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Overview of Current Ratemaking Methodology - Cont.
The final pure premium is determined by adding a statewide loading for the losses that were removed by the 80/20 rule to the smoothed pure premium loaded for the safety factor. A charge for losses that were excluded from the analysis, arising from prevented planting and other causes which are not directly related to yield loss, is also included. The final pure premium is divided by the current rate to produce a normalized loss ratio. The normalized loss ratio is compared to a judgmentally predetermined schedule of rate changes centered at the mandated target loss ratio of 107.5%. For example, if the normalized loss ratio falls between 0.90 and 1.15, the current rate may not be revised. If it falls between 0.80 and 0.90, a 5% rate reduction may be indicated, and so on.
Once the new base rate for a county is determined, rates for each farming practice must be developed. All practices within a county had been combined for ratemaking purposes. However, practices such as irrigation have a significant influence on yield variability, and consequently on the expected losses. The indicated rates for each practice are determined by multiplying the new county base rate by factors which reflect the relative riskiness of each practice relative to the county average. The factors are based on insurance data drawn from larger geographic areas as well as on the relative importance of the various practices within the county.
The rates by Coverage Level and Risk Class are determined by applying factors which are uniform for all states and crops, with minor exceptions. All rate increases are limited to no more than 20% in accordance with Federal law.
The rates established by these procedures are for coverage provided on an optional unit basis, meaning that each field is insured independently of any other field farmed by the producer. The producer also is permitted to insure the production of all these fields in total. Since this option diversifies the risk, a reduced rate is provided.
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