Understanding how an insurance product has operated historically provides insights that may help maximize its future potential. LGM-Cattle (LGM) has been available since 2006, yet participation has remained low because there was no premium subsidy until July 1, 2020.
To gain a better understanding of LGM, we utilize a tool created by Dr. Marin Bozic that allows one to analyze LGM’s historical performance with today’s current premium subsidy structure. Through historical analysis, it provides insights into the most common questions clients may have with LGM-Cattle. For simplicity, at times the analysis assumes pooled coverage so that a premium subsidy can be applied. This analysis utilizes data from 2006 through 2020 and applies current premium subsidies to historical premiums.
Contact our team at (866) 374-2112 for further insights on LGM-Cattle, including net indemnity by year, analysis of seasonal effects, and more, and personalized analysis specific to your operation.
Question: LGM-Cattle has two options, Calf Finishing or Yearling Finishing. Would one have performed better than the other historically?
Answer: Comparing LGM for Calf Finishing and Yearling Finishing provides significantly different results. For example, Calf Finishing would have provided an average net indemnity of $6.58 per head; whereas, Yearling Finishing would have only provided $3.94 net indemnity per head. Frequency of payment was also higher for Calf Finishing at 24 percent of purchases, compared to 20 percent of purchases for Yearling Finishing.
- Calf Finishing would have provided better coverage than Yearling Finishing with significantly higher net indemnities per head.
- On average, the expected margin for calf finishing is significantly higher than yearling finishing, and it appears to correspond to better insurance coverage.
- The remaining analysis will be based upon Calf Finishing, as it appears to provide a significantly stronger safety-net.
*Assuming coverage 8 months in advance with a $70 per head deductible. Premium subsidy is calculated as if it was pooled coverage.
Question: Expected margins fluctuate depending upon market factors. Historically, would the expected margin level impact potential indemnities?
Answer: Historically, the expected margins would have materially impacted indemnities. For example, insuring eight months ahead at a $70 deductible provided an average net indemnity per head of $6.58 and the percentage of events with a positive net indemnity was 24 percent. If a producer chooses to only purchase during those periods when the expected gross margin is above $300, the average net indemnity is increased to $12.46 and the percentage of events with a positive net indemnity increases to 32 percent.
- Historically, LGM would have provided more frequent payments and higher net indemnities per head if insurance was purchased only when expected margins were over a certain threshold.
Question: LGM allows producers to choose a deductible between 0-$150. How would varying deductibles have impacted historical performance?
Answer: Three levels of deductibles, including $30, $70, and $90, were evaluated to illustrate the tradeoffs between each option. The cost per head insuring 8 months in advance ranges from $10.80 for a $90 deductible to $13.69 for a $70 deductible and up to $30.90 for a $30 deductible. The net indemnity per head is $4.57 for a $90 deductible, $6.58 for a $70 deductible, and down to $2.05 for a $30 deductible.
- A $30 per head premium resulted in a higher indemnity per head, but not a higher net indemnity per head due to the higher cost of insurance.
- Historically a deductible higher than $30 and less than $90 would have provided the best return when compared to the premium.
Question: Is LGM’s performance impacted by how many months ahead you insure?
Answer: LGM-Cattle allows one to insure between 2-11 months ahead since the first month after coverage is established cannot be insured. As a general rule, it is less expensive to insure the near months and more expensive to insure the months furthest away. Historical analysis suggests that insuring months further away provides more effective risk management against a prolonged slump in margins however, eight months appears to have the highest net indemnity.
- Insuring two months ahead is rarely effective. It costs the least, pays the least, and it has the smallest likelihood of having a positive indemnity.
- The highest net indemnity and likelihood of a positive net indemnity occurred when insuring about eight months in advance.
- There appears to be diminishing value in insuring 11 months in advance, but it still performed better than insuring less than six months ahead.
Question: To receive a premium subsidy, LGM requires one to pool coverage (insure more than one month at a time). Is it better to maximize pooling or minimize pooling?
Answer: This answer varies based upon many factors, but two scenarios are analyzed to evaluate the frequency of payments. The scenario in the graph illustrates the frequency of payments for Calf Finishing utilizing a $70 deductible and insuring 7 months ahead. Historical analysis indicates that net indemnities for pooling two months together are similar to only covering one month, but adding additional months may slightly reduce the net indemnity per head.
- Pooling multiple months together can make the cost per head decrease by small amounts, but the net indemnity per head is also decreased.
- Insuring one month at a time and not pooling months has the highest net positive indemnity over time.
Question: When would LGM have provided payments?
Answer: Understanding both the frequency and amount of and historical indemnity payments helps one understand how LGM is likely to function in the future and helps create realistic expectations. The following graph is based upon insuring 8 months in advance at a $70 deductible with two months (8 and 9 months ahead) pooled together. It illustrates a few things: indemnity payments are made approximately 25 percent of the time. Yet, the indemnities are clustered together so LGM isn’t paying every three months. Rather, there can be significant periods between indemnities. Finally, it demonstrates that when LGM does provide indemnities, they are usually far above the amount of premium paid.
- Establishing a plan that recognizes that with a $70 deductible there can be lengthy periods with no LGM indemnities is key to long term success with LGM.
LGM is a solid product for cattle producers, but its performance would have varied based upon many factors outlined in this article. There are no guarantees that LGM’s historical performance will be indicative of future performance. Yet, the following lessons may improve one’s likelihood of success utilizing LGM:
- Utilizing Calf Finishing, not Yearling Finishing.
- Purchasing when the expected margin is above a threshold level. (Likely somewhere between $200-$300 per head.)
- To balance cost per head with net indemnities, insure around a $70 deductible. A slightly lower deductible will be effective as well, but there is little advantage to a deductible over $70 other than providing affordable coverage for catastrophic circumstances.
- Purchasing at least six months in advance will result in the most likely chance for effective risk management.
- LGM provides payments in clusters so it’s important to have a long-term plan that ensures consistent enrollment.
- Some degree of pooling coverage between months is necessary to receive the premium subsidy. Pooling beyond two months at a time may reduce the effectiveness of coverage.
Notes: As of publication, USDA is enforcing an unfortunate rule that requires one to choose between LRP or LGM. It is necessary to understand that once one utilizes one or the other program, one cannot switch between them while coverage still exists.
Finally, every effort has been made to ensure accurate information is presented in this paper. This paper is for informational purposes only, and the decision to purchase insurance is the sole responsibility of the insured.
About the Author: From 2013-2017, Brandon Willis oversaw USDA’s insurance programs as the Administrator of the Risk Management Agency. Before that he served as a Senior Advisor to the U.S. Secretary of Agriculture Tom Vilsack. He owns Ranchers Insurance LLC, an insurance agency that specializes in LGM. He can be reached at (435) 213-0463 or email@example.com