In 1993 the loss ratio was 3.27, or $3.27 paid out for each $1 of premium. Barnaby says, “A $40 billion loss on corn and soybeans that was suggested by the quoted economist would require a corn and soybean loss ratio that is 2.5 times higher than the 1993 loss ratio that was the highest loss ratio in the RMA data base. To generate that level of loss is a guessing game, but clearly it would need to exceed the 1988 yield losses. Probably a yield that is 40% below trend would be needed to generate a nation 8.175 corn loss ratio that would be necessary to generate underwriting losses approaching $40 billion.”
On one hand, Barnaby says the 1993 loss was based only on yield, and not on the revenue that will be the primary type of insurance today, and APH yields are more current today than was the case in 1993. On the other hand, Barnaby says the risk pool is bigger with more farmers insured, the crop insurance companies will be picking up some of the tab from their commercial risk pool, better genetics will dampen the continued drop in yield, and the soybean crop is in better shape than corn. Additionally, Barnaby says the fall price will determine the amount of the indemnity, so it will require an insurable yield loss of more than 25% of their APH to trigger a payment.
Interestingly, Barnaby says the biggest beneficiary of the crop insurance program will be Main Street USA. While farmers will not make money off the insurance, since it covers production expenses, they will have that money to spend in rural communities, which otherwise might have dried up along with the crops and the soil.
USDA will be paying out a large crop insurance indemnity payment to farmers this year in a time when Farm Bill deliberations have contended too much money is being spent on the program. The claims could be some of the highest ever, thanks to the great volume of revenue insurance policies. However, those will certainly funnel billions in cash to local rural communities.
Source: FarmGate blog