Agents Look to Farm Profit

By | April 15, 2002

Depending on what line of agriculture insurance agents are serving, the potential is there to farm a profit. However, some lines of insurance are finding the growing tough.

California-based Fredricksen Insurance Services is a program manager for the Travelers’ Livestock Mortality Program on a national basis, also providing coverage for any type of farm risks that falls under those guidelines.

Mark Fredricksen, president, said in general, “The farm market in California has seen some elimination of carriers. There have been people withdrawing from the farm market completely, much like the workers’ comp program has had some problems.” One portion of the industry that has been stable and seen good numbers is the horse industry, which Fredericksen labels, “extremely healthy and very competitive.”

Dustin Lewis, a farm underwriter with California-based Networked Insurance Agents, pointed out that his office is “Seeing companies that are unprofitable are going out of business. Accounts that were more complex — we’re having to bust them up now. We’re having to place a commercial operation with a Chubb and write the farm elsewhere. The other thing is some of our carriers are unwilling to write umbrellas for whatever you want. There’s a ton of opportunities for agents writing this kind of insurance, in fact, you can make more money now because prices are going up to a certain extent.”

For the next year, Fredricksen looks to see rates for agriculture insurance that increased significantly in the last nine months leveling off by July or August. “They’ll level off at a high premium,” he commented. “At the same point and time, that provides us with an opportunity to make certain the industry is profitable.”

The biggest change in agriculture insurance during his several decades of doing business says Fredricksen is that “it isn’t uncommon to have someone from Orange County contact us with what might now be considered a farm risk. It could be a larger gentleman farmer with acreage that might have a tractor and a couple of horses that may have outgrown the homeowners’ market. We have more and more of that. I think today there are a lot more farm agencies that specialize in farm insurance than there were in 1986. With agriculture being such a large part of California’s economy, there are bound to be more companies coming into the state, but not until we get the other factors situated, workers’ comp being one of them.”

Agents in the business of selling agriculture insurance not only in California, but the Pacific Northwest and surrounding areas, have seen a market that can be very profitable, but needs the utmost attention in this day and age.

With changes in policy forms over the years, Fredricksen advises agents that they make certain the policy hasn’t been modified to a great extent and taken away a lot of coverages. “There are some companies here in the state that have filed a stripped-down farm program and while the price looks good, you’re getting what you pay for,” Fredricksen says.

Trying to make up for lost time
Ron Abram, president and CEO of Abram Interstate, which offers equine business, cattle, dairies and vineyard insurance, noted that agents dealing in ag insurance are “seeing tightening of the underwriting criteria while risk selection is becoming more important due to the hard market. Increases in reinsurance pricing is also a factor, anywhere from 10 to 25 percent depending on the carrier. I don’t see it getting any better, but not tremendously worse,” he says. “Availability will likely still be there.”

“Overall, companies that have reduced premiums over the years are trying to make up for lost time,” says Abram. “I think its too early to tell if we’ll see a lot of carriers eliminated in agriculture insurance. Small agents are getting squeezed. They’ve received volume increase requirements from the carriers to keep the contract and we’re seeing agency consolidation. They have the relationship with people, but they have a hard time keeping the large company in fold because of the volume requirements placed on them.”

Mark Halvorsen vice president and broker, for Arthur J. Gallagher, working out of the Houston office, said he’s seen many of the companies exit the market in recent years.

“They were competing with one another so fiercely and writing risks too cheaply, they got hit with some pretty catastrophic losses on top of that. It wouldn’t be a good time to be entering ag insurance in most cases.”

Crop insurance grows with the times
With California producing most of the crops the country uses, its ag insurance agents have an opportunity to turn a good profit. But the complexity of a number of the programs presents challenges for even the most experienced.

“There has been a steady increase in people buying higher levels of coverage for crops in the state,” comments Jim Otto, senior risk management specialist for the USDA Risk Management Agency in California. “Even in our historically low-participation crops like cotton and rice, we’ve seen increases. I think the increased subsidies are part of it. There are also people who never used to consider additional level of coverages, but with the current economic climate out there, they’re realizing they need some kind of coverage base. The major complaint you get is that crop insurance is a complicated program.

Down the road, Otto hopes to see a lot more crop policies in places like Hawaii, where macadamia trees and nuts are about all that’s insured, though he doesn’t expect that for three to five years. Arizona is another example. There, the cost of water and the poor commodity prices for cotton are really squeezing the cotton industry. Agriculture in Nevada is really minimal, he says, while Utah is much like the rest of the country: “Farmers are looking at alternative crops and finding niche markets.”

As Otto notes, agents selling crop insurance in California have such a wide array of products to deal with that are grown only in this state, that it can be a unique challenge as they work with products that other agents across the country do not deal with.

Dave Paul, regional director for the USDA Risk Management Agency based out of Spokane, Wash., and responsible for the federal crop insurance programs in Alaska, Idaho, Oregon and Washington, said that farmers are taking advantage of some of the programs available to them, opening the door for agents to reap the benefits.

“We have daily interactions with the crop insurance industry in the Pacific Northwest, particularly with the regional representatives,” Paul said. “The companies come to us for information and we have update meetings where we cover changes with insurance companies, then they go out and use that information. We also have an outreach part of our office that works hand in hand with the crop insurance industry on educating producers, agents and commodity organizations on how the federal crop insurance program works.” Paul notes that the Risk Management Agency presently has 19 companies under contract that deal in crop insurance.

Farmers see benefits of increased coverage
What are the greatest challenges for agents in this line of insurance?

Paul points out that trends in crop insurance in the Pacific Northwest include seeing producers continuing to see the opportunities in the insurance plans which are open for them to participate in. “More people see their neighbors participating in the program,” Paul commented. “No question, this is a good time for agents to be selling crop insurance. There is so much more awareness today of the federal crop program. As you look at the numbers today, there’s quadruple the number of acres insured in the Pacific Northwest. There’s still huge potential out there for agents to tap in and build off the current momentum. You don’t pick up an agriculture paper out here anymore without seeing some reference to the farm programs and the federal crop program. What we hear from growers is that they need better coverage, more affordable coverage and less deductibles, because they can’t afford to incur as much loss as they use to.”

And farming continues to be a major part of the economy in the Pacific Northwest, despite reduced numbers of farms.

“A lot of people are waiting to see what Congress does with the Farm Bill,” says Paul. “More and more farmers are taking steps necessary to develop a good, sound risk management plan. That helps them through the tough times. We met several times over the winter with the Oregon wheat growers and they said without a sound risk management plan and the federal crop insurance, they wouldn’t be in business today.”

Paul notes that changes in Congress regarding subsidy have also been an incentive for farmers to get more insurance.

“Once you make some changes in the programs, like working with the potato growers or grape growers and you sit down with their organization, they buy into that change,” he says. “I think that’s a very important part of the success of the insurance program in the Northwest because they have input in it.”

As Jim Otto points out, there are opportunities available for agents specializing in crop insurance.

“You can find an awful lot of success stories in those agents who only concentrate in crop insurance because of their expertise,” Otto says. “The individual policyholder still values the knowledge of the individual agent, but they still have to work awfully hard to do that.”

Farm package awaits Congress
Currently, there’s nearly $74 billion in new farm aid Congress is expected to approve after its spring break, primarily spent on subsidies to growers. California, with the largest farm economy in the nation, will only obtain a small portion of that money, with cotton and rice growers the primary exceptions. In 1999 and 2000, rice farmers in the state, a large portion of them in the Sacramento Valley, received $480 million.

California’s rice industry is behind a Senate proposal to spend $3.7 billion on the Conservation Security Act, a new program that would pay farmers who run their farms in an environmentally sensitive way. Spending on conservation programs will increase by 80 percent under the farm bill, the majority of the proposed new federal spending æ $46 billion æ goes to traditional subsidies.

The bulk of California’s vegetable, fruit and nut crops don’t fall under the direct subsidy program. California’s farms obtained $2.2 billion in subsidies between 1996 and 2000, according to the Environmental Working Group.

Grapes of wrath?
According to Dustin Lewis, vineyards are a real target class for the company’s carriers. “It can be very profitable. There are a lot of agencies that specialize in wineries. Not just in Napa Valley, but we’re seeing a lot more wineries in the foothills, with very specialized coverages for those.”

Coverages need to be precise and offer the best policy possible for growers with a stake in a $33 billion wine industry, and it has been on the offensive from Pierce’s disease, a lethal infection that afflicts grapevines. The disease has been a problem in California for decades, killing thousands of acres of grapevines. Just three years ago, it was determined that a new leafhopper, the glassy-winged sharpshooter, was responsible for spreading the disease in Southern California, including in San Diego County. To date, more than $50 million in state and federal funds have been put forth toward fighting the disease and the pest causing it.

“It is a concern, but the amount of damage is outside of the Temecula area that is relatively small,” Otto commented. “The potential and adverse impact could be catastrophic, but at this point, they’re concerned about it, but it has been relatively stable.”

Pollution policy is no smoke screen
Several experts in the field suggest that agents also need to offer policies that include a pollution program to combat an array of exposures.

“There are more exposures out there and the agent better be offering a pollution policy for certain classes of business,” Lewis says. “We’re not seeing people really offer that when they should be. I think it is a price issue, but pennywise, pound-foolish. I think Sept. 11 has affected the reinsurers, and the reinsurers have affected the other markets. We’re seeing some mold exclusions also put on. Carriers are being a lot more careful about what they’re writing, but those are the ones who will be here in the long haul. A lot of these farms have a lot of old dwellings. From a liability standpoint, if you have a mold exclusion on there and you have problems, it is an issue. A year ago Foot and Mouth was a big deal. A lot of the dairy farmers were pretty scared, but it seems to have died down. Ground water contamination impacting the environment to a certain degree is also important to look at.

Ron Abram agreed that pollution liability is also becoming a major factor, and will continue in the years to come. When asked if possible terrorist contamination of crops is a threat, he remarked, “There’s been discussions and inclusions of some terrorist policies on some non-admitted paper. I think that will take longer to infiltrate the admitted marketplace, but certainly there is some discussion along those lines.”

Workers’ comp key part of plan
It seems no line of insurance can be discussed in California without mentioning the workers’ compensation saga.

“Workers’ comp is also an issue,” says Dustin Lewis. “We’re seeing some classes that are pretty darn hard to place. Take farm labor contractors…we don’t have any workers’ comp company with us who will take those, so State Fund is a natural choice for those. We really don’t have anybody who will write a package with those. You’ll see the liability placed with a non-admitted carrier. One of the biggest ag carriers going out is Paula, who is no longer writing workers’ comp — we’re seeing more of that.

Abram points out that his company is seeing workers’ comp impacting more on the equine side.

“There’s only one carrier available in the State Fund, and there is not a lot of selectivity,” he says.

Mark Fredricksen noted that the workers’ comp program in California continues to be a problem, stating, We’re currently working on a program for horse-related farm workers’ comp,” Fredricksen says. “By law, workers’ comp benefits must be provided no matter where the workers are coming from. Unfortunately, it is the employers’ responsibility to make sure they’re legal.”

One-on-one relationship still key
And even though much of today’s business is being converted to the Internet, Fredricksen has a warning. “With farm insurance, you still have to go out and what they call ‘walk the dirt’ and see what it looks like. There’s an increased opportunity for the independent agent in agriculture insurance in California without question.”

For Dustin Lewis, the most important thing for a farmer is for an agent to still go on the premises and keep that relationship going. “There are so many exposures that a professional agent still needs to go there. Some of those relationships, the agent has written them for 30 years or more.”

Ron Abram summed it up best, adding that, “It is pretty hard to engineer a farm package from a computer.”

Planting seeds for future profit
As Lewis points out, there are less companies out there than a few years ago offering ag insurance. “There are less choices,” he says. “For agents, you’ll see in the months to come more increasing in terms of price, more questions asked in terms of underwriting. The overall loss ratio for farm and ranch in California is about a 58 percent loss ratio. It is still a fairly profitable in certain areas. This state is so diverse. I’m also seeing a lot of agents specialize in small farms, because they can round out the account, writing the auto, the umbrella, the jewelry on it.”

He says there aren’t a lot of people coming in from out of state offering ag insurance and some that were lost. The dominant players now are Allied, Travelers, Fireman’s Fund, OneBeacon, Royal.

“Our market is the rural agent or the agent who has one or two accounts. We do anywhere from the small hobby farm where they have 10 acres, a cow and a house to a large grower. You’re also seeing a lot of farms get pressured. It is more difficult and they’re looking at their pennies. A lot of small family farms, particularly in California, are being taken up by development companies.”

With developments going up all over California and many other areas of the country, farmers and agents are having to dig in a little deeper and make sure coverages are sound and affordable. “We’re seeing shrinking farmland, no question about it,” says Ron Abram. “As for other issues, we don’t see any real ramifications of Mad Cow. The horse industry continues to grow. It has slowed down a bit as the economy has slowed, as it is a pastime in many cases. If you’re in an agency with ag insurance clientele, there is plenty of market out there. Cultivate your risks, engineer your risk management accordingly and develop a strong relationship with your existing carrier.”

As Jim Otto points out, much of the success or failure of the industry relates back to economics. “The overall concern is the economic climate of the ag industry,” Otto says. “Our agency or a particular agent can’t control that.”

Concerns that will no doubt continue to grow from time to time.

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Insurance Journal Magazine April 15, 2002
April 15, 2002
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