Actuarial Impacts of Loss Cost Ratio Ratemaking in U.S. Crop Insurance Programs
This study examines the actuarial implications of the loss cost ratio (LCR) ratemaking methodology employed by the Risk Management Agency as a component of base rates for U.S. crop insurance programs, and identifies specific conditions required for the LCR methodology to result in unbiased rates whe...
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Western Agricultural Economics Association
2011-04-01
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doaj-78aa6df81c09479ab35d3d34472a72f82020-11-25T02:57:28ZengWestern Agricultural Economics AssociationJournal of Agricultural and Resource Economics1068-55022327-82852011-04-0136121122810.22004/ag.econ.105550105550Actuarial Impacts of Loss Cost Ratio Ratemaking in U.S. Crop Insurance ProgramsJoshua D. WoodardBruce J. SherrickGary D. SchnitkeyThis study examines the actuarial implications of the loss cost ratio (LCR) ratemaking methodology employed by the Risk Management Agency as a component of base rates for U.S. crop insurance programs, and identifies specific conditions required for the LCR methodology to result in unbiased rates when liabilities trend. Specifically, constant relative yield risk resulting in growing absolute variance through time and other restrictive requirements are required for the LCR to result in unbiased rates. These requirements are tested against a large farm-level data set for Illinois corn. Our findings indicate that the conditions required for appropriate use of the LCR methodology are violated for this high premium volume market, resulting in large implied rate biases. The process does not correct itself through time with the addition of longer rating periods as sometimes claimed. A simple correction function is suggested and demonstrated.https://ageconsearch.umn.edu/record/105550actuarial fairnesscrop insuranceinsurance ratingloss cost ratiorisk growthrisk management agencyyield trends |
collection |
DOAJ |
language |
English |
format |
Article |
sources |
DOAJ |
author |
Joshua D. Woodard Bruce J. Sherrick Gary D. Schnitkey |
spellingShingle |
Joshua D. Woodard Bruce J. Sherrick Gary D. Schnitkey Actuarial Impacts of Loss Cost Ratio Ratemaking in U.S. Crop Insurance Programs Journal of Agricultural and Resource Economics actuarial fairness crop insurance insurance rating loss cost ratio risk growth risk management agency yield trends |
author_facet |
Joshua D. Woodard Bruce J. Sherrick Gary D. Schnitkey |
author_sort |
Joshua D. Woodard |
title |
Actuarial Impacts of Loss Cost Ratio Ratemaking in U.S. Crop Insurance Programs |
title_short |
Actuarial Impacts of Loss Cost Ratio Ratemaking in U.S. Crop Insurance Programs |
title_full |
Actuarial Impacts of Loss Cost Ratio Ratemaking in U.S. Crop Insurance Programs |
title_fullStr |
Actuarial Impacts of Loss Cost Ratio Ratemaking in U.S. Crop Insurance Programs |
title_full_unstemmed |
Actuarial Impacts of Loss Cost Ratio Ratemaking in U.S. Crop Insurance Programs |
title_sort |
actuarial impacts of loss cost ratio ratemaking in u.s. crop insurance programs |
publisher |
Western Agricultural Economics Association |
series |
Journal of Agricultural and Resource Economics |
issn |
1068-5502 2327-8285 |
publishDate |
2011-04-01 |
description |
This study examines the actuarial implications of the loss cost ratio (LCR) ratemaking methodology employed by the Risk Management Agency as a component of base rates for U.S. crop insurance programs, and identifies specific conditions required for the LCR methodology to result in unbiased rates when liabilities trend. Specifically, constant relative yield risk resulting in growing absolute variance through time and other restrictive requirements are required for the LCR to result in unbiased rates. These requirements are tested against a large farm-level data set for Illinois corn. Our findings indicate that the conditions required for appropriate use of the LCR methodology are violated for this high premium volume market, resulting in large implied rate biases. The process does not correct itself through time with the addition of longer rating periods as sometimes claimed. A simple correction function is suggested and demonstrated. |
topic |
actuarial fairness crop insurance insurance rating loss cost ratio risk growth risk management agency yield trends |
url |
https://ageconsearch.umn.edu/record/105550 |
work_keys_str_mv |
AT joshuadwoodard actuarialimpactsoflosscostratioratemakinginuscropinsuranceprograms AT brucejsherrick actuarialimpactsoflosscostratioratemakinginuscropinsuranceprograms AT garydschnitkey actuarialimpactsoflosscostratioratemakinginuscropinsuranceprograms |
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