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Geographical Influences on Farming and Risk - Cont.
The second factor is the effect of geography on experience. If the producers who have purchased MPCI coverage only in the last five years are in close proximity to the previously insured producers, their experience should be expected to be similar, solely due to the common influences of weather, soil types, elevation, and other factors. Insuring additional exposures which are similar to and highly correlated with other insured exposures may not result in a significant reduction to the loss costs or to the risk. At an extreme, if all exposures within a county were 100% correlated, then the experience of a county would model the experience for each producer within the county. Consequently, the variability of yields for the county over time would be a reasonable proxy for the variability of yields for the individual producer. Since the variability of yields (or more specifically, the shortfall in yields) for each individual producer determines the loss payments under MPCI, the variability of county yields should be highly correlated to the county's historical loss costs. This is demonstrated for Iowa corn experience by county on Chart 16, where the measure of variability of yields is defined as the 100 times the coefficient of variation of yields over time. This evidence supports the idea that the yields, and hence the losses, of individual producers are strongly influenced by external factors. Consequently, producers results are highly correlated, which would suggest that the recent increase in exposures may have limited influence on MPCI loss costs or risk.
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