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- Kansas State University agricultural economist Art Barnaby is well aware of corn growers’ struggles this year as they deal with blistering summer heat and drought. But after crunching the numbers, he believes that some estimates of this year’s U.S. crop losses are premature and might be overstated.
The rare year was 1993 when the national loss ratio was over 2.19 and Minnesota’s all crop loss ratio was 6.10. Therefore, any suggestion the underwriting losses will exceed $20 billion is premature. The 2012 underwriting losses likely will be between $10 billion and $12 billion. If we assume no rain for the next month then a $15 billion to $20 billion loss is possible and it would be a record loss ratio. The $15 billion scenario seems more likely with each crop condition report.
To get to a $17 billion underwriting loss on corn would require a loss ratio of about 5.00 on the national corn book only. The largest corn loss ratio was in 1993 at 3.29 and higher than 1988.
“I’ve gone back to 1988 and looked at the history in the top 18 producing corn states and it’s very rare, even at the state level, much less at the national level, where you have a loss ratio of 5.0. In fact there are only five states that have ever had a loss ratio of 5.0 on corn and they will surprise you,” Barnaby said.
“The top four are in the Corn Belt. That was the first shocker. No. 1 was Minnesota in 1993 and the corn loss ratio was 8.27. Illinois in 1988 was No. 2 with a loss ratio of 6.61. Pennsylvania had a loss ratio of 6.46 in 1991 and Wisconsin in 1988 had a loss ratio of 6.41. Texas, the only Great Plains state in the top five, in 1988 had a loss ratio of 5.37. All of the rest of the states had a loss ratio on corn below 5.0, so if you’re going to get to national loss ratio above 5.0 on corn, it will require a number of state loss ratios to exceed 5.0 and this is just for corn.”
“It’s very rare even at the state level, and it would be more rare at the national level because all crops gets averaged together, so I think my $15 billion with $10 billion from corn, should be on the upper end of the size of the underwriting loss,” Barnaby said. “There’s a lot of guessing going on. Based on what I’m seeing in the USDA reports, I don’t think this crop is quite at the same level as what the ’88 crop was in terms of being a disaster but the trend is clearly in that direction.”
One state that’s worse this year than it was in 1988 is Indiana, he said, but other states are better off: “I didn’t say great, just not as bad as in 1988.”
He noted that the dollar amount of claims is much more than in 1988 because more farmers buy crop insurance now.
“If you go back to ’88, less than 13 percent of Illinois corn acres were insured. Today, roughly 80 percent are insured,” he said.
“The way the press has been reporting this is the gross indemnity payment, not the loss in excess of premiums, which is the way the insurance industry and the government treat these things,” he said. “The numbers are big, no matter how you cut it, but many farmers are wondering if their company will be able to pay the claim and the short answer is yes. This is something they don’t need to worry about.”
After a company failed about 10 years ago, RMA put in into place much stronger financial requirements in order to be an approved insurance provider (AIP), including sufficient assets for reinsurance to cover at least two disasters in a row.
“The reinsurance market is a worldwide market, not just a U.S. market, so if one thing goes bad, it doesn’t bring down the whole market. For most of these companies, this is a very small part of their overall portfolio.”