Rating Price Risk in Crop Insurance Markets

Barry Goodwin, Ardian Harri, Rod Rejesus and I just published a paper in the American Journal of Agricultural Economics examining the use of the Black-Scholes implied volatilities in rating crop revenue insurance.  For those not familiar with futures option implied volatility, it is derived from observed option premiums and known parameters of the option contract. Under certain assumptions it is the price volatility implied by the price of the option contract.

To rate a revenue contract one needs both an expected price and a volatility associated with that expected price.  Needing an expected price is rather obvious, but many forget that the price volatility estimate profoundly affects premium rates. In 2017 the premium associated with these revenue insurance policies was approximately $7.68 billion dollars.  Just a few years ago both expected corn and soybean prices and volatilities were much higher than today.  For example, in 2010 the price volatility used by the USDA Risk Management Agency (RMA) for Midwest corn was 0.28 while in 2017 it was 0.19. This decline in volatility has reduced premium rates and the amount of subsidy in the program.

Current USDA RMA methods are based upon a pre-signup average of futures closings and Black–Scholes (BS) implied volatilities calculated from “near–to–the–money” options for the harvest time contracts.  We focus on options and futures markets during the period of time used by RMA for price discovery (i.e., planting and harvest time pricing).

We find that the Black-Scholes model works well when there is robust trading during the pricing period. We also conclude there is strong support for using a forward looking implied volatility rather than a backward looking historical based volatility.  We also determine there is merit in using a third party source of volatility rather than some less transparent model.  However, the contracts for which significant violations of the assumptions inherent in the BS model tend to be for thinly traded crops.

This leads to a really interesting question.  Does crop revenue insurance which protects against low prices, as well as, low yields reduce the number of natural pre-season hedgers in the futures and options market? If so we have something of a catch-22.

I know that up-side price protection makes revenue insurance more conducive to pre-harvest hedging than straight revenue insurance. But is does also have a substitution effect (Coble, Heifner, Zuniga JARE 2000).  In the end I think the prima facie evidence is that corn and soybeans have had robust preseason price data and these two crops have among the highest levels of crop revenue protection insurance participation.  Conversely, rice arguably has had the most severe price data problems and yet has relatively low crop insurance participation.  Finally, note also that crop insurance does not affect the natural longs in the market.  However, we are left with the question of how to utilize the data from a thin market such as rice.

Lastly, there is another closely related question we did not address.  Are historical models good enough to rate crop revenue insurance when there is no futures and options market?  This deserves more research given the demand for revenue insurance in those markets is obvious since a functioning price risk market often does not exist.

The Use of Enterprise Units in Crop Insurance

The 2008 Farm bill provided for an alternative level of crop insurance subsidies for Enterprise Units relative to Basic and Optional Units.  As you can see in Table 1 the subsidy for enterprise units are sometimes as much as 20% higher than for the same coverage with basic and optional unit structures.

Coverage Level Basic & Optional

Subsidy %

Enterprise Unit Subsidy %
50% 67% 80%
55% 64% 80%
60% 64% 80%
65% 59% 80%
70% 59% 80%
75% 55% 77%
80% 48% 68%
85% 38% 53%

A brief review of unit structures is as follows:

  • Basic unit – All insurable acreage of the insured crop in the county on the date coverage begins for the crop year: (1) In which a producer has 100 percent crop share; or (2) Which is owned by one person and operated by another person on a share basis.
  • Optional Unit – Subdivision of basic unit.
  • Enterprise unit – All insurable acreage of the same insured crop or all insurable irrigated or non-irrigated acreage of the same insured crop in the county in which a producer has a share.

Importantly, because enterprise units are aggregated from basic units the base rates for enterprise units are generally lower than for the basic units from which they are aggregated.  Thus, higher subsidies and lower rates lead to significantly lower producer paid premiums for enterprise units.

A review of RMA participation data from 2009-2016 reveals the choices farmers have made.  The results are reported by crop.  For the six major row crops enterprise units have covered at least 27% of acres since 2009.  However, it appears enterprise units are far more popular for corn and soybeans than the other four crops.  More than ½ of corn and soybean acres have been insured with enterprise units.  In contrast, ½ of wheat acres have been insured at the optional unit level.

Percent of 2009-2016 Acres Insured with Basic, Enterprise, or Optional Units
Crop Optional Unit Basic Unit Enterprise Unit
Corn 28% 18% 53%
Cotton 42% 25% 33%
Rice 12% 54% 33%
Sorghum 34% 38% 29%
Soybeans 28% 20% 52%
Wheat 50% 23% 27%

Source: USDA RMA County Summary Data

The Four Percent Rule of Crop Insurance

With a looming farm bill debate, crop insurance stands as the largest single component of the crop farm safety net.  The program provides risk protection from low yield or revenue in return for a premium that producers pay.  These premiums were subsidized by the USDA on average about 63% across all programs in 2016.  The total cost of the subsidy in 2016 was approximately $5.85 Billion.  Figure 1 provides a bit of historical perspective on acres insured and total crop insurance subsidy.  Beginning in the early 1990s a series of legislative changes increased subsidy levels and acreage insured has trended up as well.  We note that recent declines in subsidy primarily result from reduced crop value as prices decline from historic highs.

Figure 1

In the next farm bill debate the amount of subsidy for crop insurance is likely to be a topic of discussion.  A frequent question posed to economist sounds something like this, “If we change the subsidy structure what will happen to crop insurance participation.”  This question has been asked and answered numerous times.  In most, but not all studies, the conclusion has been that crop insurance demand is inelastic.  That is, the percent change in participation will be less than a percentage change in subsidy.  However, many of those studies are older and may reflect a different era of crop insurance.

In this report, we examine some key data associated with RMA corn and soybean program participation.  We do not estimate an elasticity, but rather show evidence of a consistent pattern in in how much farmers are willing to pay for crop insurance.  We use the dramatic changes in crop value between 2011 and 2016 and variation in riskiness across regions to show a remarkable constant in crop insurance demand.  We find that across periods of high and low crop value and across regions of low and high risk – corn and soybean farmers are willing to pay out-of-pocket no more than four percent of the expected value of the crop.  If this is true, it has implications for the demand for crop insurance when subsidy is changed.  We do not provide a theoretical explanation for this finding but believe it may be tied to the degree of risk aversion and farmer budget constraints.

We begin by examining variation across region in the base county premium rate.  The maps in figure 2 and 3 show wide variation the level of yield risk across growing regions.  While most producers purchase revenue insurance, regional variation in premium rates are largely driven by yield risk.

Figure 2

Figure 3

Next we examine the amount of insurance chosen by corn and soybean producers.  Figures 4 and 5 reflect the acre-weighted average coverage level chosen in each county.  We use coverage level to represent the amount of insurance chosen by those who participate in the program.  When figures 4 and 5 are compared to figures 2 and 3, a pattern begins to emerge. Areas of the country with lower per-acre base premium rates also tend to purchase higher coverage levels than areas with higher base premium rates.

Figure 4

Figure 5

Figures 6 and 7 show the 2016 average producer paid premium per acre for corn and soybeans by county.  Note that producer premium is a function of the coverage level, rate, and value of the crops.  In general, low risk-high yield regions pay similar premiums per acre as higher risk-lower yielding regions.  Having said that the lower coverage levels chosen in many higher risk regions results in lower producer paid premium per acre.  Finally, the maps show that producer paid premium for soybeans are generally lower than for corn.  This is in part due to lower per acre expected crop value.

Figure 6

Figure 7

Figures 8 and 9 divides the average producer paid premium by the insured value of the crop to compute the percentage of expected crop value farmers opt to pay in producer paid premium.  This reveals our primary finding.  As can be seen in both figures, the majority of counties are shown to pay between one and four percent of the value the crop in 2016.  Thus, we find that farmers appear to be willing to pay a premium of about four percent of crop value and no more.

Figure 8

Figure 9

To test the robustness of our results in 2016 we also conduct the same analysis using data from 2011.  These results are shown in figures 10 and 11. Note that higher crop price in 2011 resulted in expected crop revenue more than 30% higher in that year than in 2016.  However the premium paid as a percent of crop value maps look quite similar to that of 2016.

Conclusions

While we find quite robust results, it is not clear why producers seem to spend such a constant percent of crop value on crop insurance.  Most likely it is related to the out of pocket cost associated with this program and the perceived benefits. We suggest that models of insurance demand consider the possibility of a budget constraint on crop insurance demand.  Ultimately, the consistency of these results suggests that if crop insurance costs rose past four percent of expected crop value, the producers would reduce insurance expenditure – most likely by reducing coverage levels.

Figure 10

Figure 11

Will farm programs be cut even before the next farm bill starts?

I had the privilege of serving as a chief economist for the U.S. Senate Committee on Agriculture, Nutrition, and Forestry during the last farm bill debate.  The cost of legislation was paramount with the mandated goal of reducing the Congressional Budget Office (CBO) score of the bill.  Roughly speaking all the program crops were asked to take about a 30% reduction in the CBO estimate of farm program spending.  Note that CBO looks forward 10 years and compares the cost of new legislation to a continuation of existing legislation.  One must also understand that the CBO agricultural baseline changes from year to year as market conditions change.  One should understand predicting program costs that far into the future is a highly imprecise process.

Many groups have turned their attention to the expiration of this bill.  So it is fair to ask where will the baseline for the big three farm support programs (ARC, PLC, crop Insurance) be at when CBO is asked to score a new farm bill.  Figure 1 shows the March 2016 CBO baselines for County ARC, PLC, and crop insurance.  Examining this chart, one can see that from 2018 on:

  • CBO assumes that at expiration of this bill producers will be allowed a ‘do over’ on the ARC vs PLC choice. Some switch from ARC to PLC is expected.
  • Crop insurance is projected to increase slowly and average around $9 billion/year.
  • PLC a program widely adopted by rice, peanuts and a substantial amount of wheat is projected to remain at around $3 billion/year in out years.
  • County ARC annual cost is expected to slide 85% from a peak of $6 billion to around $1 billion. This especially affects corn, soybeans and some wheat producers. This is primarily due to the fact that the 5-year Olympic average price used in ARC will fall dramatically as the high prices of a few years ago are dropped.
  • The baseline is likely to shrink in the next 24 months primarily due to dropping the recent high ARC payment levels and replacing them with out-years with lower payment levels. For example, the $6,099 Billion for ARC in 2017 will likely be replaced with a value near one billion. This reduces money available for the next farm bill.

 

CBO Baseline 2016

 

So what does this mean?

  • Crop insurance will likely remain a focal point for policy because it is the biggest pot of funds. That also means it will be attached as a source of funds for other programs.
  • Three commodities are facing dramatic declines in baseline funding – corn, soybeans, and to a lesser degree wheat.
  • Participation rates affect these outcomes. For example, the fact that actual STAX participation has been below what CBO expected, means expected increases in cotton crop insurance program cost in the last farm bill did not materialize.

 

Regional Differences in Crop Insurance Base Rates

Base county rates reflect the starting point for crop insurance rates for an insured crop in a particular county.  A particular insured unit’s rate will be derived by adjusting the base county rate to reflect yield versus revenue coverage, coverage level, unit structure, and unit APH relative to base county yield.  Differences in base county rates reflect differences in yield risk derived from historical crop insurance losses.  Figures 1-4 reflect the 2016 base rates for corn, cotton, rice, and soybeans.  A lower base rate reflects a less risky region.  Often large contiguous areas have similar risk levels.  Also, a low yield risk crop such as rice has generally lower rates than other crops.

Figure 1
Figure 1
Figure 2
Figure 2
Figure 3.
Figure 3.
Figure 4.
Figure 4.

Crop Insurance Subsidy Per Policy

It is crop insurance sign up time and I did a quick analysis of 2015 crop insurance subsidy per policy by crop for the entire U.S.  Note subsidy is a function of rates, coverage levels, unit structure, quantity and value of the crop.  What jumps out of this analysis is that specialty crops tend to top the list and that row crops are generally fairly far down the ranking.  But some other special crops also fall near the bottom of the list

 

Commodity Name Average Subsidy/Policy
Strawberries

$39,169

TOMATOES (FRESH MARKET)

$39,064

ONIONS

$36,845

Whole Farm Revenue Protection*

$34,666

COTTON EX LONG STAPLE

$27,797

POTATOES

$27,780

TOBACCO – CIGAR WRAPPER

$27,436

PRUNES

$25,498

MACADAMIA TREES

$24,928

PEPPERS

$24,302

APPLES

$23,881

MACADAMIA NUTS

$23,533

NURSERY – FIELD GROWN & CONTAINER

$22,292

Pistachios

$21,428

BANANA TREE

$19,029

MANDARINS/TANGERINES

$18,277

TABLE GRAPES

$17,388

TOBACCO – CIGAR BINDER

$16,363

ALMONDS

$16,324

SWEET POTATOES

$15,583

CULTIVATED WILD RICE

$14,133

CITRUS (TX) – RIO RED & STAR RUBY GRAPEFRUIT

$14,066

CABBAGE

$13,919

APRICOTS (PROCESSING)

$12,994

TOMATOES

$12,183

ALFALFA SEED

$12,066

CHERRIES

$11,535

PEACHES

$11,044

COTTON

$10,152

TOBACCO – FLUE CURED

$9,979

CLAMS

$9,840

BLUEBERRIES

$9,115

CUCUMBERS

$9,063

APRICOTS (FRESH)

$8,689

FIGS

$8,562

PECANS

$8,118

CITRUS TREES (FL) – ORANGE

$8,105

APICULTURE

$7,760

NECTARINES (FRESH)

$7,530

BEANS (DRY)

$7,104

LEMONS

$7,043

BEANS (FRESH MARKET)

$6,777

AVOCADOS

$6,696

GRASS SEED

$6,406

SWEET CORN (FRESH MARKET)

$6,294

PLUMS

$6,197

GRAPES

$6,116

SUNFLOWERS

$5,931

CORN

$5,847

CANOLA

$5,780

ORANGES

$5,575

PASTURE,RANGELAND,FORAGE

$5,552

CITRUS TREES (FL) – GRAPEFRUIT

$5,392

POPCORN

$5,344

PEANUTS

$5,175

WALNUTS

$5,068

PEAS (DRY)

$5,019

ANNUAL FORAGE

$5,002

TOBACCO – BURLEY

$4,887

Olives

$4,819

MINT

$4,661

BEANS (PROCESSING)

$4,459

CITRUS TREES (FL) – AVOCADO

$4,353

PAPAYA

$4,323

WHEAT

$4,277

BARLEY

$4,208

RAISINS

$4,173

MUSTARD

$4,160

SUGARCANE

$4,080

GRAPEFRUIT

$3,975

PEACHES (CLING PROCESSING)

$3,936

HYBRID SORGHUM SEED

$3,927

RICE

$3,902

BUCKWHEAT

$3,792

SUGAR BEETS

$3,715

CITRUS (TX) – LATE ORANGES

$3,605

CITRUS TREES (FL) – CARAMBOLA

$3,589

SAFFLOWER

$3,531

SOYBEANS

$3,525

GRAIN SORGHUM

$3,464

PEACHES (FREESTONE FRESH)

$3,392

SILAGE SORGHUM

$3,195

FORAGE PRODUCTION

$3,064

HYBRID CORN SEED

$2,917

CRANBERRIES

$2,826

SESAME

$2,684

PEAS (GREEN)

$2,670

TOBACCO – FIRE CURED

$2,664

TANGELOS

$2,529

PEARS

$2,468

PEACHES (FREESTONE PROCESSING)

$2,406

FLAX

$2,224

RYE

$2,099

CITRUS (TX) – RUBY RED GRAPEFRUIT

$1,991

MILLET

$1,929

BANANA

$1,858

CITRUS TREES (FL) – ALL OTHER CITRUS TREES

$1,645

COFFEE

$1,590

CHILE PEPPERS

$1,565

TANGORS

$1,483

SWEET CORN

$1,475

PUMPKINS

$1,317

CITRUS (TX) – EARLY & MIDSEASON ORANGES

$1,283

COFFEE TREE

$1,233

CITRUS TREES (FL) – MANGO

$954

Tangerine Trees

$837

Camelina

$831

FORAGE SEEDING

$786

OATS

$776

TOBACCO – DARK AIR

$748

CITRUS TREES (FL) – LIME

$497

TOBACCO – CIGAR FILLER

$373

PAPAYA TREE

$333

TOBACCO – MARYLAND

$44

* Note Whole Farm Revenue Insurance covers multiple commodities.

Five things you need to know about County-triggered Shallow Loss Programs

 

The Supplemental Coverage Option (SCO), Stacked Income Protection Program (STAX) insurance and county Agricultural Risk Coverage (ARC) programs in the new farm bill are novel risk protection products.  All three cover a band of shallow losses and leave the producer exposed to more severe losses unless otherwise protected by crop insurance or by some other means.  Shallow loss programs are new, but most people understand the concept of layering risk protection.  What is less clear is how well people can evaluate county- versus farm-triggered programs. County-triggered programs are not new.  They have been around for decades in the form of area coverage insurance. This type of insurance is currently known as Area Risk Protection Insurance (ARPI) and was formerly called the Group Risk Plan (GRP) and Group Risk Income Protection (GRIP).  ARPI is a county-triggered alternative to farm-triggered insurance whereas STAX, SCO, and ARC are supplements to farm-triggered insurance (e.g., Yield Protection and Revenue Protection).  Over the years we have probably studied and evaluated area risk protection products as much as anybody.  So here are a few pointers.

 

  1. For an area triggered program to exist, county yields must be estimated and reported.  In the past ARPI programs have been based solely on NASS county yield estimates.  A historical series is used to predict expected yield and an actual yield is necessary to determine actual yield (or revenue) shortfalls in the insured year.  NASS does not report county yields for every commodity in every county.  They are unlikely to report in counties where the commodity is grown on relatively few acres and/or where few farms produce the commodity.  To increase the availability of STAX and SCO it is likely that RMA will, at least in some crops/areas, use aggregated yield reports from farm-triggered crop insurance policies to construct county yields.  It is less clear what FSA will use for ARC calculations.  The bottom line is no county yield equals no program.
  2. Risk protection from area products all depends on correlation.  Correlation is a statistical concept that simply means, two variables are related to each other rather than independent.  For area shallow loss programs, this may be translated to, “To what degree does county revenue go up (or down) when my farm revenue goes up (or down).  What we find is that this relationship is driven by the farm-county yield relationship.  Typically county yield and farm yield move up and down together, but not perfectly.  Further we find wide differences across farms in the relationship between farm yield and county yield.  Think of a farm using typical production practices on the predominant soil type in the center of a county versus a farm using an atypical practice on a less common soil type at the edge of the county.  The correlation of farm-county yields will likely be less for the atypical farm and a county triggered program will provide poorer risk protection.  Some have suggested that with the availability of county-triggered shallow loss products, growers should reduce the coverage level on their underlying farm-triggered insurance. Before making this decision growers should think very carefully about how correlated their yields are with the county yield.  Likewise, a number of shallow loss “decision aids” are becoming available and more will likely follow.  Growers should determine whether these decision aids allow for differences across farms in the correlation between farm yield and county yield. Ideally they would also help in measuring that correlation. Unfortunately, this is not that easy to do and many of the decision aids we have seen implicitly assume that farm-yield and county-yield are independent.  Growers should be aware that any decision aid that does not adequately address correlation is likely to provide erroneous guidance on decisions about shallow loss programs.
  3. What is not very important is whether your average yield is higher or lower than the county average.  With both farm-triggered crop insurance products and county-triggered shallow loss programs, payments occur when the realized percentage shortfall exceeds the percentage deductible. The percentage deductible is just 100% minus the coverage level (thus a crop insurance policy with a 75% coverage level has a 25% deductible). The percentage shortfall and percentage deductible are both calculated relative to the expected yield or revenue. For county-triggered programs it doesn’t really matter whether your excepted farm yield is higher or lower than the expected county yield. What matters is how closely the percentage shortfall on your farm matches with the percentage shortfall at the county level. If the county experiences a 25% revenue shortfall and your farm also experiences a 25% revenue shortfall then the county-triggered program should do a nice job of covering your losses.  However, if your revenue falls 25% but the county revenue only falls 15% you will not be fully covered.
  4. County yields are less variable than the average variability of farms in the county. This is the result of the county yield being an average of all the farms in a county.  Past research typically finds the average farm is about 30% riskier than the county in which it resides.  What does this mean for STAX, SCO, and ARC?  It means that, all else equal, a layer of county-triggered coverage will pay less than the same layer of farm-triggered coverage for the typical farm. This is actually the motivation behind the scale option in ARPI and STAX products.
  5. Get ready for differing USDA estimates of county yields.  FSA, RMA, and NASS may each use different data and different procedures for estimating realized county yields.  Thus, it is quite possible that these various USDA agencies will generate different estimates of the realized county yield in a given year and these different estimates will be used to determine payments for different programs.  If that seems strange, know that the 2014 Farm Bill did not define how these county yields would be developed.   Good luck to the USDA officials who have to explain the differences.     

 

 

 

 

 

Supplemental Coverage Available for 2015 Mississippi Winter Wheat

The Supplemental Coverage Option (SCO) crop insurance endorsement will be available to winter wheat producers in Bolivar, Coahoma, Sunflower, Tallahatchie and Washington counties for 2015. SCO was authorized in the Agricultural Act of 2014 and will provide an indemnity payment when yield or market revenue (depending on whether the producer has a yield protection or revenue protection policy) measured at the county level falls below 86 percent of the expected county revenue as determined from county yield histories and futures prices.

The SCO indemnity payment size is determined by the proportion of the range of the loss below 86 percent down to the nominal coverage level of the producer’s farm-level crop insurance. A producer will pay 35% of the actuarially-fair premium (65% subsidy) for SCO coverage. While the indemnity is triggered by county level production or revenue, the producer’s actual production history yield is used calculate both the SCO indemnity and SCO premium.

Winter wheat producers in the five eligible counties will need to make SCO participation decisions by the September 30, 2014 sales closing date. Risk Management Agency will have the projected price for winter wheat available after September 14, 2014, at which time premiums will also be calculated.

A producer is not required to purchase SCO coverage. SCO is not available for acreage enrolled in the Farm Service Agency’s (FSA) Agricultural Risk Coverage (ARC) program. For fall planted wheat for the 2015 crop year only, an insured who applies for SCO and later elects to participate in ARC for winter wheat has until the earlier of the acreage reporting date or December 15, 2014 for any fall-planted wheat with an acreage reporting date after December 15, 2014 to withdraw SCO coverage on winter wheat on the farm for which ARC was elected for winter wheat and owe no premium. This is a one-time exemption that will only be allowed for 2015 crop year for fall planted wheat, to recognize that the ARC program rules may not yet be available to the public (FCIC-18180).

Producers who intend to plant winter wheat this fall in the five eligible counties are encouraged to contact their crop insurance agents regarding this important decision.

A Look at U.S. Crop Insurance “Buy-Up” Participation

Crop insurance continues to gain importance which is reflected in the 2014 Farm Bill. Given the extreme weather events in the past few years, coupled with price uncertainty, U.S. producers are aware of the pitfalls of not having insurance. However, many options exist with respect to the level of coverage a producer can obtain. At the minimum a producer can purchase “CAT”, or catastrophic coverage, that will protect up to 50% of his crop if a loss occurs. In all areas of the U.S. producers can “buy-up” to higher levels of coverage with some locations having the option to insure up to 85% of their crop [1]. Coverage levels for crop insurance increase from the 50% level to the 85% level, in 5% increments. The maps below show the average level of coverage for each county in the U.S. where crop insurance purchase data are available.

A few patterns stick out. First, it is noticeable that with corn and soybean insurance producers in the Cornbelt (primarily Iowa, Illinois, and Indiana) buy-up to higher levels of coverage. This is not surprising since the uncertainty around yield is small relative to other regions, which implies the insurance product is typically less expensive (in other words, the premium is cheaper [2]). Also, with respect to revenue insurance products, given that the bulk of these two crops are produced in this region there is a ‘natural hedge’ relationship between yield and price. So, when yield is low prices are high and vice versa, which provides a smoother revenue outcome compared to other locations. As a result these premiums are typically less than in other regions.

Also, we notice that coverage levels are low (averaging from 50% to 70%) in the Mid-South, southern Georgia and South Carolina, and the southwestern U.S. This is most likely the result of the inverse that was noted above. In these instances yields are less certain and typically carry a higher premium which decreases the incentive to buy-up to higher premium levels. More specifically, across all crops, the counties in eastern Arkansas and Louisiana (with some spillover in to the boothill of Missouri) as well as the counties from southeast Alabama through southern South Carolina, the coverage level is consistently very low (50% to 65%).

… Click each map for a larger view …

2013 Soybean coverage levels  2013 Corn coverage levels2013 Cotton coverage levels2013 Wheat coverage levels2013 Rice coverage levels 2013 Sorghum coverage levels

[1] In relation to an automobile insurance policy, this would imply the producer’s crop insurance carries a 15% deductible whereby a $20,000 vehicle with a $1,000 deductible would equate to a 5% deductible.

[2] Again, using the automobile insurance example, the premium for a 40 year old female driver will be less than a 18 year old male driver since the younger male is typically more reckless behind the wheel and therefore poses a higher risk for the insurance company. Here the older female is the Cornbelt and the 18 year old is the southwestern U.S.