Record-setting droughts in the U.S. Midwest throughout 2012 are likely to result in substantial gross insured losses for crop insurers and reinsurers and possibly their first overall loss in 10 years, says Moody’s Investors Service in a profile of the industry.
“Although a significant portion of the loss will be borne by the U.S. government through its crop reinsurance program and by farmers, crop insurers and reinsurers could experience their first overall loss for the sector since the droughts of 2002,” says Alan Murray, a Moody’s senior vice president.
Murray said results for each insurer are likely to vary significantly, however, depending on product and geographic mix, as well as reinsurance programs.
Looking at longer term trends, Moody’s says that ongoing expense reimbursement reductions by the federal government to insurers have contributed to industry consolidation. The top five crop insurers — all national underwriters — now account for approximately two-thirds of direct premiums written.
Moody’s says market leaders are likely to benefit from competitive barriers to entry in the sector, as well as certain technological, business and geographic diversity advantages, which should enable them to sustain profitability. Conversely, smaller, more agriculture-focused and regionally concentrated insurers may face considerably greater near-term strain as a result of drought-related losses, according to Moody’s analysts.
The still-pending 2012 Farm Bill and pressures on the federal budget are likely to further reduce direct government subsidies to the agricultural community, says Moody’s. That should further promote the use of commercial crop insurance, although the drought may delay uptake or lead to modification of competing proposals currently under consideration by Congress.
Agricultural producers, including farmers and ranchers, purchase crop insurance to protect against the loss of their crops because of natural disasters such as hail, drought and floods and/or the loss of revenue owing to a combination of variability in crop yield and agricultural commodities prices.