CLOSER LOOK: Agribusiness

Farmers are adding agritainment or agro-tourism to their operations, such as using the farm for haunted houses, corn mazes, cider mills, vineyards with wine festivals and restaurants, craft shops and hay rides, among other activities.

Understanding buyers is key to writing farmowners policies.

If you’ve been writing agricultural and farm insurance for years and think you know everything there is to know about the business, don’t bet the farm. Farm exposures have changed dramatically in the past 50 years and require sophisticated liability coverages, according to Chris Leliaert, vice president at Towers-Perrin Reinsurance. Leliaert recently gave the keynote address at the 19th Annual Insurance Skills Center Agribusiness Conference held in Sacramento, Calif., March 15-16, 2006.

In looking at the current state of the farmowners market in the United States, Leliaert said there are fewer farms today. “Urban areas are encroaching and farms are going away,” he said. “There’s a very select group producing a huge percentage of our agricultural output.”

Nevertheless, comprehensive general liability is needed more and more, he said. There also is much more of a need for farm umbrella, he said, with higher valued property and increased farm gross income and net worth.

“Farmers are looking more like agribusinesses. Something that has been prevalent in the western United States and started about 10 years ago but is moving across the country now is the trend for farmers to grow, process and market their own crops. More sophisticated farmers are taking their products all the way through delivery,” Leliaert provided as an example.

Additionally, more farmers are adding agri-tainment or agro-tourism to their operations, such as using the farm for haunted houses, corn mazes, cider mills, vineyards with wine festivals and restaurants, craft shops and hay rides, among other activities. “Do you think those activities are contemplated in the farmowners’ policy?” Leliaert said. “Probably not, but it’s a new challenge. Everyone wants to take the kids out and have that farm experience.”

Other factors affecting farms that eventually affect the insurance industry are – mad cow disease, bird flu, genetically modified crops, pollution, environmental groups, farmers suing farmers over pollution and foul odors, and contract farming – “the things you see on TV or read in the newspapers,” Leliaert said.

Business still good

Despite the new challenges facing today’s farmers, Leliaert said the farmowners market is still healthy. The U.S. farmowners market size totals approximately $5 billion. “If you look at the statistics, there are still several direct writers who only write in one state, which shows how fragmented the industry can be,” he said. The crop insurance market has grown from under $1 billion to $4.2 billion in multi-peril.

The loss ratio in 2004 was 56.8 percent, which was a good year, he said. “The last time it was below 60 percent was in the late ’80s and 2005 looks like it will be a pretty good year.” Leliaert said 2005 loss ratios are due to be published in May.

In the West, the loss ratio in 2004 was 49.6 percent. “The West has done very well in relation to the rest of the industry,” he noted. “There’s no substitute for inadequate rates in this business or any other for that matter.”

Looking at California specifically, there were 79,631 farms in 2002 compared with 87,991 farms in 1997, according to the 2002 Census of Agriculture State Profile. In the Plains region, 10 percent of farms have gone away in a five-year time. Nationwide, there were almost 8 million farms in the 1930s, compared with about 2.2 million farms in 1997. Of the 1997 numbers, 84 percent generate less than $100,000 in farm income. If you look at California farms by value of sales, approximately 8,100 farms have sales values of $500,000 or more, while 67,327 farms have sales values of $0 to $249,000., Leliaert said

“If you say you don’t write small farms, you’re missing an awfully big chunk of the market,” Leliaert added, analyzing the statistics.

Understanding
farmers

The key to writing farms, he noted, is understanding who the buyers are for insurance products. Farms are changing buyers, he said.

For example, ac-cording to 1999 U.S. Census statistics, in 1940, the average farm operator was 48. By 1969, the average farm operator was 51 years old. And by 1997, the average farm operator was 54 years old. In picking out a state from each region of the country – California for the Western region, Colorado for Mountain region, Georgia for the Southeast region, Indiana for the Midwest region, Nebraska for the Plains region and Pennsylvania for the Northeast region – the oldest farm operators are in California and Georgia, at approximately 56 and a half years old.

Farmers also have more wealth today, Leliaert added. “There are newer houses on the farm, farmers have skis, satellites, jet skis. They have everything everyone else wants,” he said.

A primary concern among farmers, Leliaert said, is expenses. “The farm is a complicated line of business to automate,” he said. In addition to rising fuel costs, “equipment can be expensive to update, and the cost can run into the hundred of thousands, or even millions.” Tractors cost $100,000 to $200,000, and harvesting equipment can cost up to $500,000, he said.

Farmers also are concerned with forms and coverages, he said. “A lot of companies are using independent forms that haven’t been updated and are expensive to update. And, farm underwriters are getting older, just like the average age of farmers, meaning that there is a lack of understanding about the farm market. It isn’t unheard of for companies to exit the farm business with the underwriter specializing in that field retires,” Leliaert said.

Based on those trends, Leliaert said the insurers who succeed in the farmowners market will be those focused on niche markets, who understand local markets and underwrite like a regional carrier, have strong financial balance sheets, understand that farm automobile is an integral part of the farmowners product, and have sophisticated automation systems.

Topics California USA Agribusiness Pollution