Risk Management
Crop Insurance – Premium Discounts and Surcharges for Corn
By Don LeDrew, OCPA

The base premium rate for a particular crop plan is influenced by a number of factors, including the plan’s historical performance, anticipated claims, the forecasted claim price, and the balance of the Crop Insurance Reserve Fund.
Premium discounts and surcharges are designed to ensure that the premium that individual growers pay reflects their demonstrated level of risk. Discounts and surcharges are specific to each crop plan. You may have a surcharge for one crop plan and a discount for another. Your premium and your individual discount or surcharge are printed on your Crop Insurance renewal notice.

Calculating Discounts and Surcharges
Discounts and surcharges are determined by comparing your individual claim rate to the provincial claim rate. The claim rate measures the total dollar value of all claims paid, as a percentage of the accumulated insured liability. Liability is the total value of the insured crop, or the amount Crop Insurance would pay if you had a total crop loss.

Your claim rate takes into account the total liability you’ve insured during your enrolment in the plan and the total value of all the claims you’ve received. The claim rate for the plan takes into account the total liability insured and the value of all claims paid over the years that the plan has been in existence. For grain and oilseed crops, this time period is capped at 20 years, and is also known as ‘years in base’.

For example, suppose that during the time you’ve been enrolled in a crop plan you’ve insured $1 million in liability and received $50,000 in claims. Your individual claim rate would be 5%. If the crop plan has covered $500 million in liability and has paid out $30 million in claims during its existence, the claim rate for the plan would be 6%. Since your claim rate is less than the claim rate for the plan, you would receive a premium discount.

Limits on Discounts and Surcharges
For all growers, the maximum annual surcharge is capped at plus 15% of the base premium rate. The maximum annual discount is capped at minus 30%. Your first discount or surcharge is calculated after your first year of production in the plan. For new growers, AGRICORP has established caps on discounts and surcharges to soften the impact of any claims in the early years of enrolment. Limits on discounts are phased in over the first six years of enrolment, while limits on surcharges are phased in over the first three years. These phased-in caps are outlined in Table 1.

Graph 1

When you are in a claim situation, you may wonder what effect the claim will have on your discount or surcharge. With Crop Insurance, it’s not the number of claims that determines your discount or surcharge, but rather the size of the claims relative to the total liability you’ve insured over the years. A small claim may have little or no effect on your discount or surcharge.

And in a year when many other growers are also in a claim situation, even a large claim may have little impact on your discount or surcharge, because the claim rate for the plan is also likely to increase.
Effect of Crop Years 2000 and 2001

In the 2000 and 2001 crop years, corn producers experienced decreased yield production, resulting in elevated Crop Insurance claims. Crop years 2000 and 2001 were the most severe weather years for Ontario corn producers since 1992. These two consecutive years of high claims have had an effect on individual cumulative claim rates, the program cumulative claim rates, and individual discounts and surcharges.

Distribution of Discounts and Surcharges
Graph 1 shows the number of corn producers at various levels of discount and surcharge. Overall, between 2000 and 2002 the number of producers with the maximum discount remained relatively stable, while the number of producers with the maximum surcharge increased slightly.

Graph 2

The number of years you’ve been enrolled in a particular plan is also a factor in the calculation of your discount or surcharge. Graph 2 shows the average number of years the producers have been enrolled in the plan at each level of the discount and surcharge. Customers who have been enrolled for many years are more likely to be in a discount than those who enrolled recently.

The longer you insure a crop, the more insured liability you accumulate, so when you do have a claim, it’s relatively small in comparison to the total liability you’ve built up over time. If your liability increases relative to the amount of claims you have received, your claim rate goes down. As long as any future claims are small relative to those of other growers enrolled in the plan, any surcharge you have will eventually disappear.

If you have any questions about your premium discount or surcharge, call AGRICORP’s Customer Action Centre, toll-free, at 1-888-247-4999.

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