Overview of Current Ratemaking Methodology

MPCI ratemaking follows a pure premium approach, with each crop analyzed separately. At present, only the experience arising from the standard MPCI APH yield coverage is included in the analysis. The experience arising from the MPCI revenue contracts is being considered for inclusion in future analyses. The first step in the analysis is to convert the losses for each county to a base level. The second is to stabilize the results for each county by capping the largest pure premiums. Third, the pure premium is smoothed over a local neighborhood. Next, the pure premium is adjusted to include for a risk factor and to spread back the losses eliminated by capping. The resulting pure premium is compared to the current rate in order to select the base rate change and the final rates for each Coverage Level and Rate Class.

The base level to which the loss experience is converted is the 65% Coverage Level. Paid claims are converted to the 65% level simply by restating the value of the loss for the difference in the deductibles. A further adjustment is needed for claims eliminated by the deductible. For policies insured at less than 65% coverage, the losses eliminated by the deductible are estimated from the severity distribution for policies with higher Coverage Levels.