Minding Ag's Business

By Marcia Zarley Taylor
DTN Executive Editor

Just like grocery stores, crop insurance companies seem to run "loss leaders" in the meat department to get your business in the snack aisle. By law, insurers must sell identical multi-peril policies, so offering private riders is one way to differentiate themselves from the crowd. Offer a good deal on hail and you'll probably sign up with the same firm for multi-peril.

Supporting that notion is that leading crop insurance companies suffered big underwriting losses in 2014 on their private coverage, according a new report issued June 22 by SNL Financial. Its research was based on data made public for the first time this year. In fact, insurers with more than $1 million in written premiums last year combined to post a loss ratio of 128%--or paid claims of $1.28 for each $1 of private premiums collected, SNL reported. Those payouts included not only hail, but innovative new programs such as "flex" pricing periods that allow growers to pick months outside of February for their base price guarantees.

The better news was that on the federal multi-peril part of their business, insurers paid claims of 92 cents for each $1 in premiums. (When you account for the 18% additional help insurers receive from taxpayers for administrative costs and overhead, their profit was even better, an industry analyst points out. But they don't make money every year: when the most severe drought since 1988 hit the Corn Belt in 2012, the industry reported a loss ratio of $1.57 per $1 premium.)

Industry trade groups argue the 2014 losses were exceptions and not the norm. In its 2014 Year in Review, National Crop Insurance Services pointed to severe hail as one of the culprits for big insurance claims in their private policy coverage last year: The program had the largest hail losses in its history and was only the third time since 1948 that the U.S. loss ratio exceeded 1.0, NCIS explained.

Competition among insurers is intense. SNL also reported that just three insurance companies control more than 50% of the federal crop insurance business: ACE Ltd. with a 19% share; Wells Fargo's Rural Community Insurance Co. with an 18% share and QBE Insurance Group Ltd. with 13%. Lower profits in recent years have spurred consolidation--especially big losses due to the 2012 drought. When you account for all revenues and costs the companies' pretax net income has been close to zero between 2011 and 2014, NCIS says.

How's profitability looking for the rain-soaked 2015? Payouts for the 2015-crop actually show a slow-down in claims compared to year-earlier levels, according to this week’s Risk Management Agency reports. Although torrential rains have inundated Texas, Oklahoma, parts of Arkansas, Kansas and Missouri, some insurers doubt prevented planting claims will match 2011 levels again.

A recent record of 9.6 million acres nationwide were left unplanted in 2011, but the average is closer to 3.6 million acres, a recent University of Illinois farmdoc daily report points out.

What's different compared to 2011 is that growers south of Iowa typically purchase 65% to 75% insurance coverage compared to the 80% or higher revenue protection common in the core Corn Belt. What’s more, southerners must control weeds and other pests year-round, so often have more money sunk into their crop prior to planting, making prevented planting claims less attractive than North Dakota.

In addition, 2015 price guarantees are much lower than in past years. Net result is prevented planting claims won't be very attractive. “A 60% prevented plant payment on $4.15 corn and $9.73 beans this year is not as generous as $6.00 corn and $12 beans in 2011,” one crop insurance company rep says. He believes his Kansas and Missouri operators will keep planting far later than normal to avoid a prevented planting claim.


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