It is difficult to predict what insurance losses will be for 2012. Not only do overall yields matter, which are difficult to predict, but also the distribution of yields across the nation matters. As important, the levels of harvest prices for corn and soybeans, which are set based on futures prices in the fall, will greatly influence overall losses as revenue policies’ guarantees will largely reset to the higher harvest price levels.

To develop a feel for size of loss in 2012, the following assumptions are used:

  • Gross premiums will total $12,000, roughly equal to last year’s premium.
  • Underwriting losses will be estimated at an overall loss ratio of 2.5. This is close to the highest loss ratio of 2.45, which occurred in 1988. The next highest overall loss ratio is 2.19, which occurred in 1993. These historical loss ratios come from an era when crop insurance programs where much different than they are today. Hence, these historical loss ratios may not be totally representative of today’s crop insurance program and are likely to be higher than what would be experienced today. However, the 2012 drought may be a worse drought than 1988 drought from a meteorological perspective, which would suggest a higher loss ratio than in 1988. To account for uncertainty, underwriting losses for 2.0 and 3.0 loss ratios are presented below to give a feel for the range of losses possible.
  • Gross indemnities will equal $30 million (2.5 loss ratio x $12,000 million of gross premium).
  • Underwriting losses will equal $18 million ($12 million premium - $30 million indemnity).
  • Crop insurance companies’ shares of losses are estimated assuming that crop insurance companies made the same allocation decisions in 2012 as in 2011; crop insurance companies choose to retain 100% of commercial fund liability; and the loss ratio equals 2.5 for each state, each fund and for each company. These assumptions likely over-state the companies’ shares of underwriting loss. However, under these assumptions, crop insurance companies’ share of losses would be $7,100 million and the federal government would have $22,900 million of losses.

The 2.5 loss ratio would result in $18,000 million of underwriting losses, with private crop insurance companies share equal to $7,100 million and the Federal government share of $10,900 million. A 2.0 loss ratio results in $12,000 million of underwriting losses, with private crop insurance companies share of $3,900 million and a Federal government share of $8,100 million. A 3.0 loss ratio results in $24,000 million of underwriting losses, with private crop insurance companies share equal to $10,500 million and Federal government share of $13,500 million. These estimates depend on the assumptions used above.

Summary and Commentary

Gross underwriting losses likely will be large this year, with underwriting losses of $18,000 million or more being possible. Given the nature of agriculture, these large losses from a crop insurance program of the current size and scope should be expected to occur in years like 2012.

In the past decade, there have been total underwriting gains of $15,319 million. In some senses, these underwriting gains partially offset the losses occurring in 2012. These gains would have been larger had the size of gross premium been the same in 2002 through 2010 as in 2011. With gross premium of $12,000 million per year and similar loss experience, underwriting gains would have been $25,000 million over the past decade. Hence, the underwriting losses in 2012 may seem larger relative to previous gains simply because the scope of the program has increased.

Crop insurance companies will face losses in 2012. Given federal regulations and stress testing, crop insurance companies are highly likely to have sufficient funds to cover losses. However, there may be longer run impacts of these losses for crop insurance companies. This will be the first major loss year for crop insurance since many of the larger changes in crop insurance program have been made that resulted in larger participation. Many of the companies that provide reinsurance to crop insurance companies have not seen losses of the current size. In addition, some of the crop insurance companies are owned by public companies that may not have realized the scope of losses that their crop insurance subsidiaries could generate. Reactions of private reinsurers and public companies to these losses could influence the profitability and number of private crop insurance companies in the future.

 

Read the article at farmdocDaily.