Crop Reinsurers’ Profit Could Fall 30% Under USDA Changes, Says Aon

April 12, 2010

Proposed cuts in the agreement crop insurers have with the federal government would likely reduce reinsurers’ expected profit by 20 to 30 percent, which could lead to some companies withdrawing from the program or scaling back their capacity, according to a report by a reinsurance broker.

The analysis by Aon Benfield of the U.S. crop reinsurance market says that changes sought by the United States Department of Agriculture (USDA) indicate “significant structural and economic changes which would result in a meaningful reduction in the expected future profits for crop insurers.”

The Multi-Peril Crop Insurance (MPCI) program provides American farmers with insurance policies delivered through 16 private crop insurance companies. Participating insurers are subject to the Standard Reinsurance Agreement (SRA), a contract that defines reinsurance purchases, gain sharing and expense reimbursement. Changes to the SRA were drafted by the USDA agency that administers the program, the Risk Management Agency (RMA),

With the SRA set to expire after the 2010 crop insurance year, terms are currently being negotiated for 2011 and beyond.

Joseph Monaghan, head of Aon Benfield’s Agriculture practice group, said that crop insurers and reinsurers have fared well under the program for 10 years but that could change.

“Our study reveals that over a 10 year period, reinsurers participating in the MPCI program have experienced favorable returns due to relatively low loss experience resulting from few adverse weather events. However, the proposed changes to the program would have the likely effect of reducing participants’ margins, which could see potential reductions in capacity,” he said.

Monaghan said that reinsurers providing cover for the program on a quota share basis may reduce their participation as well, which could in turn reduce the ability of cedents to provide MPCI.

The crop study suggests that if the latest RMA proposals had been in place from 1998 to 2008, participating insurers’ underwriting gains would have been reduced by nearly $560 million.

According to reinsurers, while the 10-year period witnessed relatively few crop losses, the potential for significant losses still remains.

Additionally, reinsurers don’t like that the RMA has proposed changes to the expense reimbursements. If these changes had been in place in 2009, crop insurer profits would have been reduced by more than $300 million, according to Aon Benfield.

Monaghan said the reinsurance market has become more competitive, which has benefited insurers.

“In recent years, an increased number of reinsurers have started to write crop reinsurance, primarily attracted by the low volatility and diversification of this line of business. As a result, terms and conditions for crop reinsurance have become more competitive and insurers have benefited from lower pricing,” he said.

But those economics could change if the USDA proposals are adopted, according to the study.

“Currently, quota share reinsurance is generally priced at low single digit expected margins by reinsurers. Reinsurers may be unwilling to support their renewal treaties at the expiring terms given the erosion in expected economics under the proposed SRA. Reinsurers may either discontinue their support for crop insurance or demand lower ceding commissions and profit commissions for continued support, which will in turn put pressure on participating insurers,” Monaghan said.

Source: About Aon Benfield

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