(Large hailstone with concentric rings. Photo credit: ERZ.)

Farmers Mutual Hail Insurance Company of Iowa (FMH, West Des Moines) has selected AIR Worldwide’s (Boston) Fund Designation Service to better optimize the carrier’s risk and enhance its fund designation strategy.

“By leveraging AIR’s fund designation solution, we can do a better job managing our crop portfolio risk and optimizing our company’s stakeholder’s value under the current yield, price and crop insurance program uncertainties,” comments Ron Rutledge, chairman, president and CEO, FMH. “Based on a blind test of more than half a million crop insurance policies, AIR’s allocation recommendations led to a significant improvement in return by accurately selecting the best policies to keep. This innovative tool will be an essential part of our fund designation strategy moving forward.”

AIR’s Fund Designation Service provides fund designation alternatives that the vendor claims best fit client’s risk-return targets and profiles. The service utilizes AIR’s U.S. MPCI model to rank and sort policies based on their estimated risk level. Several risk metrics, such as probability of loss, mean loss ratio, and 100-year return loss ratio are calculated from the catalog and used for risk assessment of individual insurance policies. AIR reports that it then applies various retention levels to develop multiple fund designation strategies; those giving the lowest potential risk for their client’s expected return.

“Because it is unrealistic to accurately forecast the weather and yield outcome for the next growing season at the time of the fund designation deadline, the best approach is a probabilistic one,” comments Oscar Vergara, assistant VP and crop expert at AIR Worldwide. “AIR uses 10,000 possible yield and price outcomes, or events, that are equally likely to occur during the next growing season. The stochastic events are based on the current climate, geographically correlated, and trended to current levels of crop technological improvements.”

Higher Gain, Lower Risk of Loss

FMH’s selection of the AIR solution was influenced significantly by the vendor’s reputation in the industry for providing fund designation strategies with higher expected gain and lower risk of loss than crop insurers can obtain using traditional actuarial-based models, according to FMH’s Rutledge. “AIR’s solution is a powerful tool, providing us with more data and knowledge to make better informed allocation decisions while maximizing profit potential and minimizing earnings volatility,” he comments.