Crop Insurance Today Second Quarter 2019 - 18

program. While liability and the number of acres
insured increased in 2018, premium, policy
counts, and unit counts decreased in comparison
to 2017. Indemnity payments continue to be at a

low level, particularly in comparison to the large
payouts in 2011 through 2014. Gross underwriting gains, the difference between premiums
and indemnities, are below the record level set

Map 1 Hurricane Florence

Indemnity
(0-25,000)
(25,000-50,000)
(50,000-100,000)
(100,000-500,000)
(500,000-1,000,000)
(1,000,000-5,000,000)
(5,000,000-10,000,000)

Map 2 Tropical Storm Gordon

Indemnity
(0-750,000)
(750,000-1,000,000)
(1,000,000-5,000,000)
(5,000,000-10,000,000)
(10,000,000-15,000,000)
(15,000,000-25,000,000)
(25,000,000-79,000,000)

Map 3 Hurricane Michael

Indemnity
(0-250,000)
(250,000-500,000)
(500,000-1,000,000)
(1,000,000-5,000,000)
(5,000,000-10,000,000)
(10,000,000-15,000,000)
(15,000,000-25,000,000)

18

SECONDQUARTER2019

in 2016 and less than 2017, but still strong. The
gross loss ratio, defined as the ratio of indemnities to premiums, is the traditional metric used
for comparing the performance of the program
over time.  From an underwriting perspective,
the breakeven point is a loss ratio of 1.00, with
values below 1.00 indicating a year with underwriting gains and values above 1.00 indicating
a year with an underwriting loss.  On this basis,
the program had a very good year in 2018 with
a reported gross loss ratio of 0.68, though this
value is expected to increase a few points as any
remaining open claims are settled. In comparison, 2016, the best year in the history of the program, had a loss ratio of 0.42, while 2017 came in
at 0.54, and the four years prior to 2016 had loss
ratios of 0.65, 0.91, 1.02, and 1.57.
Net underwriting gains differ from gross underwriting gains in that any gains or losses on a
gross basis are shared between the Federal Crop
Insurance Corporation (FCIC) and the participating insurance companies under the terms
established by the Standard Reinsurance Agreement (SRA). After reinsurance, more than half of
the gross underwriting gains in 2016 were ceded
to FCIC. For 2018, roughly a quarter of the gross
underwriting gains will be ceded, with participating insurance companies retaining the rest.
One point that needs to be made is that having
a number of consecutive years with solid underwriting gains is not a guarantee that future years
will continue to be profitable. For example, the
seven-year period from 2004 through 2010 also
achieved excellent underwriting results, but
these were immediately followed by four years
with modest to severely unprofitable results. In
addition, it is important to recognize that underwriting gains are but one component of a company's pre-tax income. After accounting for all revenues and expenses, company pretax net income
is estimated to have averaged slightly more than
seven percent of retained premium for the eight
years under the current SRA.
The number of insured acres for the major
crops from 2016 through 2018 are shown in Table 5. Corn and soybean acres declined in 2018,
but these were offset by increases in wheat and
cotton acreage. The overall increase in acres insured was driven by the expansion of the Rainfall
Insurance program under Pasture, Rangeland,
and Forage. In comparison, NASS reports that
the total number of acres planted to principal
field crops, excluding land used for cattle grazing,
was up marginally for the year.
Crop Insurance Today Second Quarter 2019

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