The Optional Unit Mistake: Analyzing the production history of real growers.

One of the drums we’re always beating at Foothills Insurance is the importance of affordability and risk management strategies that prioritize surviving the worst crop years.  Most of our row crop growers buy the relatively inexpensive Enterprise Unit (EU) where all of a crop planted in a county has one guarantee.  Losses are less frequent than with an Optional Unit (OU), where  each farm is guaranteed individually and can have its own claim, but EU has the benefit of being up to 1/3rd the price of OU. We believe that the EU is the best option for most growers because it balances reliable payouts with affordability.  

However, many Agencies in our area push for the more frequent payouts of OU.  After all, isn’t it better to be able to claim a loss any time a soybean field is damaged by deer?  Wouldn’t you rather get paid any time your bottom land is flooded even if the rest of your farm has a bumper crop?

According to the data, the answer is a resounding NO for most farmers!

Money Where My Mouth Is!

We recently analyzed the last decade of history for all of the growers that we insure.  We compared the estimated cost of a 75% EU and OU for each year and used their actual production, on each farm, each year to determine if they would have a loss and how large it would be with each unit structure.  

By subtracting the premiums from the gross payout for each insurance type, we were able to compare the cost/benefit for OU/EU across our entire book of business.

Of all of the corn, soybeans, wheat, and cotton policies that we insure, less than 13% would have netted (Losses  -  Premium  = Net) more with OU than EU.  And for more than a third of those policies, the higher OU net was less than 10% higher than the EU net. 

This analysis required some assumptions and estimations like the premiums for each crop and year, so it is not definitive on a grower to grower basis.  However, we erred on values that would benefit the OU side of things and the data taken as a whole still shows that, more often than not, EU nets growers more than OU by a large margin.

The Downsides to Optional Units

The problem with OU is that the more frequent payments usually do not justify the significantly higher premiums.  One thousand acres of corn on an Optional Unit has the same guarantee as the same thousand acres on an Enterprise Unit.  This means that in a bad year where most or all of your farms have a loss, EU and OU pay out roughly the same, but OU has a significantly higher premium.  In good years where everything does well, OU has a significantly higher premium and there is no loss at all.  

The only time that an Optional Unit is better than an Enterprise Unit is during a year when you have an overall above average crop even though a significant portion of your farms underperformed. 

Moneyball

It’s a bit like baseball if you think of OU as home run hitters.  You might have some games decided by home run hitters, but a great season relies on players that consistently get on base and score runs.   Of that 13% of policies in our analysis that netted more with OU, many were due to one or two out of ten years with high OU payouts rather than seeing consistent variability from year to year that led to OU claims.  So even when OU was favorable, it was often due to rare one or two time events as opposed to regular, yearly small OU losses on a handful of farms.  More indication that Enterprise Units is a better general practice and less of a gamble than Optional Units.

This isn’t to say that Optional Units aren’t still right for some growers. On the contrary, our case study revealed several growers who may be better off with one or more of their insured crops on an OU.  However, absolutely NO ONE was better off insuring all of their crops as Optional Units.  OU is a useful tool for very specific circumstances, but it should by no means be considered the gold standard of insurance.

So Why Do Some Agents Push For OU Policies?

If this is the case, why do so many insurance agencies push Optional Units so hard?  That’s not a question I can answer for sure, but I can certainly speculate.  For one, it can be counterintuitive that more frequent payments are not necessarily better for your operation, so maybe they just aren’t looking at it that hard.  Likewise, it’s no small thing to run these calculations on 126,000 lines of different farms, years, growers, and crops. 

However, I will say that crop insurance is a commission based business.  For every dollar a farmer spends in premium, commission increases.  I hate to be cynical about the industry, but I’m sure there’s more than one agent out there selling higher cost products simply because it increases their income.  Additionally, people usually remember the money they receive a lot better than the premiums they had to pay out, so the downside of OU is often less obvious in retrospect.  It can be easy to sell an expensive product that doesn't service the client properly and be confident that the grower will never realize it.

Key Takeaways

Ultimately, you should want your insurance to help you make it to next year no matter what the weather does.  As a general rule, a mid to high level EU is usually the most affordable and consistent way to do that, and you will likely be better served going to a higher EU level of coverage than you would spending the same amount on lower level OU.

Make sure to look at all of the numbers if considering Optional Units.  It’s true that OU will usually pay more claims than the EU.  However, nearly 90% of the time, the higher premium completely negates those gains and takes more money out of your pocket.  

Verify that the premiums are taken into account if you’re looking at the benefits of OU and that you are certain that you consistently have a significant number of underperforming farms even in the good years.  

If you are one of our clients and would like to know where your operation falls on the OU/EU evaluation, don’t hesitate to call.  If you are insured elsewhere and would like a second opinion, we’d be happy to help you out as well.  Don’t let the promise of high dollar payouts in fancy presentations distract you from making it around the bases and to next season.

Foothills Crop Insurance is a family owned insurance agency with over 85 years of combined experience. We’re experts in tailoring policies to fit grower's operation and budget. Contact us today, and let our family take care of you like you’re one of us!  800-660-8674

Jeremy Petree