AIR: Crop Insurance Claims Expected to Exceed $13 Billion

The drought in the U.S. agricultural heartland continues to deteriorate crops in the Corn Belt with no meaningful precipitation relief in sight. After the hottest July on record, insured losses from the 2012 drought are now expected to surpass losses of other historical droughts.

According to catastrophe modeling firm AIR Worldwide, losses resulting from farmer claims for the crop insurance industry may exceed $ 13 billion with potential losses as high as $20 billion.

However, after government recoveries available through the standard reinsurance agreement between private crop insurers and the government, the total responsibility for the insurance companies and their private reinsurers, net after accounting for premiums collected, will be about $1 billion to $3 billion, AIR said.

Although the 2012 growing season began on a very promising note, by the end of June the crop insurance industry was facing one of the worst agricultural droughts. By the end of July 2012, the area of the contiguous U.S. affected by severe to extreme drought increased to 42 percent.

Dr. Gerhard Zuba, senior principal scientist at AIR Worldwide, said AIR’s current estimate for this year’s crop insurance losses point to a gross loss ratio for the whole industry of 120-180 percent, which translates to payouts of $13-20 billion assuming $11 billion in total premiums.

The net loss after of $1-$3 billion for insurers is on the basis of $11 billion of assumed total premiums for 2012. However, Boston-based AIR noted, the exact value of the total premiums for 2012 is not yet available.

“The drought of 2012 will greatly reduce the harvest of major crops such as corn and soybeans. The AIR model indicates yields as low as 40 percent below normal in some areas. These low yields and the expected shortage at harvest have already increased prices for these commodities,” said Zuba.

“Since planting this spring, corn prices have risen by 142% percent and soybeans by 138 percent (as of August 24). With high prices and high-take-up rates, most corn and soybean farmers will not suffer a loss, as they bought revenue protection policies. Because their monetary compensation will be calculated based on the final harvest price in the fall, typical deductibles in the drought areas of the Corn Belt with respect to yield shortfalls of 20 to 25 percent will be compensated by the higher fall price for the commodities,” the AIR scientist said.

Source: AIR