Catastrophic Nature of the Coverage - Cont.

Another perspective on the catastrophic potential of MPCI coverage can be obtained by examining a simulated distribution of producer outcomes rather than the loss ratios in aggregate. Chart 5 provides an illustration of how a weather induced shift in yields of -10% can result in much greater frequency of claims. Consider a producer whose APH yield is 120 bushels. The probability of this producer experiencing a loss in excess of a 25% deductible, i.e., an actual yield of less than 90 bushels, is under 16% in a normal year. This probability increases to 25% if weather results in a 10% reduction in yields. As a result, the expected number of claims would rise by 60%, six times as great as the change in the expected yield.

The limited ability to eliminate the risk through diversification affects the ratemaking analysis by increasing the uncertainty of the expected pure premium. One method used to address this uncertainty is to include many years of experience in the analysis. Currently, 20 years are used, and this will be increased in future reviews. A second is to limit the extreme losses from the analysis of individual counties, and a third is to smooth the pure premiums over a broader geographic region, as is currently done with the concentric circle method.