The AAIS Agricultural General Liability (AgGL) Program, developed and filed in 2008, has introduced a new approach to insuring liability exposures of farms and agribusinesses.

As reported in the Summer 2008 edition of Viewpoint (available at www.AAISonline.com), the AgGL provides two general liability forms specifically designed for agricultural operations. One form is for farms, the other for any farm or agribusiness exposures the company wishes to cover under the terms of a CGL policy. Each has built-in coverages and exclusions that address agricultural exposures (in addition to standard CGL provisions).

Secondly, the program manual identifies 360 classifications of agricultural risks, far more ag classes than are found in most farmowners or CGL manuals.

Among those classes are 64 farm classes that have been converted from acreage-based to sales-based rating information. There are also 37 classes derived from the AAIS Homeowners manual, plus 259 classes derived from commercial liability, all but 39 of them sales-based.

Importantly, several of the farm classes are distinguished from similar classes by the manner in which the commodity is utilized. For example, crops and animals raised for human consumption pose different liability risks than do those raised for feed, seed, breeding, or soaps, lotions, and cosmetics. For that reason, there are multiple farm classes in those and other commodity categories defined by how commodities are utilized.

The change from acreage- to sales-based rating in many farm classes has generated considerable interest among insurers, and here Sherry Taylor, AAIS manager of farm and agribusiness, addresses some of the
questions they have raised.

An audio file of this interview with Viewpoint editor Joseph Harrington is available at www.AAISonline.com.

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Joe Harrington: Why has AAIS decided to introduce sales-based rating in farming classes at this time?

Sherry Taylor: This initiative is analogous to the mid-1980s shift in the CGL rating base from floor area to sales.

At that time, there was some initial resistance to a shift from a rating base that was stable and easy to verify to one that would needed to be audited at least annually. But the industry recognized that area-based rating did not adequately reflect the effect of inflation on losses, or the growing exposure posed by the intensification of commercial operations.

Simply put, more and more things could be done in less and less space, and area-based rating could not keep up in most classes.

Agriculture has reached a similar crossroads.

For decades, farm liability insurance has been rated on the basis of a risk’s number of acres. As with area-based rating for commercial liability, acreage-based rating has the virtue of simplicity. It’s easy to determine the size of a farm, and rarely would the size change appreciably over the course of a policy period.

Yet, like commercial operations, farms have seen an intensification of operations. More and more output--and risk--can arise from the same or less acreage. Consider, for example, the contrast between modern hog confinement operations and mega-dairies and traditional methods of hog raising and dairy farming.

If anything, the intensification of agriculture has been even greater than that of commercial operations in recent years, when we consider the “vertical integration” of production and processing operations on farms.

According to figures from the U.S. Dept. of Agriculture, the average size of a farm in the U.S. increased only slightly over the 10 years leading up to the agricultural census of 2002. But, over the same period, the income of an average farm before taxes and expenses grew by 60%.

Even those farms that are still primarily devoted to raising crops, produce, and livestock are generating growing percentages of their revenue from non-farming activities.

These activities include, but are not limited to “agritainment” and “agritourism” activities and events where members of the public are invited onto farm premises for educational and recreational activities. Vermont alone accounted for $19.5 million in agri-tourism revenue in 2002, an average of $9,000 per farm.

Joe Harrington: How much effort will be involved in auditing premium for sales-based rating?

Sherry Taylor: It is not hard to gather and verify the information needed to conduct premium audits.

The sales and production information is readily available from standard crop insurance production and yield reports, and carriers have several options for having the information reported and verified.

Many farm carriers already have their insureds or their agents submit “voluntary” reports of commercial-type sales for the policy period under consideration. These reports can then be verified or corrected, and the premium modified, during periodic audits or when a claim is submitted.

The larger the risk, the more cost-effective it will be to conduct a premium audit. Once you implement sales-based rating for those farm classes where it is appropriate, you may be surprised to learn how large some of your farm risks have become.

Joe Harrington: Will sales-based rating lead to big premium increases?

Sherry Taylor: AAIS compared its new sales-based loss costs for farm classes with existing acreage-based loss costs. Overall, we found them to fall within established parameters.

For any given risk, of course, there can be a big jump in premium. That would be a signal that the risk may not have been rated adequately under an acreage-based approach.

Potential premium increases can be curbed by the use of the AgGL experience and IRPM plans.

Joe Harrington: How did AAIS develop lost costs needed to support sales-based rating?

Sherry Taylor: Since farm premium and loss data has been reported to AAIS on the traditional acreage basis, AAIS had to convert the resulting loss costs to a sales base.

To do that, AAIS agricultural insurance specialists utilized data from the USDA to determine the average income per acre for each agricultural commodity grown in each state, and the number of acres in an average-sized farm producing each type of commodity in each state.

Through a series of additional steps, loss costs were determined for an “average-sized” farm in each of three AAIS acreage-based categories. These were then combined and converted to determine a single loss cost in each state per $1,000 of income for each commodity. Those, in turn, are then combined into the applicable
classification in the new structure.

Joe Harrington: How does AAIS address the effect of commodity price swings on agricultural sales data?

Sherry Taylor: Farm commodity prices can be more volatile than the prices of commercial products and services, and would distort sales-based rating if not adjusted for a more long-term, smoother progression.

To do that, AAIS has developed a “Commodity Price Stabilization Plan” in its AgGL manual. This plan provides a six-step procedure for producing a premium adjustment factor for the latest available year.

Using simple arithmetical steps, the manual indicates how to convert all production within the farming classification to a standardized measurement. If a farm measures output of one commodity in bushels, another in hundredweight, and another in pounds or cartons, the manual shows how to convert them all to a common measure.

The manual then indicates how to arrive at an annual commodity price change factor, a preliminary commodity adjustment factor, then a final commodity adjustment factor reflecting changes in commodity prices and the overall rate of inflation.

The manual provides examples demonstrating how the commodity price stabilization plan works, as well as Internet links to an inflation calculator and production measure conversion factors.

Joe Harrington: What else does the AgGL rating plan offer?

Sherry Taylor: The AgGL manual provides an individual risk premium modification plan and an experience modification plan.

The IRPM plan allows underwriters to apply a credit or debit up to 25% of the premium determined after all other manual rating procedures have been applied. The plan identifies nine risk characteristics to be considered when modifying the premium:

• The care and condition of equipment;
• The care and condition of premises;
• Classification deviations from standard;
• Cooperation of owners or operators with loss control recommendations;
• The selection, training, experience, and supervision of employees;
• The insured location’s accessibility, congestion, and exposures;
• Storage practices and hazardous operations;
• Safety programs and safety measures; and
• Past losses and measures taken to prevent their re-occurrence.

The experience modification plan is available to single entities or to multiple entities in which the named insured holds a majority interest in each entity. To qualify, a risk must generate a minimum of $2,000 in annual premium, and three or five years of premium and loss experience.

Once the premium and adjusted loss ratio are determined for the 3- or 5-year period under consideration, a corresponding experience rating factor can be found in tables provided in the manual.