Press Release - JUNE 29, 2018

Best’s Market Segment Report: Pressure Ramps Up on U.S.-Subsidized Multi-Peril Crop Insurance Market


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 Connor Brach, FRM
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FOR IMMEDIATE RELEASE

OLDWICK - JUNE 29, 2018
The U.S. government-subsidized multi-peril crop insurance market has been under pressure in recent years, and any major cuts as a result of farm bill negotiations in the U.S. Congress could change the landscape for crop insurers, according to a new A.M. Best report.

The Best’s Market Segment Report, titled, “Economies of Scale Driving Consolidation in Crop Insurance,” notes that federal crop insurance program, which is set to expire in September 2018, has been under growing scrutiny. The federal government and approved insurance providers share in underwriting gains and losses, with the government covering a greater share of losses as losses grow. Recent farm bill proposals have recommended various provisions, including lowering the target rate of return substantially (to 8.9% from 14.5% in one proposal), and limiting subsidies to individual farmers. In addition, newly implemented tariffs could cause significant volatility for crop commodity prices.

Price volatility on commodity crops has caused fluctuations in multi-peril crop insurance direct premiums written, and in 2017, direct premiums written declined to $10.1 billion in 2017, after peaking at $12.4 billion in 2011. Prices for each of the top five crops (excluding cotton) in the last five years have declined more than 20%. The renegotiated Standard Reinsurance Agreement in 2011 between the Federal Crop Insurance Corporation (FCIC) and insurance companies also has had a direct impact on private insurers’ crop insurance profitability, although yields and commodity prices helped the sector’s underwriting performance in 2016 and 2017. The sector’s combined ratio in 2017 deteriorated slightly to 84.1, compared with a combined ratio of 81.7 in 2016.

However, the renegotiated standard reinsurance agreement, a large number of drought claims in 2012 and 2013 and price declines in 2013-2015 led to four years of underwriting losses leading up to 2016.

The market has undergone significant consolidation, as it has become a way for larger insurers without multi-peril crop insurance business to improve diversification, while those with crop insurance operations see mergers and acquisitions as a way to diversify geographically and improve economies of scale. Pricing for multi-peril crop reinsurance remains competitive with favorable terms and conditions, and capacity continues to grow. Reinsurers with excess capacity and experience in the crop insurance market have purchased approved crop insurance providers to maintain or grow their crop premiums. Scale has become increasingly important in the crop insurance market, and those that lack it may continue to seek alternative options.

Despite the market headwinds and the threat of new legislation, A.M. Best views favorably primary and reinsurance multi-peril crop insurance businesses. The marriage of insurers and agricultural technology firms also is allowing farmers and insurers to gather more data, optimize yields and customize products. The results are higher yields and greater efficiency for farmers, less risk and lower claims-handling costs for insurers, and more automation for both parties.

For the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=275337 .

A.M. Best is the world’s oldest and most authoritative insurance rating and information source.