Actuarial implications of prevented planting coverage

Abstract

Within the Federal Crop Insurance Program (FCIP), prevented planting (PP) coverage provides payments for pre-planting costs associated with crops that ultimately cannot be planted due to adverse weather. PP indemnities, which are not considered production losses within the FCIP rating methodology, influence premium rates differently than typical losses. This study utilizes a panel data set consisting of approximately 77,697 county level observations from RMA's summary of business to identify the relationship between the prevalence of prevent plant use and a number of actuarial related outcomes. Overall, we find that increases in the share of total indemnities attributable to PP claims over the preceding 10 years produce generally negligible changes to loss ratios, but can significantly increase loss ratios among subsets of the FCIP that heavily utilize PP coverage (greater than 20% of total indemnities). This suggests that, despite loss ratios being robust to typical rates of PP claims, actuarial performance can degrade when PP payments are high relative to indemnities from all other perils. Additionally, a simulation is conducted in which prevent plant indemnities are counterfactually treated as production losses when pricing FCIP contracts as opposed to current practice of recovering prevent plant costs via a fixed rate load. Doing so suggests significant improvements in loss ratios for crops that have historically had high shares of prevent plant indemnities, however, these improvements come at the expense of higher premiums and reduced demand for crop insurance.