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Geographical Influences on Farming and Risk - Cont.
In the past decade, the participation of producers in the MPCI program has roughly doubled. Most of this increase occurred in 1995 due to a federal requirement, now rescinded, that producers purchase insurance coverage in order to qualify for other government programs. This increase in exposure is thought to result in a wider spread of risk, which should lead to more stable loss costs and less risk for insurers. There is also a question whether the spread of risk should result in lower loss costs and lower rates. This would be the case if the doubling of the insured exposures has reduced any adverse selection operating against the program. In some sense, these expectations have been proved true by the experience. Chart 1 shows that the countrywide loss ratios in the period from 1994 through 1998 to be much lower than in any year from 1980 through 1993. However, this argument disregards two key factors. The first is general weather conditions, which have been very good in recent years. Except for a drought in Texas during 1998, weather has not resulted in major disruptions to farming. The Deputy Chief Economist of the USDA has reported to the Senate "with the exception of regional loss events like the drought in Texas and parts of the South in 1998, most of the country has enjoyed relatively benign weather since 1995." The El Nino and La Nina events of the past two years have had little impact. For this reason, the experience from 1994 through 1998 should be expected to be excellent.
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