Service is the difference.

With insurance, let program do math

In 2007, the U.S. Department of Agriculture Risk Management Agency (RMA) rolled out a pilot crop insurance program in the rolling plains surrounding Abilene, Texas. The pasture, rangeland, forage (PRF) program as it has come to be known insures against a single peril: low precipitation relative to a historic average. The now nationally-available program currently covers 52 million acres in 14 states, insuring grass as well as irrigated and non-irrigated forage production.

The program uses a grid system where precipitation measured at the National Oceanic and Atmospheric Administration (NOAA) stations inside the grid is compared to the historic average for the grid. When actual precipitation is low compared to history, an indemnity is triggered for any acres insured under the program in that grid. Grids are roughly 12 miles long by 12 miles wide.

The coverage period is one calendar year, and coverage is placed in two-month intervals. For example, you place 60 percent of your coverage in the June-July interval and 40 percent in the August-September interval. You also select a coverage level, for example 90 percent, and if actual precipitation falls below 90 percent of the historic average, you are paid an indemnity up to this level. The size of the indemnity is based on a county-specific forage value set by RMA.

A common mistake is automatically selecting coverage intervals based on perceived driest months, which are often the summer months. This is not always the best use of the PRF program as indemnities often fail to trigger in the summer months. The same can be said for any other months that seem dry. This is a clear signal to not try to guess when the weather will be dry.

When should coverage be placed? Math helps to decide.

We developed a program that determines the interval and coverage level combinations that maximize the chances of an indemnity. The program runs in an internet browser, and it performs roughly 25 trillion calculations in just under one second. Some of our producers have collected indemnities totaling more than their premiums each year they have used the program. We have even delivered indemnity checks in the rain.

How often will a net-positive indemnity occur? No two grids are created equal, but we have producers in grids that would have paid at least the entire premium back in 18 out of the last 20 years. The average for our producers is closer to 16 out of 20, but our program has found a few grids that would have triggered a net-positive indemnity in 20 out of 20. This demonstrates the power of mathematics in the PRF program.

Which interval and coverage combinations are the best? Again, no two grids are created equal. Our program is just as likely to place 50 percent of your coverage in February-March and 50 percent in September-October as it is to place 34 percent in January-February, 21 percent in March-April, 28 percent in June-July and 17 percent in October-November.

The most important aspect of crop insurance is service, so our program also has a few other features to make it as flexible as possible. For example, tell us the level of premium you are comfortable with and our program will select the best combination given this premium. Or, override our interval selections and go with your gut. The program will then select the right percentage of the year’s coverage for the intervals you choose.

Do not try to outguess the weather. The PRF program is a powerful tool, and if used correctly and with the right amount of math, it can be a great investment for your grass or forage acres.

Chris's columns appear in Kansas Farmer magazine monthly. You can view this column published in the online edition here.