .0325 based on the 65% coverage level (i.e. .05 x .65 = .0325). 

Beginning with the 11/30/2007 and subsequent filings, the cup amount changed from 0.010 to 

0.0065 in order to keep the cup on a consistent basis with rates re-stated to the 65% coverage level. 

The Excess Indemnity for each county is essentially pooled for the entire state and then spread back 

evenly to each county. As noted earlier, the actuarial justification for the capping process is that 

extreme LCRs are generally due to catastrophic events and as such are infrequent, lack statistical 

credibility, and may not be reflective of the county’s expected value. Since they have been 

removed from the county experience, it is appropriate to add them in at a broader level. The State 

Cat Load calculation accomplishes this. 

The automated system assigns a run identification number denoting the date and time the State Cat

∑

∑= Liability from countiesall

Cat sIndemnitie from countiesall

LoadCatState

MARCH 2008 71 FCIC-11010 (RMH-APH)
Load routine was run that can be utilized for future review and reference. State Catastrophic Load 

output files are reviewed by AB Rate Specialists for reasonableness, appropriateness, and to ensure 

that calculated values accurately reflect programmed calculation specifications and any 

issues/concerns are raised to the Rate Team Leader (Rates TL) and AB Chief. 

V. County Catastrophic Load.

The State Cat Load is calculated as excess indemnity divided by the total adjusted liability. The 

State Cat load is then limited to a maximum of 3.25% (5% at 75% coverage) and a minimum of

0.65%. Any state excess above the 3.25% cap is distributed back to each county proportional to 

each county’s adjusted liability. The purpose for the caps is to limit the amount of rate being 

shared across all counties when the counties may or may not be homogenous. 

If the state cat load is greater than 3.25%, as is the case with Allen County, Kansas wheat, the 

following calculations are performed to establish the target county’s County Cat Load. This is 

done by the calculating the excess indemnity that would then be prorated back to each county based 

on its amount of indemnity contributed to the state pool relative to its liability.

Excess Cat Load = State Cat Load – 0.0325 

then

(1)

then

(2)

then

(3)

then

(4)

Target County Cat Load = [(1) * (2)] / (3) 

For Allen County, Kansas wheat, the state catastrophic load was greater than the cap of .0325; 

therefore, an excess indemnity would need to be distributed amongst the counties. The following 

table illustrates the County Cat Load calculation for Allen County, Kansas wheat. 

[ ∑ ] ∑

=

Target County Cat /Indem State Cat Indem

Target County Cat portion Indem

ExcessIndemnity = Excess Cat Load x ∑State Adjusted Liability

Target County Liability = ∑target county adjusted liability

MARCH 2008 72 FCIC-11010 (RMH-APH)
Table 12 

 

Allen County, Kansas Wheat

Excess Cat Load: 0.03716319 - 0.0325 = 0.00466319

Target County Cat Indemnity: $15,7951 / $247,858,656 = 0.00063726

Excess Indemnity: 0.004663 x $6,669,467,278 = 31100993

Target County Liability: 11145547

Target County Cat Load: (0.000637 x $31,100,993) / $11,230,652 = 0.00176404 (0.0018)

VI. Miscellaneous Rate Loads 

Policy provisions are subject to change and changes may have an effect on the risk of insurance. 

Therefore, it is essential that each change be reviewed for rate impact. Currently, there are three 

other rate loads that are included in the ratemaking process: 1) Prevented Planting rate load; 2) 

Replant rate load; and 3) Quality Adjustment rate load. Not all crop policies contain coverage 

provisions for prevented planting, replanting or quality standards. Therefore, individual crop policy 

provisions are utilized to determine if a rate load is greater than zero (0.000). Exhibit 1 lists which 

crops currently have coverage for prevented planting, replanting, and quality adjustment. 

These three rate loads are calculated outside of the “normal” rate determination because they are 

considered external factors “which are not directly related to yield loss.” The rate loads for 

prevented planting, replant, and quality adjustment are generally based on internal RMA

evaluations and reviews. The supporting information and documentation for these internal 

evaluations and reviews is maintained in AB for future review and verification. Prevented planting 

coverage was first added to a limited number of crops beginning in 1994; replant coverage, while 

being a part of the basic provisions for a longer time, has had limited losses; and quality adjustment 

language was added to a number of crop policies beginning with Spring crops of crop year 2000. 

The prevented planting and replant loss data was removed from the loss experience in Statplan and 

is therefore not included in the data underlying the rates. Nevertheless, since prevented planting 

and replant are an identifiable event, the rates should include a provision for this type of loss, so the 

concept of the adjustment is appropriate. 

Although captured in the loss data, quality adjustments are not isolated on the loss records, making 

it nearly impossible to capture the impact of quality adjustments on the recorded indemnities. 

While it is believed to be a very small amount of additional indemnity that occurs due to quality 

adjustment, the ideal scenario would be to extract the amount of quality loss from the loss 

experience similar to the method used for prevented planting or replant. Since this segregated data 

is not currently available and until it is available, judgment on the part of the analyst is utilized 

during quality adjustment rate load reviews, weighting the amount of quality losses contained in the 

loss experience verses the current rate load. All data utilized during the subjective judgment 

process will be maintained either in the Regional Office or in AB for future review and reference.

VII. Disaster Reserve Factor

MARCH 2008 73 FCIC-11010 (RMH-APH)
The disaster reserve factor is used to increase calculated rates by an amount that is intended to meet 

the Congressional requirement that rates be adequate to cover anticipated losses and a reasonable 

reserve. This factor is applied to all crops and insurance plans. 

RMA’s current disaster reserve factor is 0.88 and is based on calculations done in 1991. Analysts 

used 41 years (1948-1988) of data for all crops and figured the probability for breaking even 85% 

of the time over any 10 year period, which resulted in a target loss ratio of 0.88. That means that 

1/0.88 or 13.6% is currently added into the rate for reserve. Prior to 1991 the disaster reserve load 

was set at .90. It is unknown when the disaster reserve load was first added to the rate 

determination process but was probably instituted in the mid 80’s when APH (Actual Production 

History) first began. RMA contracted with a non-governmental entity to conduct a study to review 

and evaluate the disaster reserve factor load. The contracted review was recently completed and 

confirmed that RMA’s current Disaster Reserve Load was appropriate, thus no changes to this load 

will be made.

Actuarial procedures often incorporate a risk load or contingency load in order to build in an 

additional margin of protection against future adverse experience. The Statement of Principles 

states, “The rate should include a charge for the risk of random variation from the expected costs.” 

In Table 8, it can be seen that even after removing the extreme portions of the historical loss cost 

ratios, the annual LCRs may vary significantly from the long-term average of 0.084. There is no 

single approach that will produce an appropriate risk margin in all circumstances. Factors that need 

to be considered include: variability in loss costs from year to year, accumulated funds that have 

been earmarked to pay claims if indemnified losses exceed premium revenues, and availability of 

funds from other sources to pay claims should the accumulated funds be depleted. 

VIII. Optional Unit Factor 

The Unit Division Load or Optional Unit Factor takes into account the fact that indemnity is not 

computed for an entire farm, but rather for each division of a farm. For example, if a farm is 

divided into four equal segments where one segment had 0% production and the other three had 

100% production, the producer would receive indemnity for the unproductive segment at a 75% 

coverage level, whereas, if the farm was insured as a whole, there would be no indemnity at the 

75% coverage level. 

To incorporate the unit structure into the premium rates, the main actuarial procedure used is 

premium rate discounts. This means that once the base premium rate has been set, it will then be 

adjusted depending on the choice of unit format. The actuarial logic for incorporating unit format 

discounts in premium rate setting is to ensure that premium rates reflect any difference in loss 

experience among the different unit formats. 

The basic unit structure is typically the “base” unit format in historical experience. Since the 

optional unit format is the lowest level of presentation of the actuarial structures, the historical 

experience is loaded up by how much discount is warranted for a producer that selects basic units 

over optional units. This means that discounts are given only when an insured producer chooses to 

insure at the basic, enterprise, or whole-farm unit level. For example, if a corn producer chooses to 

insure his acreage as a basic unit, a multiplicative discount factor is used to adjust his base premium 

rate to reflect this unit format. 

This multiplicative discount factor for basic units has been set at 10% for many years as a 

MARCH 2008 74 FCIC-11010 (RMH-APH)
reasonable discount for the coverage that is given up from having basic units instead of optional 

units. This equates to an optional unit surcharge factor in establishing target rates of 11.1% (1.0 / 

0.90). This assumes that the historic loss cost ratios for a basic unit would be 10% less than that of 

optional units. The 11.1% optional unit factor is currently a universal factor used for all crops and 

geographic areas where the policy allows for optional units. Internal data analysis and evaluation 

have tended to support the amount of this load. RMA has contracted with a non-governmental 

entity to conduct a study to review and evaluate the appropriate factors for each of the unit 

structures. The study concluded that the current unit structure does not need to be changed. 

However, the current basic unit discount of 10%, while actuarially appropriate for the book of 

business as a whole, should be tailored to vary across crops, regions, and unit structures (including 

enterprise units). The Board has approved adoption of the study recommendations. RMA planned 

to implement the variable unit discount (but this implementation has been suspended indefinitely 

with RMA’s eWA system redesign).

Maintaining the indemnity data separately by unit or field, as would be necessary to avoid the Unit 

Division Load correction factor, would probably be more accurate but also more cumbersome and 

less cost efficient. It is often necessary to balance the benefits of more accurate results and the 

costs of obtaining those results. The procedure of deriving rate indications based on data at the 

field level instead of the field unit level is a reasonable simplification as long as the adequacy of the 

Unit Division load is monitored.

IX. County Target Rate 

The county target rates are developed using the following formula and the variables defined in 

earlier sections of this chapter. The target rate is generally considered to consist of two parts, a 

variable portion and a fixed portion. However, an individual’s rate (not covered in this manual) 

may vary based upon his approved yield. The basis for different rates for different approved yields 

is driven by the variable portion of the rate while the fixed portion of the rate remains constant 

across all approved yields. 

Target Rate = Variable Rate + Fixed Rate

 

 Where

ULR = County Unloaded Rate Section III

CntyCAT = County Catastrophic Rate Load Section V 

ResFac = Disaster Reserve Factor Section VII 

PP = Prevented Planting Rate Load Section VI 

RP = Replant Rate Load Section VI

QA = Quality Adjustment Rate Load Section VI

StCAT = State Catastrophic Rate Load Section IV 

UnitFac = Optional Unit Factor Section VIII

Substituting the values found in previous sections of this chapter, plus assumed values for PP, RP, 

and QA, a target rate can be determined for wheat in Allen County, Kansas of:





 



 +++

+























 



 



 +

= UnitFac

PP RP QA StCAT

UnitFac

ResFac

ULR CntyCAT

RateTarget

MARCH 2008 75 FCIC-11010 (RMH-APH)
Target Rate = 0.0957 (variable) + 0.0439 (fixed)

 = 0.140 

The automated system assigns a run identification number denoting the date and time the County 

Rates routine was run that can be utilized for future review and reference. County Rates are 

reviewed by AB Rate Specialists for reasonableness, appropriateness, and to ensure that calculated 

values accurately reflect programmed calculation specifications and any issues/concerns are raised 

to the Rate Team Leader (Rates TL) and AB Chief. 

X. Judgment Target Rate 

The focus in the first nine sections of this chapter has been on the development of a mechanical 

process for determining the rate. However, there will be situations where human intervention will 

be a necessity in determining the county target rate. Situations where counties experience is limited 

or the county experience does not represent the expectation of future events. 

As discussed previously, the credibility measurement is an indicator of predictability of future 

events and is based on the number of acres insured. The weight of the experience is a factor of the 

amount of acres and variability of a county’s experience with its county group. 

All county target rates that are not credibile undergo a mandatory review by the AB and Regional 

Underwriting Office. For these counties, each crop rate specialist review the adjusted insurance 

experience and provide a target rate with justification for acceptance for the county target rate. 

The county target rates and justification documents submitted by the regional offices are then 

reviewed by AB for completeness and to resolve any differences. Once accepted by AB the county 

target rates are posted to a file within the rates database as county target rates for the current year 

and subsequent years or until another rate review is completed.

XI. Type/ Practice Factors

The rates developed to this point have used data aggregated for all crop types and cultural farming 

practices. Each type or practice can affect a producer’s expected indemnification and, 

consequently, needs to be reflected in the individual producer’s rates.

Type/Practice factors reflect the fact that different crop types and farming practices increase or 

reduce the risk of loss. For example, an irrigation practice reduces the risk of loss due to 

inadequate moisture. For each practice, the rate is multiplied by a factor representing the relative 

risk. Type/Practice factors are derived from MPCI data that is aggregated at a level greater than the 

county level. This is appropriate, since the county data would likely lack sufficient credibility. 

In addition, one should not expect that the relative impact of specific practices would vary 





 



 +++

+























 



 



 +

= 90.

0325.0001.00006.0

90.

88.

0018.0074.0

RateTarget

MARCH 2008 76 FCIC-11010 (RMH-APH)
significantly from one county to the next (although the impact could vary across broader regions). 

It should be noted that subdividing data, and aggregating at a broader level, is commonly used in 

insurance ratemaking. 

Currently the type/practice factors are applied to the variable portion of the rate only. The fixed 

rate portion of the rate is generally considered to be rate loads that are uniform across a broad range 

of types, practices, crops, counties, and policies. 

, where

ULR = 

 County 

Unloaded Rate Section III

CntyCAT = County Catastrophic Rate Load Section V 

ResFac = Disaster Reserve Factor Section VII 

PF = Practice Factor Section XI

PP = Prevented Planting Rate Load Section VI 

RP = Replant Rate Load Section VI

QA = Quality Adjustment Rate Load Section VI

StCAT = State Catastrophic Rate Load Section IV

UnitFac = Optional Unit Factor Section VIII

Milliman & Robertson, Inc. wrote in 2000, the type/practice factors are derived by dividing the 

practice specific LCR by the combined LCR where the combined LCR is calculated over all 

practices in the rating area. This is a reasonable approach. RMA should monitor the type/practice 

factors over time to determine whether there are any trends emerging in the factors.

AB Rate Specialists review updates and modifications to type/practice factors for reasonableness, 

appropriateness, and uniform application across regions. Problems or differences discovered would 

be presented to the RT Leader and to the AB Chief for resolution. Documentation, in these cases, 

would be maintained by the AB Rate Specialist in either hardcopy or automated media.

(6) MANDATED CAPPING REQUIREMENTS COMPONENT 

Objective: to determine a process such that changes in target rate, reference yield and coverage 

level rate relativities are maximized to the extent that they do not exceed the 20% increase in base 

premium rate that is legislatively imposed on RMA. 

Changes in premium for all crops will generally range from –5% to +15%. In accordance with 

legislative mandate, in the extreme cases premium increases will be capped at 20% compared to 

what the insured would have paid last year for the same coverage. However, premium decreases 

can exceed 20% so that the target base premium rate can be reached in three years. The premium 

rate for the first year is decreased so that in the following two years the premium rate will only have 

to decrease by no more than 20% to reach its target rate at the end of three years. The capping 

calculations are performed in a stand-alone SAS program with output generated in spreadsheet 

format that serves as input used to load final published rates to AFS. Edit and validation reports are 

a by-product of this process. These reports are reviewed by AB Rate Specialists who approve the 

final output. The reports are reviewed for reasonableness, appropriateness, and to ensure that 

( ) 



 



 +++

+×























 



 



 +

= UnitFac

PP RP QA StCAT

UnitFac

ResFac

ULR CntyCAT

RateTarget PF

MARCH 2008 77 FCIC-11010 (RMH-APH)
calculated values accurately reflect programmed calculation specifications and any issues/concerns 

are raised to the Rate Team Leader (Rates TL) and AB Chief. When all problems have been 

analyzed and final output has been approved, the data is loaded to AFS.

The Base Premium Rate is defined as:

(1) reference _ rate load_fixed differential

reference _ yield

_APH yield BPR ⋅















 ⋅ + 













 =

exponent

For capping purposes, assume that the t-yield represents the county average. Therefore, the base 

premium rate for capping is defined as:

 

(2) reference _ rate load_fixed differential

reference _ yield

_t yield BPR ⋅















 ⋅ + 













 =

exponent

Where the yield ratio is bound: 

(3) 5.1 _

_ 5. ≤













 ≤

reference yield

t yield

The t-yield and exponents are assumed to be fixed. The other four components can change and 

move towards their target values. 

The goal of the capping routine is to change the four components so as to keep the change in the 

BPR within policy bounds. 

So, start off with the initial BPR 

(4) initial initial initial

exp

initial

initial dfr

y

ty BPR ⋅





















+⋅ 













 =

And the target BPR

(5) target target target

target

target r df

y

ty BPR

exp

⋅





















+⋅ 













 =

Where ty is the target yield, y is the reference yield, r is the reference rate, f is the fixed load, and d

is the differential. 

However, there are caps placed on the movement of the BPR. 

If BPRt arg et > BPRinitial then: 

(6) ( [( ) ]) BPRcapped BPRt et BPR BPRinitial BPRinitial = min , min 06.09.1 ⋅∆⋅+ 2.1 , ⋅ arg 65

MARCH 2008 78 FCIC-11010 (RMH-APH)
Where ∆BRP65 is the percent change in the base premium rate at the 65% coverage level.

If BPRt arg et < BPRinitial and BPRtarget will be reached in three years then: 

(7) ( *max[ (BPR* .06 - 91. initial / target BPR , .8 1),- BPR target/BPRinitial]) BPRcapped = BPRinitial

If BPRt arg et < BPRinitial and BPRtarget will not be reached in three years then for year one:

(8) BPRcapped 23.1 ∗= BPRt arg et 

Then use formula (7) for the following two years. 

The capped base premium rate (BPRcapped) can be used to define an iso-rate frontier: all 

combinations of the reference yield, reference rate, fixed load, and differential that give the same 

rate.

(9) dfr

y

ty BPR

exp

capped ⋅





















+⋅ 













 =

Suppose the maximum change in the BPR is 20%. The rate frontier would be all combinations of 

reference yield (y), reference rate (r), fixed load (f), and the differential (d) that results in a 20% 

increase in the BPR. Then, the capping routine finds the intersection point of the line defined by 

the initial and target BPRs and the rate frontier. The point of intersection will determine the values 

of the rating components. 

Example 1

Assume the fixed load and differential are constant. Given the initial reference yield of 12 and rate 

.05, the target values for the yield (16) and rate (.11) results in the new target BPR to exceed the 

maximum allowable increase defined by the frontier. The capping routine will find the intersection 

point which will give the derived values for the reference rate and yield (.065 and 13). 

MARCH 2008 79 FCIC-11010 (RMH-APH)
Initial BPR

Target BPR

Frontier

20% Increase in BPR

.03 .05 .07 .09 .11 .13 .15 .17

Reference Rate

10 11 12 13 14 15 16 17 18

Reference Yield

Point of Intersection of a Line and Plane 

Because it is necessary to work in R3 space (reference rate, reference yield and fixed load space), 

use of the typical equation of a line in a plane, y = mx + b, is not appropriate. It is necessary to use 

the parametric form of the equation of the line. Below is an example of how to find the intersection 

point of a plane and line. 

Given points P1 = (X1, Y1, Z1) and P2 = (X2, Y2, Z2) the parametric form for the line is: 

( ) 1 12 −+= xxtxx

( ) 1 12 −+= yytyy

( ) 121 −+= zztzz

t ≤≤ 10

To find the point of intersection, A, of the line L: 

tz

ty

tx

21

3

32

−=

−= +

−=

With the plane P: 

zyx =+− 5224

one must find the coordinates that satisfy both the equation of the line and the equation of the plane. 

MARCH 2008 80 FCIC-11010 (RMH-APH)
For the line at A, HAVE

A A

A A

A A

tz

ty

tx

21

3

32

−=

+−=

−=

For the plane at A, HAVE

=+− 5224 AAA zyx

Now combine these to find tA: 

( ) ( ) ( ) =−++−−− 521232324 A A A t t t

18

11

t A =

Now use this value to find the coordinates of A: 

9

2

18

11 21

18

43

18

11 3

6

1

18

11 32

 −=

 



 −=

 −=

 



 +−=

 =



 



 −=

A

A

A

z

y

x

Example 2

In Bibb county Alabama the current base premium rate for soybeans is .27. The target values 

would lower the rate to .20, a 26% decrease. The resulting allowed change would be capped at 

A

Plane A

(XA, YA, ZA)

Line L

MARCH 2008 81 FCIC-11010 (RMH-APH)
10% with the derived reference yield rounded to the nearest whole number. 

Soybeans 

Alabama, Bibb County 

Reference 

Yield

Fixed 

Load

Reference 

Rate

t-yield Exponent Residual Differential BPR

Initial 21.0 .03 .1440 16 -1.879 1 1 .270

Target 18.0 .03 .1360 16 -1.879 1 1 .200

Derived 20.0 .03 .1410 16 -1.879 1 1 .244

No Type Specified / Irrigated, Coverage Level 65%

Initial BPR

Target BPR

Derived Values

Frontier

9% Decrease in BPR

.1

.11

.12

.13

.14

.15

.16

.17

Reference Rate

17.5 18 18.5 19 19.5 20 20.5 21 21.5 22

Reference Yield

Soybeans, Autauga Alabama 

Capping Procedure

(7) APH BUSINESS PROCESS AND CRITICAL CONTROL COMPONENT

RMA establishes an annual filing schedule that includes final dates for county expansion, policy 

provision changes, actuarial document changes including rate and coverage changes, price 

establishment dates, and document preparation dates. These dates establish a reasonable timeframe 

from which all rate work can be processed. 

APH rate reviews are a part of the overall business process as has been discussed in the prior 

MARCH 2008 82 FCIC-11010 (RMH-APH)
chapters. Generally, each step of the process involves AB. 

In addition to a strict filing schedule that dates must be held too, critical control points are also 

established to assume proper quality control within each step of the rate determination process. 

These critical control points are outlined earlier in Section 2 of this handbook under Business 

Process and Critical Control Points and also in the APH Business Process and Critical Control 

Points Exhibit 2. Section 2 and Exhibit 2 both denote that approval or disapproval of 

recommendations is required before the processes can continue and supervisory oversight is 

required where noted. 

Documentation is generally maintained in AB; however, additional documentation is also 

maintained in Regional Offices. Contracted studies, internal evaluations and analysis, and 

authorizing memoranda, etc. are maintained in AB for future review and reference. AB also 

maintains automated (and hardcopy, if applicable) documentation of rate determination, rate 

review, and rate approval as denoted in Section 2 and Exhibit 2. 

RMA’s AB periodically reviews and updates documented support for all factors in the rate 

determination process. The frequency for review of some factors will vary, but will generally be 

reviewed every 3 years unless the underlying study suggests a longer interval for review. 

Keys to the APH Business Process and Critical Control Points Exhibit 2: 

RO Staff Regional Office Staff

RO Director Regional Office Director

AB Staff Actuarial Branch Staff Members

RT Leader AB Rates Team Senior Statistician 

FT Leader AB Filing Team Senior Risk Management Specialist 

AB Chief Actuarial Branch Chief

APDD Director Actuarial and Product Design Division Director

Senior Actuary RMA Senior Actuary 

Deputy Admin for PM RMA Deputy Administrator for Product Management

Admin RMA Administrator

MARCH 2008 83 FCIC-11010 (RMH-APH)
4. REFERENCE MATERIAL

EXHIBIT 1 – Crops with PP/RP/QA Provisions

MARCH 2008 84 FCIC-11010 (RMH-APH)
APH Crop Crop 

Code Prevented Planting / Coverage

Replant

Payment

Prov.

Quality

Adjustment

***Enterprise (E)

** Optional (O)

Basic (B)

Unit

Almonds 0028 B/O

Apples 0054 B/O

Avocados (Pilot - Florida Only) 0019 B/O

Beans (Processing) 0046 Yes 1998 40% B/O/O by type

Blueberries 0012 B/O by type 2/

Cabbage (Pilot) 0072 Yes B/O 

Canola/Rapeseed 0015 Yes 1995 60% Yes B/O

Citrus (AZ & CA) 

 Grapefruit

 Lemons

 Mandarin

 Minneola Tangelos

 Navel Oranges

 Sweet Oranges

 Valencia Oranges

 Orlando Tangelos

 Kinnow Mandarins

0201

0202

0205

0206

0215

0216

0217

0237

0239

B by Crop/O

Citrus Fruit (Texas) 

 Early & Midseason Oranges

 Late Oranges

 All Other Grapefruit

 Ruby Red Grapefruit

 Rio Red & Star Ruby Grapefruit

0224

0225

0226

0228

0238

B/O 

Corn 0041 Yes 1994 60% Yes B/O/E

Grain Sorghum 0051 Yes 1994 60% Yes B/O/E

Soybeans 0081 Yes 1994 60% Yes B/O/E

Cotton 0021 Yes 1994 50% B/O

Cotton (ELS) 0022 Yes 1994 50% B/O

Cranberries 0058 B/O

Dry Beans 0047 Yes 1997 60% Yes B/O/O by type

Figs 0060 B by type/O

Forage Production 0033 B/O 

Grapes 0053 B/O Variety3/

Grapes, Table 0052 B/O Variety3/

Hybrid Corn Seed 0062 Yes 1994 60% B/O 

Hybrid Sorghum Seed 0050 Yes 1994 60% B/O 

Macadamia Nuts 0023 B/O

Millet 0017 Yes 2004 60% B/O

Mint (Pilot) 0074 B/O

Mustard (Pilot) 0069 Yes 1999 60% Yes B/O

Onions 0013 Yes 1998 45% Yes B/O/O by type

Peaches 0034 B/O 

Peanuts 0075 Yes 1999 50% Yes B/O by FSN

MARCH 2008 85 FCIC-11010 (RMH-APH)
APH Crop Crop

Code Prevented Planting / Coverage

Replant

Payment

Prov.

Quality

Adjustmen

t 

***Enterprise 

(E) 

** Optional 

(O)

Basic (B)

Unit

Pears 0089 B/O 

Peas, Dry 0067 Yes 1998 60% B/O/O by Type

Peas, Green 0064 Yes 1998 40% B/O/O by Type

Plums 0092 B/O 

Popcorn 0043 Yes 1999 60% Yes B/O 

Potatoes 0084 Yes 1998 25% B/O 

Prunes 0036 B/O 3/

Rice 0018 Yes 1994 45% Yes B/O 

Safflower 0049 Yes 1998 60% Yes B/O 

Silage Sorghum Pilot 0059 Yes 2005 60% Yes B/O/E

Barley 0091 Yes 1994 60% Yes B/O/E

Flax 0031 Yes 1995 60% Yes B/O/E

Oats 0016 Yes 1994 60% Yes B/O/E 

Rye 0094 Yes 1995 60% Yes B/O/E

Wheat 0011 Yes 1994 60% Yes B/O/E

Stonefruit

 Fresh Apricots

 Processing Apricots

 Fresh Nectarine

 Processing Cling Peaches

 Processing Freestone Peaches

 Fresh Freestone Peaches

0218

0219

0220

0221

0222

0223

B/O by type

Sugar Beets 0039 Yes 1997 45% Yes B/O 

Sugarcane 0038 B/O 

Sunflower Seed 0078 Yes 1998 60% Yes B/O 

Sweet Corn (Processing) 0042 Yes 1998 60% B/O 

Sweet Potatoes (Pilot) 0085 B***

Tobacco, Guaranteed Production

 Flue Cured

 Fire Cured

 Maryland

 Dark Air

 Cigar Filler

 Cigar Binder

 Cigar Wrapper

0229

0230

0232

0233

0234

0235

0236

B by/share/ 

type/ O by 

FSN 3/

Tobacco (Quota)

 Burley 0231 B by FSN

Tomatoes (Fresh Mkt Guar. Prod.) 0086 Yes B/O 

Tomatoes (Processing) 0087 Yes

Wild Rice (Pilot) 0055 B/O 

MARCH 2008 86 FCIC-11010 (RMH-APH)
EXHIBIT 2 – APH Business Process and Critical Control Points 

MARCH 2008 87 FCIC-11010 (RMH-APH)
Adjusted 

Data

Load StatPlan 

Database

APH Business Process and Critical Control Points

Annual Rating Cycle

Normalize data 

to common 

coverage level 

RT Leader – Directs data normalization to begin.

RT Leader – Directs the loading of the most recent years information 

into the Statplan Database.

Annual 

Rating Cycle

Determine crops

 to review

Included in the Rate Methodology Memo

RO Staff – Request additional crops or state/county programs be 

supplemented to generated list

AB Staff – Recommend additional programs be added to the 

generated list.

RT Leader – Reviews requests and makes Approve/ Disapprove 

recommendations.

AB Chief – Reviews and recommends final list of crops to be 

reviewed.

APDD Director – Reviews and concurs on final list of crops to be 

reviewed and presents to Senior Actuary.

Senior Actuary – Reviews and approves final list of crops to be 

reviewed and presents recommendations to Deputy 

Administrator for PM.

RT Leader - Directs the annual rating cycle program to begin; 

this occurs prior to the upcoming crop year rate review. 

Annual 

Rating Cycle

(A)

MARCH 2008 88 FCIC-11010 (RMH-APH)
Contracted 

Studies

APH Business Process and Critical Control Points

Implementation of Actuarial Rate Studies

RMA Actuarial 

Analysis

Incorporation of 

Actuarial Rate 

Studies/Analysis

Actuarial 

Rate Studies/

Analysis (B)

RO Staff – Review actuarial studies and deliverables and provide 

feedback to AB staff.

AB Staff – Review actuarial studies final deliverables and recommend 

incorporation/implementation of rate changes or rate methodology 

changes.

RT Leader – Reviews requests and makes Approve / Disapprove 

recommendations.

AB Chief – Reviews and recommends studies to be incorporated/

implemented.

APDD Director – Concurs/Nonconcurs on studies to be incorporated/

implemented and presents to the Senior Actuary.

Senior Actuary – Approves / Disapproves studies to be incorporated 

and presents recommendations to the Deputy Administrator for PM.

Included in the Rate Methodology Memo

MARCH 2008 89 FCIC-11010 (RMH-APH)
APH Business Process and Critical Control Points

Reference Yields

Existing 

T-Yields

Define 

process

Reference 

Yield 

Determination

Reference 

Yields (C)

AB Staff – Make recommendations of crops and process needed to 

update reference yields.

RT Leader – Reviews recommendations and compiles a list of crops 

and recommendations. 

RO Staff – Provide feedback and make recommendations.

RT Leader – Reviews requests and makes Approve / Disapprove 

recommendation.

AB Chief – Approve / Disapprove recommended crops for reference 

yield updates, apprise APDD Director, Senior Actuary and Deputy 

Administrator for PM, and include in the Rate Methodology 

Memorandum.

Reference 

Yields

Reference 

Yields (D)

MARCH 2008 90 FCIC-11010 (RMH-APH)
Annual Rating 

Cycle

(A)

Actuarial Rate 

Studies/

Analysis

(B)

Reference 

Yields

(C)

Rate 

Methodology 

Memo

APH Business Process and Critical Control Points

Rate Methodology Memo

RT Leader – Drafts Decision Memorandum (DM).

RO Staff – Review draft DM and provide feedback.

RT Leader – Reviews and finalizes DM.

AB Chief – Reviews and approves DM.

APDD Director – Reviews and Approves / Disapproves of 

recommendations in DM.

Senior Actuary – Reviews and Approves / Disapproves of 

recommendations in DM.

Deputy Admin for PM – Reviews and Approves / 

Disapproves of recommendations in DM.

Admin – Approves Decision Memorandum for the agency.

Crop Rate 

Review?

Yes

Rate Review 

(E)

No Target 

Rate Review 

Completed 

(F)

No

MARCH 2008 91 FCIC-11010 (RMH-APH)
Rate 

Review 

(E)

StatPlan 

Data

Establish Target 

Rates

Target 

Rate 

Calculation

Target Rates 

Developed

(G)

APH Business Process and Critical Control Points

Target Rates

RT Leader – Directs the program target rate calculation to 

begin.

RT Leader – Notifies RO Staff that target rates are ready for 

reviews.

RO Staff– Reviews generated rates, Approves or 

Recommends alternative rates including supporting 

documents.

AB Staff – Review RO recommendations and Approves or 

reaches consensus with RO. 

AB Chief & RO Director – If consensus not reached, they 

cooperate and collaborate to reach consensus.

Deputy Administrator for Insurance Services & Deputy 

Administrator for PM – If consensus not reached, they agree 

to final decision.

RT Leader – Notifies FT Leader to proceed with publication 

process when all target rates have been finalized.

MARCH 2008 92 FCIC-11010 (RMH-APH)
No Target 

Rate Review 

Completed 

(F)

Rate Capping 

Process

Target Rates 

Developed

(G)

AFS

 Database

APH Business Process and Critical Control Points

Publication of Rates

Quality 

Review

Publication

Generate 

Documents

Coverage 

Level 

Relativities

Rate 

Exponents

RT Leader – Initiates the capping process to establish the final 

publishable rates.

RT Leader – Initiates the loading of final rates to the AFS database.

RT Leader – Notifies FT Leader that rates are loaded in AFS database 

and rate documents can be generated.

FT Leader – Generates rate documents and notifies RO staff.

RO Staff & AB Staff – Review rate document, validate calculator, and 

correct/update as needed. 

RT Leader, AB Chief – Approve/disapprove rate changes.

RO Staff – Concur on final documents.

AB Chief - Authorizes publication of all documents and notifies 

customers via RO Server Release Memorandum.

Reference 

Yields (D)

Other 

Rate 

Loads

MARCH 2008 93 FCIC-11010 (RMH-APH)