Crop Insurance Profitability
March 27th, 2007 by David Graves
Myth: The crop insurance industry makes excessive profits
At least once a year, someone writes an article purporting that crop insurance companies make excessive profits. Over the years and across many national media reviews, none of these stories have resonated. Why?
Fact: Underwriting gains are not profits
The national media mistakenly characterize underwriting gains as profits. Underwriting gains occur when premiums exceed indemnities; the industry keeps a portion of the overage (underwriting gain). Conversely the industry pays a share of the loss when indemnities exceed premium (underwriting loss). Underwriting gains pay for private market reinsurance, expenses to operate the program not covered by the administrative and operating expense and taxes. Profits occur after all expenses are paid. Moreover, the industry uses profits to build capital for future catastrophic losses. Profits are typically invested, contributing to the health of the economy.
Fact: Crop insurance is a more risky business than other lines of insurance and subject to lower rates of return.
Multiple studies have shown that crop insurance profitability is lower and more volatile than other lines of property and casualty insurance (Deloitte and Touché 2004, Price Waterhouse Coopers 1999 and 1997, Milliman and Roberts 2002). Indeed any analysis of Best’s Aggregates and Averages will demonstrate this fact. The Deloitte and Touché study reported a 10 year profitability measure of 7.9 percent for the crop insurance program with a standard deviation of 12.9 percent, while other lines of property and casualty insurance ran a 12.7 percent return with an 8.9 percent standard deviation (1992 – 2002).
Fact: The government has control of the program, the rates and the reinsurance terms.
Companies deliver the program within the government’s parameters. Thus, companies are not in a position to manipulate the program or its returns.
Kent Olson Says
Dave:
I installed my AACI Blog button. What an idea. It is my quickest and best “one-finger” search for what I work with and need to know about crop insurance.
Can you give me an idea of the cost, programing etc as I see this as a wonderfull idea for our North Dakota PIA to “one-button blog” for our members.
Iam an old-timer but this Blog Button Idea gives me ideas.
Thanks for any direction.
Apr 2nd, 2007 at 11:22 am