WICHITA, Kan. — 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 predict record insurance losses, exacerbated by changes that lowered 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 that meant farmers in some states paid smaller premiums for corn and soybeans. The agency also adjusted yields for those crops upward to reflect 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 assumptions that new technology would eliminate or reduce big losses, he 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 underwriting rules, but private companies pick the contracts they want to take a risk on. Coverage is based on 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 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.
The program paid a record $10.8 billion in crop insurance claims last year but had a $1.1 billion underwriting gain because of record premiums. Insurers pocketed most of the gain. The Risk Management Agency lost about a half-billion dollars.
As of Monday, with fall harvests continuing, more than $1.42 billion had been paid in insurance claims filed early, according to Agriculture Department statistics. Texas led the nation with $518.6 million in claims paid. Kansas was second at $223 million, and Colorado was third with $66 million.