Scorching summer heat and widespread drought conditions are leading to questions regarding crop insurance losses for the property/casualty insurance industry.
Fitch Ratings notes that, while underwriting performance in crop insurance is likely to deteriorate in 2012, the magnitude of losses is difficult to estimate given the nature and complexity of the product line.
However, private insurers' net losses, after federal and private reinsurance, are anticipated to have more of an impact on earnings rather than capital. 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.
Multiperil crop insurance is a relatively small segment of the U.S. property/casualty insurance industry representing approximately 1 percent of annual net written premiums. The top writers of crop insurance are higher rated, large, diversified, global companies with solid balance sheets and experienced management teams that primarily use this line of business to help diversify their risk by product and geography. The public companies with the largest market share in this line based on 2011 direct premium written include
The primary companies typically provide crop protection throughout the U.S. and are diversified geographically and by crop within the business line, which reduces the risk of exposure to a single event or a heavy accumulation of losses in any one region such as the Midwest. Due to the unique relationship with the federal government and the weather-related nature of the product, crop insurance is not correlated to the property/casualty insurance pricing cycle and is only offered in the U.S. 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. We note that industry profitability over the past several years has also created a cushion for years of larger losses.
In the U.S., multiperil crop insurance (MPCI) is sold and serviced through private insurance companies. A portion of the premium, as well as the expenses of the private companies, is subsidized by the federal government. Through the
The MPCI program policies cover revenue shortfalls or production losses due to natural causes such as drought, rain, hail, wind, frost, insects, and disease. Most policies have deductibles ranging from 10 percent-50 percent of the farmer's risk. The
Additional information is available on fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at fitchratings.com. All opinions expressed are those of Fitch Ratings.
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