Review of the Rating Methodology of the

APH Yield Exclusion

Contract BPA #: AG-645S-B-14-0022

Task Order #: AG-645S-K-15-0018

Submitted to

Board of Directors

Federal Crop Insurance Corporation

Submitted by

Nicholas E. Piggott, PhD

Dept. Agricultural and Resource Economics

North Carolina State University

Phone: 919 515 4668

E-mail: nick_piggott@ncsu.edu

Date Submitted

February 6, 2015

Hardcopy (Fed-Express Overnight)

Electronic (E-mail: cindy.spoor@rma.usda.gov)

Date Due

February 6, 2015
Review of the Rating Methodology of the APH Yield Exclusion

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TABLE OF CONTENTS

(1) THE EXECUTIVE SUMMARY..........................................................................................iv

(2) THE RESEARCH REPORT............................................................................................. 1

(A) DESCRIPTION OF THE METHODOLOGY USED BY THE EXPERT REVIEWER................... 1

(B) A DISCUSSION REGARDING EACH OF THE ITEMS LISTED IN SECTION C.4. ................. 1

1) Actuarial soundness................................................................................ 1

(A) Are adequate, credible, and reliable rate-making data 

available?........................................................................................ 1

(i) Is it likely that the data will continue to be available? .............. 2

(ii) Is the data vulnerable to tampering if the proposed 

rated methodology is approved?............................................. 3

(B) Are the explicit and implicit assumptions used in the rating 

process reasonable?....................................................................... 4

(C) Are the technical analyses (e.g., stochastic and other 

simulations) technically correct? Do they provide credible, 

relevant results?.............................................................................. 7

(D) Is the data used for the analyses appropriate, reliable, and 

the best available? .......................................................................... 7

(E) Are the proposed premium rates likely to cover anticipated 

losses and a reasonable reserve? .................................................. 8

(C) ADDITIONAL INFORMATION AT THE DISCRETION OF THE EXPERT REVIEW................ 10

(D) SHORT BIOGRAPHIES (NOT TO EXCEED ONE PAGE) FOR EACH PERSON WHO 

TOOK SUBSTANTIAL PART IN THE EXPERT REVIEW. .............................................. 14
Review of the Rating Methodology of the APH Yield Exclusion

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TABLES AND FIGURES

Table 1: Illustrative Example of How Yield Exclusion Can Affect APH ............................ 4

Table 2: Illustrative Example of How Yield Exclusion Can Affect APH Guarantee, 

Total Premium Per Acre, Producer and Government Paid Premiums, and 

the Producer-paid Premium Per APH Guarantee ............................................ 11
Review of the Rating Methodology of the APH Yield Exclusion

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(1) THE EXECUTIVE SUMMARY

The proposed (YE) option allows the producer to exclude any recorded or appraised yield 

for a crop for any year in which the per-planted-acre yield in the county is at least 50% 

below the simple average per-planted-acre yield during the previous ten consecutive 

years. More succinctly, the trigger for the YE option is when the county yield falls below 

50% of the county T-yield, enabling a producer’s actual yield for that crop in that year to 

be dropped from their approved APH. Two other components to the proposal include: (1) 

in any crop year in which the YE option is triggered for a county, any producers farming 

in contiguous counties are also eligible to exclude any recorded or appraised yield for the 

crop also and (2) separate determinations are made for both irrigated and non-irrigated 

acreage within a county.

The impact of the proposed YE option, by allowing a producer to exclude any 

recorded or appraised yield for a crop for any year in which the per-planted-acre yield in 

the county is at least 50% below the T-yield, will lead to a higher approved APH yield. 

The approved APH yield is used to establish the production guarantee for APH plans of 

insurance and so an increase in this approved yield results in a higher production 

guarantee. That is, the YE option results in an effective coverage level that is greater 

than the nominal coverage level. A higher production guarantee on a policy unit also 

leads to an increase in expected indemnities, and so premium rates should be adjusted 

(increase also) to remain actuarially fair. RMA’s proposed approach as the submission 

states is that the “same premium should be charged for a given yield guarantee on a 

policy no matter whether the guarantee is derived from a simple average of APH yields 

or an average of yields with Trend Adjustment or Yield Exclusion.”

The proposed methodology to adjust premium rates includes calculation of the 

effective coverage rate, and then using the existing nominal coverage rate differentials 

and applying the techniques of linear interpolation or linear extrapolation, to obtain an 

adjusted base premium rate for the policy unit for which the YE option is elected.

Employing linear extrapolation along with the suggested caps is appropriate in the shortterm due to a lack of experience data. The reviewer concurs with the submitters’ 

Recommendations 1, 2, and 3 as being reasonable. Looking forward after 

implementation of the YE option, and when sufficient YE option actual experience is 

available, an empirical investigation of coverage level differentials and the methodology 

to arrive at the appropriate adjusted premium rate with the YE option should be 

undertaken. Thus, the reviewer also concurs with the submitters’ Recommendation 4.

The rating process involves recognizing that the YE option increases the approved 

yield on a policy unit. Insuring a higher yield guarantee means that expected indemnities 

will increase and so in accordance with maintaining actuarial soundness, an adjustment 

will need to be made to premium rates. The proposed rating process used to adjust rates 

to reflect the YE option employs the relationship between the nominal coverage and the 

effective coverage level that results from electing the YE option. The effective coverage 

level is determined by scaling up or taking the product of the nominal coverage with the 

ratio of (YE_APH/SA_APH) where YE_APH is the average of yields in the APH database 

after the years that are triggered by the YE option are excluded and SA_APH is the simple 

average of the yields in the database inclusive of other applicable approved plugs being 

incorporated and also the yields the YE option drops from the series. Upon calculating 
Review of the Rating Methodology of the APH Yield Exclusion

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the effective coverage level with the YE option, the adjusted premium rate must be 

obtained using the existing nominal coverage differentials. This characteristic leads to 

two issues that must be managed with some additional calculations as follows: (1) 

Effective coverage levels that fall within the range of the nominal coverage levels 

(between 55% and 85% but not equal to one of the 5% increments), can employ linear 

interpolation, combined with the next-to-lowest and next-to-highest nominal coverage 

levels, and their respective coverage level differential, to obtain a coverage level 

differential for the new effective coverage level; and (2) Effective coverage levels that 

exceed the maximum nominal coverages levels can employ linear extrapolation,

combined with the change in coverage of coverage level differentials between the nextto-highest and highest available nominal levels. In both (1) and (2) the imputed effective

coverage level differentials would be multiplied by the base premium rate for 65% 

coverage, to obtain the base premium rate of the policy unit with the YE option. The 

proposed methodology involves one final step in arriving at premium based on the 

effective coverage level for YE option yields which involves capping the premium. The 

submitters believe that the rates based on linear extrapolation to effective coverage levels 

of 200% or more will need to be capped. Furthermore, the submitters recommend the 

RMA consider a mechanism by which additional premiums (or the marginal amount of 

premium) for any 5% coverage level interval such that the marginal premium cannot 

exceed the marginal liability as a result of the YE option. This makes intuitive sense, 

since a producer would not want to pay more in additional premiums (in dollars) than the 

additional guarantee (in dollars) they might receive as a result of the YE option, hence 

the recommendation of marginal premium rate caps.

In this review some potential behavioral incentives of the introduction of the YE 

option are established and examined. The motivation of this additional analysis stems 

from Recommendation 4 from the submitters and the reviewer’s opinion that the ensuing 

higher effective coverage levels obtained with the YE option will bring about behavioral 

changes in the producers in response to these possible higher levels of effective 

coverage. Producers will, in practice, most likely select the coverage level that gives them 

the best guarantee return per producer-paid premium as a result of the YE option. This 

expectation of a behavioral response is even further motivated with the premium subsidy 

in play, with the YE option enabling producers to potentially reduce the producer-paid 

premiums (perhaps an unintended consequence of the proposal) and maintain similar 

coverage levels they currently have but at a lower cost to the producer. This review 

reveals the savvy producers who seek the coverage level that gives them the best 

guarantee return per producer-paid premium paid as a result of the YE option, will if they 

were previously utilizing the nominal 75% coverage level, will be better served by electing 

the nominal 70% coverage level with YE option achieving a higher APH guarantee at a 

lower cost. This opportunity exists for producers no matter what their current nominal

coverage level is, with savings to be greater for the higher nominal coverage levels on a 

producer-paid premiums ($/acre) per APH Guarantee (bushels). It is this potential 

behavioral incentive for producers with the introduction of the YE option which 

underscores the need for RMA to re-evaluate the coverage level differentials and the 

behavioral component after sufficient YE experience has been collected.
Review of the Rating Methodology of the APH Yield Exclusion

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(2) THE RESEARCH REPORT

(A) DESCRIPTION OF THE METHODOLOGY USED BY THE EXPERT REVIEWER.

This review provides a response to all of the items in C.3 from the Task Order Statement 

of Work for “Methodology for Establishing Rates for Yield Exclusion”. Each item has been 

addressed within the scope of the reviewer’s knowledge and expertise. The reviewer

holds a Ph.D. in Agricultural and Resource Economics and has more than 18 years of 

post-doctoral work experience in the areas of crop insurance and risk management. He 

has relied upon his training in agricultural economics and econometrics, as well as his 

research experience in these areas, to assess and formulate responses to the items in 

C.4. The reviewer has also drawn upon his experiences as an Extension Specialist, which 

includes presenting educational programs in the areas of marketing and risk management 

to agricultural producers, county agents, lenders, and others. This experience has 

increased the reviewer’s understanding about what is necessary in order for risk 

management tools to be effective and to be utilized by producers.

Throughout this review, responses and discussion are supported with empirical 

evidence wherever appropriate.

(B) A DISCUSSION REGARDING EACH OF THE ITEMS LISTED IN SECTION C.4.

1) Actuarial soundness.

(A) Are adequate, credible, and reliable rate-making data available? 

Yes. The proposed methodology utilizes data that is already available and should be 

considered adequate, credible, and reliable to make the adjustment needed to rates to 

reflect the Yield Exclusion (YE) option which results in a higher approved APH yield. The 

proposed (YE) option allows the producer to exclude any recorded or appraised yield for 

a crop for any year in which the per-planted-acre yield in the county is at least 50% below 

the simple average per-planted-acre yield during the previous ten consecutive years. 

More succinctly, the trigger for the YE option is when the county yield falls below 50% of 
Review of the Rating Methodology of the APH Yield Exclusion

2

the county T-yield, enabling a producer’s actual yield for that crop in that year to be 

dropped from their approved APH. Two other components to the proposal include: (1) in 

any crop year in which the YE option triggered for a county, any producers farming in 

contiguous counties are also eligible to exclude any recorded or appraised yield for the 

crop also and (2) separate determinations are made for both irrigated and non-irrigated 

acreage within a county.

The impact of the proposed YE option, by allowing a producer to exclude any 

recorded or appraised yield for a crop for any year in which the per-planted-acre yield in 

the county is at least 50% below the T-yield, will lead to a higher approved APH yield. 

The approved APH yield is used to establish the production guarantee for APH plans of 

insurance and so an increase in this approved yield results in a higher production 

guarantee. That is, the YE option results in an effective coverage level that is greater 

than the nominal coverage level. A higher production guarantee on a policy unit also 

leads to an increase in expected indemnities, and so premium rates should be adjusted 

(increase also) to remain actuarially fair. 

RMA’s proposed approach as the submission states is that the “same premium 

should be charged for a given yield guarantee on a policy no matter whether the 

guarantee is derived from a simple average of APH yields or an average of yields with 

Trend Adjustment or Yield Exclusion.” (Section 2.1, Pg., 4). The proposed methodology 

to adjust premium rates includes calculation of the effective coverage rate, and then using 

the existing nominal coverage rate differentials and applying the techniques of linear 

interpolation or linear extrapolation, to obtain an adjusted base premium rate for the policy 

unit for which the YE option is elected. All of the data needed to complete this calculation 

of adjusting the base premium rate is already known, and any concerns of whether they

are adequate, credible, and reliable rate-making data available for the proposed rate 

adjustment are not evident rather they are the best available.

(i) Is it likely that the data will continue to be available?

Yes, all of the data needed to employ the proposed methodology will continue to be 
Review of the Rating Methodology of the APH Yield Exclusion

3

available moving forward. However, it seems appropriate to note the proposed 

methodology relying on linear extrapolation with suggested caps to calculate the adjusted 

base premium rates, is most likely to be temporary, but necessary, due to a lack of 

experience data with the proposed higher approved yields with the YE option at this time. 

It is the reviewer’s opinion, one which is also shared by the submitters (see 

Recommendation 4, page 8), that the ensuing higher effective coverage levels obtained 

with the YE option will possibly bring about behavioral changes in the producers in 

response to these possible higher effective levels of coverage. This expectation of a 

behavioral response is even further motivated with the premium subsidy in play, with the 

YE option enabling producers to potentially reduce the producer-paid portion of the total 

premiums (perhaps an unintended consequence of the proposal) and maintain similar 

coverage levels they currently have but at a lower cost to the producer. This is discussed 

in more detail in section (C) of this review. With this in mind, along the same lines as the 

submitters’ Recommendation 4, when sufficient YE experience data becomes available 

that will capture potential behavioral changes, a re-evaluation of the methodologies 

should be undertaken. 

To be clear, the proposed methodology of employing linear extrapolation along 

with the suggested premium caps is appropriate in the short-term due to a lack of 

experience data. The reviewer concurs with the submitters’ Recommendations 1, 2, and 

3 as being reasonable. Looking forward after implementation of the YE option, and when 

sufficient YE option actual experience is available, an empirical investigation of coverage 

level differentials and the methodology to arrive at the appropriate adjusted premium rate 

with the YE option should be undertaken due to concerns of behavioral changes induced 

by the YE option. Thus, the reviewer also concurs with the submitters’ Recommendation 

4.

(ii) Is the data vulnerable to tampering if the proposed rated methodology is 

approved?

No. With the trigger of the YE exclusion relying on when the county yield falls below 50% 

of the county T-yield there should be no concerns of vulnerability or tampering.
Review of the Rating Methodology of the APH Yield Exclusion

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(B) Are the explicit and implicit assumptions used in the rating process 

reasonable?

Yes. The explicit and implicit assumptions used in the rating process are reasonable. The 

rating process involves recognizing that the YE provision gives a producer the option of 

increasing the approved yield on a policy unit. Insuring a higher yield guarantee means 

that expected indemnities will increase and so in accordance with maintaining actuarial 

soundness, an adjustment will need to be made to premium rates.

The proposed rating process used to adjust rates to reflect the YE option employs 

the relationship between the nominal coverage (the coverage level a producer currently 

has) and the effective coverage level that results from electing the YE option. The 

effective coverage level is determined by scaling up or taking the product of the nominal

coverage with the ratio of (YE_APH/SA_APH) where YE_APH is the average of yields in 

the APH database after the years that are triggered by the YE option are excluded and 

SA_APH is the simple average of the yields in the database inclusive of other applicable 

approved plugs being incorporated and also the yields the YE option drops from the series 

as shown in Table 1. In this example (YE_APH/SA_APH) = (108/100) =1.08. The 

submission illustrates this calculation in equation (2.2) where a producer’s nominal

coverage level of 75% is scaled up to have an effective coverage level of 81% 

(=0.75*1.08). Upon calculating the effective coverage level with the YE option, the 

adjusted premium rate must be obtained using the existing nominal coverage differentials. 

Notably, (and this reviewer suggests purposely for the illustration) the increase in effective

coverage in (2.2) in the submission did not conveniently increase by one of the 5% 

increments ranging from 50% to 85%. This characteristic leads to two issues that must 

be managed with some additional calculations as follows:

Table 1: Illustrative Example of How Yield Exclusion Can Affect APH
Review of the Rating Methodology of the APH Yield Exclusion

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1. Effective coverage levels that fall within the range of one of the nominal coverage 

levels (between 55% and 85% but not equal to one of the 5% increments), can 

employ linear interpolation, combined with the next-to-lowest and next-to-highest 

nominal coverage levels, and their respective coverage level differential, to obtain a 

coverage level differential for the new effective coverage level. The submission 

shows in equation (2.3) an example of how to calculate the effective coverage level 

for 81% based on employing linear interpolation and using the 80% nominal

coverage level differential (of 1.4) and the 85% coverage level differential (of 1.5), 

respectively, to calculate the effective coverage level for 81% which turns out to be 

1.42.

2. Effective coverage levels that exceed the maximum nominal coverages levels can 

employ linear extrapolation, combined with the change in coverage of coverage 

level differentials between the next-to-highest and highest available nominal levels—

Year

County 

T-yield

60% of Tyield

Example 

Grower 

APH

APH w/60% 

Substitution

APH w/ 

Excluded 

Yields

2005 96 58 110 110 110

2006 104 62 100 100 100

2007 104 62 88 88 88

2008 104 62 118 118 118

2009 106 64 111 111 111

2010 106 64 110 110 110

2011 119 71 55 71 Excluded

2012 119 71 20 71 Excluded

2013 119 71 57 71 71

2014 119 71 153 153 153

Approved 

Yield 92 100 108

YE_APH / 

SA_APH 1.08

[a]

Source: "The Actual Production History Yield Exclusion: Overview of Premium Rating" 

downloaded from "http://www.rma.usda.gov/policies/2014/aphyeoverview.pdf" the 

example also appears in the submission as Table 2.1. Some additional calculations 

added by the reviewer.
Review of the Rating Methodology of the APH Yield Exclusion

6

for most crops this will be the nominal levels of 80% and 85%. The submission 

shows in equation (2.4) an example of how to calculate the effective coverage level 

for 100% coverage based on employing linear extrapolation and using the 80% 

nominal coverage level differential (of 1.4) and the 85% coverage level differential

(of 1.5), respectively, to calculate the effective coverage level for 100% coverage, 

which turns out to be 1.8.

In both 1) and 2) the imputed effective coverage level differentials (1.42 for 81% and 1.8 

for 100%, respectively), would be multiplied by the base premium rate for 65% coverage,

to obtain the base premium rate of the policy unit with the YE option.

The proposed methodology involves one final step in arriving at premium based 

on the effective coverage level for YE option yields which involves capping the premium. 

The submitters believe that the rates based on linear extrapolation to effective coverage 

levels of 200% or more will need to be capped. This recommendation appears 

reasonable. Furthermore, the submitters’ recommend (see Recommendation 3) the RMA 

consider a mechanism by which additional premiums (or the marginal amount of 

premium) for any 5% coverage level interval such that the marginal premium cannot 

exceed the marginal liability as a result of the YE option. This makes intuitive sense, 

since a producer would not want to pay more in additional premiums (in dollars) than the 

additional guarantee (in dollars) they might receive as a result of the YE option, hence 

the recommendation of marginal premium rate caps.

In short, this reviewer finds the explicit and implicit assumptions used in the rating 

process reasonable and appropriate. As discussed elsewhere in this review this 

judgment is made in the context that the YE option is likely to introduce behavioral

changes in insureds, and when sufficient data is available capturing this change, an 

empirical analysis should be undertaken to further refine rate adjustment for the YE 

option. The submitters agree with this judgment and make it a recommendation (see 

Recommendation 4). Until sufficient experience data is available the proposed approach 

is appropriate with the current base of historical experience and proposed premium caps.
Review of the Rating Methodology of the APH Yield Exclusion

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(C) Are the technical analyses (e.g., stochastic and other simulations)

technically correct? Do they provide credible, relevant results?

Yes. As explained in detail elsewhere in this review the technical analysis appropriately

employs linear interpolation or linear extrapolation when justified. Linear interpolation

utilizes the next-to-lowest and next-to-highest nominal coverage levels, and their 

respective coverage level differential, to calculate a coverage level differential for the YE 

options effective coverage. Linear interpolation is appropriate for coverage levels that fall 

within the range of one of the nominal coverage levels (between 55% and 85% but not 

equal to one of the 5% increments). Linear extrapolation, utilizes the next-to-highest and 

highest available nominal coverage levels (for most crops this will be the nominal levels 

of 80% and 85%) and their respective coverage level rate differential, to calculate a 

coverage level differential for the YE options effective coverage. The effective coverage 

rate differentials for the YE option are in turn then multiplied by the base premium rate for 

65% coverage rate to obtain the base rate for the premium for YE option. This approach 

was carried out correctly in the submission and provides credible and relevant results.

(D) Is the data used for the analyses appropriate, reliable, and the best available?

Yes. The proposed methodology utilizes data that is already available, appropriate, 

reliable, and the best available to make the adjustment needed to rates to reflect the Yield 

Exclusion (YE) option adjustment of higher approved yield. The submitters make 

Recommendations 5 and 6 in an effort to preserve the actual indemnity experience in the 

base ratemaking process to the greatest extent possible. Furthermore, the submitters

recommend the RMA to continue to adjust compiled data at the Statplan level to the 65% 

common coverage level. These procedural recommendations seem reasonable and are 

made in the spirit of having the best available data as possible on hand and avoiding 

losing indemnification data. 
Review of the Rating Methodology of the APH Yield Exclusion

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(E) Are the proposed premium rates likely to cover anticipated losses and a 

reasonable reserve?

The motivation of the YE option is that it enables the approved yield, which is used in in 

the crop insurance program to set the production guarantee for Actual Production History 

(APH) plans of insurance to increase in a county (and contiguous counties) that 

experience a severe loss to yields county wide such that the county experiences an 

average less than 50% of county T-yield. This approved yield is calculated as the simple 

average of at least 4 years and up to 10 years with various adjustments being permitted, 

such as the substitution of the 60 T-yield, yield cups of 90% of the previous yield, and the 

various yield floors based on the number of actual yields, all which lead to a higher 

approved yield than the simple average of actual yields. Whenever one of the approved 

adjustment mechanisms are applied that lead to an approved yield higher than the simple 

average as the submission describes in Section 1.0 (page 1), the producer pays a higher 

premium rate for this coverage based on the rate yield which is the simple average of 

producers actual yield history without any adjustments (i.e., plugs, cups, and floors). The 

submission further opines that use of the rate yield provides a reasonable approximation 

of the actuarial impacts of these adjustment mechanisms given their impact on the 

magnitude of the approved yields. This rationale seems reasonable and appropriate for 

the already available adjustment mechanisms.

The methodology adopted to accommodate the YE option recognizes that the YE 

option culminates in having to insure a higher yield guarantee meaning that expected 

indemnities will increase and so in accordance with maintaining actuarial soundness, an 

adjustment will need to be made to premium rates. The adjustment process that adjusts 

rates to reflect the YE option employs the relation between the nominal coverage and the 

effective coverage level that results from electing the YE option. Upon calculating the 

effective coverage level with the YE option, the adjusted premium rate must be obtained 

using the existing nominal coverage differentials. Depending on whether the effective

coverage falls with the existing nominal coverage differentials 50%-85% interpolation is 

used and, if it falls above the maximum of 85%, linear extrapolation is used to calculate 

the effective coverage rate differential which is then multiplied by the base premium rate 
Review of the Rating Methodology of the APH Yield Exclusion

9

for 65% coverage rate to obtain the base rate for the premium.

Importantly, the rate yield (the producer’s simple average with all actual data and 

no plugs or exclusions) is unaffected by the YE option. This rate yield aptly measures a 

producer’s risk relative to other producers in the county. This rate yield is used in 

conjunction with the reference yield (the county yield) to make “yield adjustments” such 

that producer’s rate yields that are above the county have lower premium rates with the 

reverse also being true that producers’ rate yields that are below the county have higher 

premium rates. The proposed methodology to adjust premium rates for the YE option 

leaves the “yield adjustment” unaffected. There is nothing about how the adjusted rates 

are derived to suggest that the adjusted premium rates to accommodate the YE option 

will not cover anticipated losses and a reasonable reserve.

(F) Is the actuarial methodology appropriate for the insured risks?

Yes. The insured risks remain the same and there are no fundamental proposed changes 

to the actuarial methodology. The methodology adopted recognizes that the YE option 

culminates in having to insure a higher yield guarantee meaning that expected 

indemnities will increase and so in accordance with maintaining actuarial soundness, an 

adjustment will need to be made to premium rates. The adjustment process that adjusts 

rates to reflect the YE option employs the relation between the nominal coverage and the 

effective coverage level that results from electing the YE option. Upon calculating the 

effective coverage level with the YE option, the adjusted premium rate must be obtained 

using the existing nominal coverage differentials. Depending on whether the effective

coverage falls with the existing nominal coverage differentials 50%-85% interpolation is 

used and, if it falls above the maximum of 85%, linear extrapolation is used to calculate 

the effective coverage rate differential which is then multiplied by the base premium rate 

for 65% coverage rate to obtain the base rate for the premium. The submitters 

recommend that RMA consider a capping mechanism to limit the amount of premium for 

a 5% coverage level interval such that the marginal premium cannot exceed marginal 

liability. In all, these procedures with the suggested caps are the best available until the 

current base has the opportunity to encompass some historical experience of the YE 
Review of the Rating Methodology of the APH Yield Exclusion

10

option.

(C) ADDITIONAL INFORMATION AT THE DISCRETION OF THE EXPERT REVIEW

Producers will, in practice, most likely select the coverage level that gives them the best 

guarantee return per producer-paid premium as a result of the YE option. Below, some 

potential behavioral incentives of the introduction of the YE option are established and 

examined. The motivation of this additional analysis stems from Recommendation 4 from 

the submitters and the reviewer’s opinion stated elsewhere in this review, that the ensuing 

higher effective coverage levels obtained with the YE option will bring about behavioral 

changes in the producers in response to these possible higher levels of coverage. This 

expectation of a behavioral response is even further motivated with the premium subsidy 

in play, with the YE option enabling producers to potentially reduce the producer-paid 

premiums (perhaps an unintended consequence of the proposal) and maintain similar 

coverage levels they currently have but at a lower cost to the producer.

To examine some of the potential behavioral incentives of the introduction of the 

YE option Table 2 below combines Table 1 and Table 2 from the RMA overview entitled 

“The Actual Production History Yield Exclusion: Overview and Premium Rating”1 and then 

calculates the producer and government paid premiums based on the current premium 

subsidy for basic and optional units published by RMA.2 The first notable illustration in 

Table 2 is a comparison of total premiums with and without the YE option for the different 

coverage levels. Consider a producer without the YE option who insures at the 75% 

coverage level with a total premium of $59.93 per acre. With the YE option, their effective

APH coverage level increases to 81% (the same illustrative example discussed above 

and in the submission) with a total premium of $73.87 per acre. That is, the additional 

APH guarantee of 6 bushels (81 bushels instead of 75 bushels) costs an additional $13.94 

per acre or $2.32 per bushel for the higher 

 

1 http://www.rma.usda.gov/policies/2014/aphyeoverview.pdf

2http://www.rma.usda.gov/FTP/References/subsidy/subsidy.pdf
Review of the Rating Methodology of the APH Yield Exclusion

11

Table 2: Illustrative Example of How Yield Exclusion Can Affect APH Guarantee, Total Premium Per Acre, Producer and Government 

Paid Premiums, and the Producer-Paid Premium Per APH Guarantee 

PRODUCER GOVERNMENT PRODUCER GOVERNMENT

bushels bushels $/acre $/acre % $/acre $/acre $/acre $/acre ($/acre)/bu ($/acre)/bu ($/acre)/bu

50% 50 54 $19.13 $23.19 67% $6.31 $12.82 $7.65 $15.54 $0.126 $0.142 $0.017

55% 55 59 $24.26 $29.39 64% $8.73 $15.53 $10.58 $18.81 $0.159 $0.178 $0.005

60% 60 65 $30.58 $38.06 64% $11.01 $19.57 $13.70 $24.36 $0.183 $0.211 $0.029

65% 65 70 $38.18 $48.69 59% $15.65 $22.53 $19.96 $28.73 $0.241 $0.284 $0.000

70% 70 76 $48.55 $61.50 59% $19.91 $28.64 $25.22 $36.29 $0.284 $0.334 $0.024

75% 75 81 $59.53 $73.87 55% $26.79 $32.74 $33.24 $40.63 $0.357 $0.410 $0.054

80% 80 86 $71.42 $87.49 48% $37.14 $34.28 $45.49 $42.00 $0.464 $0.527 $0.089

85% 85 92 $84.33 $104.68 38% $52.28 $32.05 $64.90 $39.78 $0.615 $0.707 - -

Source: "The Actual Production History Yield Exclusion: Overview of Premium Rating" combining Table 1 & 2 with some additional calculations.

http://www.rma.usda.gov/policies/2014/aphyeoverview.pdf

http://www.rma.usda.gov/FTP/References/subsidy/subsidy.pdf

Coverage 

Level Without YE With YE

Producer 

Savings 

from 

Reducing 

Nominal 

Coverage 

Level by 5% 

with YE

Producer Paid Premium 

Per APH Guarantee

Breakout of 

Premiums Without YE

Breakout of 

Premiums With YE

Premium 

Subsidy 

for Basic & 

Optional 

Without YE With YE Units

APH w/60% 

Substitution 

[APH=100]

APH w/ 

Excluded 

Yields 

[APH=108]

APH Guarantee Total Premium Per Acre Producer and Government Paid Premiums 
Review of the Rating Methodology of the APH Yield Exclusion

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guarantee. It is noteworthy, however, that the effective coverage level of the nominal

70% coverage level with the YE option generates an APH guarantee of 76 bushels, 1 

bushel more than the than nominal 75% coverage level without the YE option. The 

adjusted total premium for the nominal 70% coverage level with YE option which 

translated into an effective APH guarantee of 76 bushels is $61.50 per acre. This can be 

compared to the nominal 75% coverage level without the YE option with an APH 

guarantee of 75 bushels which is very similar $59.53 per acre or $1.57 per acre less. The 

difference can be explained by the 1-bushel-more effective guarantee associated with the 

nominal 70% coverage level with the YE option, confirming that YE option’s increase of 

the effective guarantee is reflected in higher total premiums that preserve the actuarial 

soundness in the presence of the YE option. However, returning to the initial remark that 

producers will in practice most likely select the coverage level that gives them the best 

guarantee return per producer-paid premium as a result of the YE option means that we 

need to peel the onion one more layer and explore the breakout of producer-paid

premiums given the presence of premium subsidies in place.

Table 2 shows for each nominal coverage level in increments of 5% the breakout 

of producer- and government-paid premiums without and with the YE option. Again, 

consider a producer without the YE option who insures at the 75% coverage level with a 

total producer-paid premium of $26.79 per acre (the subsidy level is 55% at the 75% 

level). Now consider if this producer decides to insure at the nominal 70% coverage level 

and utilize the YE option, the effective APH guarantee is 76 bushels and the producerpaid premium is $25.22 per acre (the subsidy level is 59% at the 70% level). In essence, 

the producer can achieve a higher APH guarantee 1 bushel (=76-75) and pay $1.57 

(=$26.79-$25.22) per acre less. The producer-paid premium per APH guarantee for the 

nominal 75% coverage level is $0.357 ($/acre)/bu compared with the nominal 70% 

coverage level with the YE option which is $0.334 ($/acre/bu), a savings of $0.024

($/acre/bu). The savvy producers who seek the coverage level that gives them the best 

guarantee return per producer-paid premium dollar as a result of the YE option, will if they 

were previously utilizing the nominal 75% coverage level, will be better served by electing 

the nominal 70% coverage level with YE option achieving a higher APH guarantee at a 
Review of the Rating Methodology of the APH Yield Exclusion

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lower cost. The final column in Table 2 reveals this opportunity exists for producers no 

matter what their current nominal coverage level is, with savings to be greater for the 

higher nominal coverage levels on a producer-paid premiums ($/acre) per APH 

Guarantee (bushels)—as high as $0.089 ($/acre)/bu from changing from 85% coverage 

level without the YE option to 80% coverage level with YE option. It is this potential 

behavioral incentive for producers with the introduction of the YE option which 

underscores the need for RMA to re-evaluate the coverage level differentials and the 

behavioral component after sufficient YE experience has been collected. This is 

consistent with Recommendation 4 made by the submitters.
Review of the Rating Methodology of the APH Yield Exclusion

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(D) SHORT BIOGRAPHIES (NOT TO EXCEED ONE PAGE) FOR EACH PERSON WHO TOOK 

SUBSTANTIAL PART IN THE EXPERT REVIEW.

Nicholas E. Piggott

EDUCATION

1997 Ph.D. University of California at Davis, California, USA

1994 M. Sc. University of California at Davis. California, USA

1992 B. Ag. Econ. (First Class Honors) University of New England, NSW, Australia

PROFESSIONAL EXPERIENCE

7/2009–present Professor with Tenure, Dept. of Agricultural and Resource Economics, North Carolina 

State University

7/2003–6/2009 Associate Professor with Tenure, Dept. of Agricultural and Resource Economics, North 

Carolina State University

11/1997–6/2003 Assistant Professor, Dept. of Agricultural and Resource Economics, North Carolina 

State University 

EXPERTISE

Demand analysis, applied econometrics, trade, commodity markets, and risk management.

SCHOLARLY HONORS

American Agricultural Economics Association Award for Professional Excellence Distinguished 

Extension Award: Less Than 10 Years’ Experience, 2005.

American Agricultural Economics Association Award for Professional ExcellenceOutstanding Ph.D. 

Dissertation Award (sole winner), 1998.

Food Distribution Research Society 1998 Applebaum Outstanding Ph.D. Thesis Award.

Gordon King Award for Best Ph.D. Dissertation completed in the Department of Agricultural and 

Resource Economics, University of California at Davis, 1997.

PEER REVIEWED JOURNAL ARTICLES: 23

BOOK CHAPTERS: 4

INVITED PAPERS AND SEMINARS: 28

REPORTS AND MISCELLANEOUS PUBLICATIONS: 12

EXTRAMURAL FUNDING: $1,712,251, Number of Awards: 28

THESES DIRECTED: Doctoral theses: 28; Master's theses: 1

EXTENSION PUBLICATIONS: 33

EXTENSION WORKSHOPS: 125 (International: 3; National and Regional: 30; North Carolina: 92)

FCIC EXPERT BOARD REVIEWS: 24

CONGRESSIONAL TESTIMONY: Subcommittee on General Farm Commodities and Risk Management

PEER REVIEWER FOR THE FOLLOWING JOURNALS 

Agricultural Economics; American Journal of Agricultural Economics; Australian Journal of Agricultural 

Economics; Canadian Journal of Agricultural Economics; Empirical Economics; European Review of 

Agricultural Economics; Journal of Agricultural and Applied Economics; Journal of Agricultural and 

Resource Economics; HortTechnology; Review of Agricultural Economics; Review of Marketing and 

Agricultural Economics.