Tips for GRIP in 2007
The use of Group Risk Income Plan (GRIP) increased dramatically in 2006 in the state of Illinois: GRIP use on corn was 11% of insured acres during 2005, increasing to 36% in 2006.
Some now are questioning the advisability of using GRIP in 2007 for two reasons. First, premiums will be much higher in 2007. A GRIP product that cost between $20 and $25 in 2006 will cost in the $40 to $45 range in 2007. Second, GRIP made payments in few counties in 2006, causing some to question whether GRIP will make payments in 2007.
The structure of GRIP has not changed between 2006 and 2007. In most Illinois counties, GRIP in 2007 will be expected to pay out more in indemnity payments than farmers pay in premiums. However, GRIP will provide less risk protection than farm-level products, as has been the case in previous years.
By design, indemnity payments from GRIP should exceed farmer paid premiums. When the Risk Management Agency (RMA) sets premiums on multi-peril insurance policies, the goal is to obtain a loss ratio near 1.0. This target is expected to be achieved over time. In any given year, loss ratios will vary from the target, depending on yield and price conditions. A loss ratio equals indemnities paid divided by total premiums.
If a loss ratio of 1.0 is obtained over time, this means that indemnities equal total premium.
Farmers do not pay total premiums on the crop insurance products. Multi-peril crop insurance is subsidized based on a schedule set in the Agricultural Risk Protection Act of 2000. At a 90% coverage level, GRIP's subsidy is 55%. This means that farmers pay 45% of the total premium while the Federal government pays 55% of the total premium.
Target loss ratios based on farmer-paid premiums can be calculated. At a 90% coverage level, the farmer-paid loss ratio should be 2.2 ($1 in payments/$.45 in farmer-paid premiums) given that target 1.0 loss ratios using total premiums is obtained. This means that farmers should expect to receive 2.2 in payments for every dollar of premium. Suppose that the premium is $40 per acre. Over time, the farmer should expect to average $88 in payments for the GRIP policy at a 90% coverage level ($88 = $40 premium x 2.2).
Note that all multi-peril crop insurance products; including Actual Production History (APH), Crop Revenue Coverage (CRC), Income Protection (IP), and Revenue Assurance (RA); should have farmer-paid loss ratios exceeding 1.0. Actual experience in Illinois indicates that farmers have paid more into APH, CRC, IP, and RA than they have received back in payments. This fact does not indicate a rating problem with GRIP. It may indicate that premiums are too high for APH, CRC, IP and RA.
In terms of expected performance, GRIP in 2007 does not differ markedly from previous years. Choice of GRIP over other farm-level products should be based on similar criteria as in previous years:
- Risk position
Farmers in more vulnerable positions should choose farm-level products over GRIP.
- Farm yields tracking county yields
Farms whose farmland more closely tracks county yields will have GRIP payments more highly correlated with farm-level experience, thereby enhancing the risk protection offered from GRIP.