Saskatchewan Crop Insurance Corp. has made a substantive change in how it calculates premiums for its multi-peril program. As producers see their coverage and premium information, there are many questions and some glaring inequities.

The previous system of premium discounts and surcharges is gone. Apparently, premiums weren’t responding quickly enough to account for the true insurance risk.

The basic premise of the new system has been widely communicated with producers being told that premiums would reflect each policyholder’s claim history on each individual crop as compared to the claim history in their particular risk zone.

If, for instance, you’ve had a higher ratio of claims to premiums on durum than others in your risk zone, your premium would go up. A lower ratio of claims to premiums and your premium would go down.

This goes back all the way to 1998, but because coverage levels have been much higher in recent years, recent history becomes much more important in the calculation. Rather than adding up all the premiums and all the payouts since 1998 on each crop, it may be more reasonable to use a system that averages the loss percentages over the years.

The risk zones are another quirk. With hailstorms or even droughts, crop yields can be far different from one side of a risk zone to another. When assessing yield claims over the past couple years, SCIC has looked at yields from other producers in a radius around your farm. However, their premium calculation is based on the entire risk zone and that can create anomalies.

Many producers are going to see their premiums reduced or stay relatively the same. Others, hit hard by drought in recent years, are going to see increases. SCIC said the increase in premium from the methodology change is capped at $5 an acre this year. Changes beyond $5 are because of other factors, such as an increase in insured prices and overall premium rates.

Next year, if they stick with this system, could see even more pain as 2022 claim results are included.

The premium change may contribute to moral hazard, causing some producers to adjust seeding plans. This is particularly true in dry western regions of the province where the possibility of another year with drought-reduced yields is weighing heavily on producers.

Here’s a personal example. My per acre coverage in dollars per acre is quite similar between brown mustard and canola. However, my premium is more than twice as high for brown mustard this year.

I’ve had claims in recent times for brown mustard, but I haven’t been growing canola for quite a few years and when I was, it was often identity preserved canola, which is a different category. Even though the claim risk is probably about the same for me between brown mustard and canola, that isn’t reflected in the new premium calculation.

For many producers in the brown soil zone of Saskatchewan, particularly if they haven’t been growing canola, the crop has the highest coverage level and very low premiums. If you’re frightened by the potential of another dry year, why not grow a bunch of canola? In my case, the yield guarantee is 29 bushels an acre, which is $550, and the premium is only 1.7 percent.

SCIC has been working on the premium change for several years. Alberta and Manitoba are no doubt watching closely. Hopefully, the methodology can be tweaked for upcoming years to address the inequities.

Source - https://www.producer.com