February 11, 2004
GRIP-HR: AN ANALYSIS OF RETURNS AND RISKS
Group Risk Income Plan (GRIP)
is a revenue insurance that insures county revenue. In 2004, a harvest
revenue option was added to GRIP. At the county level, GRIP with
the harvest revenue option (GRIP-HR) is conceptually similar to
farm-level products that have guarantee increase provisions (i.e.,
Crop Revenue Coverage (CRC) or Revenue Assurance (RA) with a harvest
revenue option). How GRIP-HR works is described in a previous
Illinois Farm Economics: Facts and Opinions entitled "Group
Crop Insurance Plans". This previous article also details the
working of the other two group products (Group Risk Plan (GRP) and
Group Risk Income Plan without the Harvest Revenue option (GRIP-NoHR)).
The purpose of this Facts and Opinions article is to quantify
the returns and risks associated with GRIP-HR.
Return and Risk Analysis
Returns and risks associated with GRIP-HR are compared to the other
group insurance products and to CRC. Comparing GRIP-HR to CRC allows
returns and risks of a county product to be contrasted to returns
and risks available from farm-level products. The group products
are evaluated at their highest coverage level and highest protection
level. Several different coverage levels are analyzed for CRC to
compare the impacts of coverage level on results. CRC premiums are
based on basic units. Comparisons are made for both corn and soybeans.
Evaluations are conducted using
the Marketing and Crop Insurance: Risk Model. This model
is a Microsoft Excel spreadsheet that is available for download
from the FAST section of farmdoc (www.farmdoc.uiuc.edu/fasttools).
This model calculates gross revenues under alternative insurance
products using prices and yields from 1972 through 2002 stated in
today's terms. These gross revenues equal crop revenue given that
the crop is sold at harvest plus insurance payments minus insurance
premium costs. In this article, the average gross revenue over the
31 years is reported as a measure of return from each insurance
product. The lowest revenue over the 31 years is reported as a measure
For each county where GRIP-HR
is sold, returns and risks are calculated for the group products
and CRC. These typical farms are contained as defaults in the beta
1.3 version of the Marketing and Crop Insurance: Risk Model.
Table 1 shows average premiums and gross revenues across all Illinois
counties for corn. Gross revenue without insurance averages $336
per acre and lowest revenue averages $167 per acre. From a risk
standpoint, lower risk is indicated by having a higher "lowest
Compared to no insurance, GRIP-HR
at the 90% coverage level (GRIP-HR 90%) has higher average gross
revenue and higher lowest revenue. GRIP-HR's average gross revenue
is $351 per acre, $15 per acre higher than the no insurance case.
Revenue for GRIP is higher because our estimates indicate that over
time GRIP-HR will pay out more indemnities than will be paid in
premiums. Lowest revenue is increase by $63 to $230 per acre. Compared
to the no insurance, GRIP-HR both raises return and reduces risk.
Overall, GRIP-HR compares favorably to GRIP-NoHR. GRIP-HR 90% has
higher revenue and lower risk when compared to higher GRIP-HoHR
90% (see Table 1). This comes at a cost of higher premiums. GRIP-HR
averages $17.98 premium across Illinois compared to $11.79 for GRIP-NoHR.
While more costly, GRIP-HR also has higher payments that, over time,
offset premium costs.
Compared to GRP 90%, GRIP-HR has higher returns ($344 for GRP 90%
compared to $351 for GRIP-HR 90%) but lower risk reductions (GRP
90% averages a lowest revenue of $241 across all counties compared
to $230 for GRIP-Hr 90%). The choice here is between $12 higher
average return for GRP-HP versus $11 higher lowest revenue for GRP.
At a 65% coverage level, average revenue for CRC is $333 per acre,
$3 below the no insurance case. This indicates that over time premiums
on CRC exceed payments by $3 per acre. Average revenue using CRC
85% is reduced to $321 per acre, $15 below the no insurance case.
At the same time, the lowest revenue increases from $246 at CRC
65% to $258 for CRC 85%.
Compared to CRC 65%, GRIP 90% has higher average gross revenue:
$351 per acre for GRIP-HR compared to $333 for CRC 65%, a difference
of $18 per acre. Lowest revenue, however, is lower for GRIP-HR:
GRIP-HR 90% has a $230 per acre compared to $246 for CRC 65%, a
difference of $16 per acre. In essence, the tradeoff between GRIP-HR
90% and CRC 65% is between $18 of higher average revenue per year
versus $16 higher lowest revenue. A similar tradeoff exists for
CRC 85%, CRC 85% has $30 lower average gross revenue and $28 higher
lowest revenue when compared to GRIP-HR 90%.
Table 2 shows results averaged across Illinois counties for soybeans.
Major points are:
GRIP-HR compares favorably to the other group products.
GRIP-HR has higher returns and larger risk reductions than GRIP-NoHR.
Unlike the corn case, GRIP-HR 90% also has higher returns and higher
risk reductions than GRP 90% in the soybean case. In soybeans, GRIP-HR
has a stronger showing compared to the other group products than
CRC has lower average gross revenue than GRIP-HR. Unlike
corn, GRIP-HR has higher lowest revenue when compared to CRC 65%.
These results suggest that GRIP-HR may reduce risk more than revenue
products at low coverage levels. If a farm-level product has been
purchased at a low coverage level, a farmer may wish to consider
purchasing GRIP-HR instead.
Variability across the State
and Tools for Evaluating Crop Insurance
The above results do vary across
the state. In general, GRIP-HR results are more favorable in the
central part of Illinois when compared to southern Illinois. Northern
Illinois is in between central and southern Illinois. The following
tools available on farmdoc can be used to examine county
The above mentioned Marketing and Crop Insurance: Risk
Model is available for download in the FAST section of farmdoc
This tool is a Microsoft Excel spreadsheet that compared the risks
and returns of crop insurance products and marketing strategies
by crop and county. Farmers can enter their own yields for analysis.
IFARM Crop Insurance
Evaluator is available in the crop insurance section of farmdoc
This evaluator shows risks and returns from alternative crop insurance
products by county in Illinois, Indiana, and Iowa. GRIP-HR will
not be available in this tool until March 2004.
IFARM Crop Insurance
Premium Calculator is available in the crop insurance section
of farmdoc (www.farmdoc.uiuc.edu/cropins).
The Premium Calculator shows premiums for different insurance
policies based on user input (i.e., county, crop, insurable unit,
and APH yield). GRIP-HR premiums will not be available to 2005.
The 2003 Group Crop
Insurance Plan Calculator is available for download in the crop
insurance section of farmdoc (www.farmdoc.uiuc.edu/cropins).
This Calculator gives premiums for the group products and
shows average payments over time from the insurance products. This
product fills the gap that exists because the web-based IFARM
tools because do not currently have GRIP-HR information available.
The Calculator requires Microsoft Excel version 97 or higher
This article provides an analysis of the returns and risks associated
with GRIP-HR. GRIP-HR compares favorably with other group products,
particularly in soybeans. If an individual is purchasing group products,
GRIP-HR should be given consideration. GRIP-HR does not have as
great as risk reductions as farm-level revenue products (CRC and
RA), particularly in corn. GRIP-HR likely has higher returns than
the farm-level products. This presents a risk-return tradeoff: GRIP-HR
has higher returns but lower risk reductions when compared to farm-level
Issued by: Gary
Schnitkey, Department of Agricultural and Consumer Economics,
University of Illinois at Urbana-Champaign.