By STEVE YAHN, who has been a reporter and editor for national publications.
Despite the dire drought that swept through the United States in 2012, the crop insurance industry remains strong, say experts.
"As far as the insurance sector goes, the system has stood up well and overall there has been no insolvency or significant capital impairment as direct results of the 2012 season," said Julian M. Roberts, London-based executive director of agribusiness and weather risk management for the Willis Group, which, among other lines, offers crop insurance products around the world.
As it turns out, the impact of the drought in the United States, severe though it was, was not nearly as bad as had been initially anticipated, Roberts noted.
"Extreme initial estimates were made by some in the $30 billion to $40 billion range, but at this stage it seems unlikely that the final figure will reach $15 billion or so," Roberts added. "Nothing like the horror show that was spoken of."
Likewise, Fitch Ratings said, crop insurers are likely to absorb near-term losses.
"Private insurers' net losses, after federal and private reinsurance, are anticipated to have more of an impact on earnings rather than capital," Fitch Ratings said. "We believe the leading writers of crop insurance will be able to absorb any near-term crop losses and are likely to maintain current levels of financial strength due to the primary writers' size, diverse portfolios, conservative use of additional reinsurance, and the business line's historical profitability."
Gretchen Roetzer, director of insurance at Fitch Ratings, said it's important to keep things in perspective.
"In the long term, crop insurance has been profitable," she said. "I think that's key."
Sure, the industry will have an underwriting loss, but the indemnities are slower to be reported to the U.S. Department of Agriculture than expected, said Bruce Babcock, an economics professor at Iowa State University.
"So far the indemnities haven't been as large as I thought, but they're still not all in yet," he said.
"The only way crop insurers would make a profit is if they saw this disaster coming, because of the low water tables and the low soil moisture levels at the beginning of the season, and they opted to minimize their exposure in the Corn Belt," said Babcock.
Looking ahead to the 2013 crop season, Babcock noted that soil moisture is low, which means that even if you get normal rainfall there will still be some heightened risk of shortfall in crops. In terms of El Nino and La Nina, we're headed into a period of above average precipitation for the spring, Babcock said.
Willis' Roberts added that producers of corn and soybeans, which together represent about two-thirds of the crop liability in the Midwest where the impact of the drought was greatest, "have been well served by the program" of private insurance combined with federal government subsidies.
Taxpayers may ultimately be responsible for 50 percent to 80 percent of crop underwriting losses, according to Babcock.
Crop insurers including Ace Ltd., QBE Insurance Group Ltd. and Wells Fargo & Co., will probably face higher costs this year, Fitch Ratings said. Private insurers sell and administer multiperil crop insurance in the United States. In return, the federal government supports the firms with payments and reinsurance.
Fitch Ratings noted that, in addition to reinsurance protection provided by the federal government, companies typically purchase reinsurance coverage from the private market in an effort to reduce the potential for large net losses.
Karsten Berlage, managing director and head of weather solutions at Allianz Risk Transfer in New York, said most farmers, about 85 percent, do have crop insurance. When a severe drought occurred in 1988, just 25 percent had crop insurance.
But amid those who see a less threatening drought season this year, there are experts who are expressing concern.
One is Brian O'Hearne, a noted weather forecaster based in Kansas City, Mo. O'Hearne, who is president and CEO of eWeatherRisk, an online weather risk management company that trades in hedges and therefore takes more of a historical approach to weather trading, noted that signs for the upcoming season do not look good. "Remember, once droughts become established, they tend to persist for multiple years like in the 1930s and the 1950s."
O'Hearne said his firm expects the drought to continue for most of the Plains and the Southwest. Northern California and the Sierras had quite a bit of snow in December but the south side of California, Nevada and Arizona are dry and the drought is intensifying again in West Texas and New Mexico, he said.
The National Weather Service has a more upbeat view of the U.S. drought picture.
"Enhanced probabilities of positive rainfall anomalies across the Southeast during the remaining winter months increase the chances of drought reduction," according to the organization's U.S. Seasonal Drought Outlook. "Some drought improvement is also possible across the Midwest and northern tier of the U.S., but general persistence of extreme to exceptional drought is expected across the Plains states during the dry season."
Nevertheless, Carl Ashenbrenner, a principal at Milliman in Brookfield, Wis., said he doesn't expect the crop insurance industry to change how it's doing business. "They are more or less taking this as a bad one-year experience."
Most insurers have decent reinsurance, Ashenbrenner noted.
And Willis' Roberts observed: "The crop insurance industry as a whole has not sustained an overall loss since 2002. You have to get your pocketbook out once in awhile. That's what you're there for. I don't think you'll find anybody who is a mature participant in this field who would say anything other than, 'It's our time.' "
Roberts and others in the crop insurance industry are also keeping a close eye on Congress' deliberations about a revisited farm bill. "We may not have fallen off a fiscal cliff, but the USDA budget must be constrained and therefore one would imagine that the farm bill and the crop insurance component of the overall budget will inevitably find itself in the spotlight again," said Roberts.
January 7, 2013
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