Crop insurance losses begin to mount amid drought

Associated Press Modified: September 13, 2012 at 5:00 pm •  Published: September 13, 2012
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WICHITA, Kan. (AP) — Thousands of farmers are filing insurance claims this year after drought and triple-digit temperatures burned up crops across the nation's Corn Belt, and some experts are predicting record insurance losses — exacerbated by changes that reduced some growers' premiums.

G.A. "Art" Barnaby, a Kansas State University Extension specialist in risk management, estimates underwriting losses on taxpayer-subsidized crop insurance will hit nearly $15 billion this year. He expects a staggering $25 billion in crop insurance claims to be filed by growers across the nation, driven primarily by one of the worst droughts in the U.S. decades. His loss estimate is based on a loss ratio of $2.50 for every dollar paid in premium.

The U.S. Department of Agriculture's Risk Management Agency made changes to the insurance program in the past year which are expected to increase the underwriting losses from the drought. The changes meant farmers in some states paid smaller premiums this year for corn and soybeans. Not only that, the agency adjusted yields for those crops upwards to reflect recent trends, Barnaby said.

"Anyone that is concerned about whether this will be sustainable over time will have to ask the question whether this was a good idea to cut rates," said Barnaby, who 20 years ago helped develop the insurance program. "Now, as a farmer, I like paying a lower rate. But my guess is the rates were not cut that much to be noticeable, but in aggregate they do make a difference."

The rate reductions were based on the assumption that new technology, such as genetically modified, drought-resistant seeds, would eliminate or reduce big losses, Barnaby said. "So it is ironic they got hit the first year out."

Under taxpayer-subsidized crop insurance, farmers pay about 40 percent of the premium cost and the federal government picks up the rest. The government sets the rates and the underwriting rules, but the private companies get to pick the contracts they want to take a risk on. Coverage is based on both yield and price. An underwriting loss or gain represents the difference between premiums paid and amount of claims paid.

For the past decade, the crop insurance program has actually had an underwriting gain, Barnaby said. In 2009 and 2010, the government made $1.4 billion from the crop insurance program because premiums collected exceeded loss claims paid out. That money went into the general treasury.

Even though the crop insurance program paid out a record $10.8 billion in crop insurance claims last year, it still enjoyed a $1.1 billion underwriting gain because record premiums were also paid. Insurance companies pocketed most of that gain, however, and the Risk Management Agency lost about a half billion dollars.

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