Demand for Agricultural Insurance Expected to Grow

February 25, 2011

The agricultural insurance market is facing rising demand along with pressures to adapt to changes in farming and to become more efficient in delivering products.

Increasing world demand for food is driving up commodity prices for corn, soybeans, wheat and other food staples. At the same time, the U.S. farming economy is strong, the federal crop insurance program is being changed and today’s farmers are getting bigger and adopting new technologies.

These and other trends promise to affect crop insurance, farm owners and agribusiness insurance, creating challenges as well as opportunities for insurers that develop more sophisticated insurance products and work hand-in-hand with agribusinesses and farmers.

The U.S. has long enjoyed the least expensive food in the world with just 6.2 percent of Americans’ average income spent on food. In China, the average is 32.9 percent of income. This illustrates a need to decrease the cost of food per capita and increase the standard of living in other parts of the world.

The U.S. Department of Agriculture (USDA) has reported that demand for corn has pushed U.S. supplies to their lowest point in 15 years. A recent Associated Press story blamed projected corn futures orders from the ethanol industry and noted that low supplies of other food staples from wheat to coffee are contributing to the upward surge in world food prices. The United Nations food agency has warned that a severe drought in China is also expected to drive wheat prices higher.

The new Standard Reinsurance Agreement (SRA), which governs federal reinsurance and regulates the rules of the Multi Peril Crop Insurance (MPCI), rebalances the profit and loss potential for crop insurers among groups of states to provide incentive to insurers to offer coverage in underserved states. At the same time, the government has imposed a cap on insurance agents’ commissions, which will cause the average commission to fall in most instances. These SRA changes will challenge insurers and agents to be more efficient in the delivery of insurance products to American farmers.

The crop insurance industry in the U.S. had multi-peril crop insurance premiums of $7.6 billion in 2010, with an additional $681 million in crop hail premiums. The price of corn, soybeans, wheat and cotton are all approaching December 2011 crop-year highs. These prices have the potential to increase MPCI written premiums to $11 billion in 2011, while crop hail premiums are expected to remain relatively unchanged.

Modern Farmers

Crop insurers and federal regulators are embracing new farming technology that will streamline the reporting of crop acreage to insurers. GPS systems on planters and tractors can now report acreage on a timely and accurate basis directly to crop insurers. Similar technology is being tested for harvesting equipment.

Farmers are planting more acreage using new technology and they are using new hybrid and genetically modified seeds. Corn and soybean yields are rising rapidly as vertical integration continues to impact all segments of farming. The crop industry is benefiting as farmers can now use MPCI revenue products as a financial management tool to backstop their downside, allowing them to plant more acres.

Farmer operations continue to evolve into roles traditionally thought of as part of the agribusiness marketplace. This challenges traditional farmowners insurers to provide the appropriate products and capacity to serve these modern farmers.

For example, farmers are routinely purchasing equipment valued in excess of $500,000. These rising values affect replacement cost and all perils coverages, as well as equipment breakdown and lost time. Farmers cannot afford to have downtime in the event of an insured loss during planting, spraying, irrigation or harvest seasons.

These larger farm operations also require increased capacity for grain storage and processing facilities. It is not uncommon for farmers to build grain complexes that rival traditional grain elevators in size and capacity. These facilities allow farmers to act as their own middlemen, increasing margins by drying and storing their own crops.

Increased limits and coverages are required for processing and storage of produce for grower-packer-shipper operations that are vertically integrated. Insurers are developing more sophisticated farmowners and hybrid agribusiness/farmowners products, such as the American Association of Insurance Services Ag op policy, to meet the demands. Coverages for product recall and pollution are becoming more common, but are also increasing the need for more sophisticated underwriting techniques and for reinsurance.

Automobile exposures for farm insurers are expanding as well. Corn growers with yields heading toward 300 bushels per acre need tractor-trailers to haul grain to a storage facility, making the traditional two-ton straight truck obsolete. Semis also are being used to bring farm inputs to the fields. The same exposure increase is also visible for the vertically integrated growers, as they haul produce from the field to the wholesaler, and sometimes directly to the grocer.

Consolidation in the agribusiness service sector is resulting in larger, more concentrated insurance risks. Property and commodity values have created a need for higher insurance and reinsurance limits. Agribusinesses have become important partners by providing consulting services in the form of prescription agriculture. These services require special treatment from insurers in the form of professional liability.

The evolving and growing agricultural sector will continue to challenge the insurance industry while providing growth opportunities. Successful insurers within this segment will be those insurers who, like the farmer and agribusinesses, work to adopt new technologies and respond with new and more sophisticated insurance and reinsurance products in addition to the capacity the market needs.

Leliaert is the director of agriculture for Catlin US, specializing in agriculture reinsurance. He is an expert in the agriculture insurance and reinsurance industry and will be speaking on issues facing the insurance industry at the Agribusiness Conference in Sacramento, Calif. on March 23-24, 2011. E-mail: Christopher.Leliaert@catlin.com. Information on the Agribusiness conference is available at www.insuranceskillscenter.com.

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