S&P: Drought to cause over $5 billion of crop insurance losses for private re/insurers

A report from rating agency Standard & Poor’s estimates that the U.S. crop insurance and reinsurance sector will see losses of over $5 billion from the severe drought which has been affecting much of the country in 2012. S&P says that however large the loss becomes they believe it will impact crop insurers earnings but won’t be sufficient to create the need for any ratings actions on its own. They expect early estimates of losses to be over $5 billion, where the final loss total will end is impossible to predict.

We wrote a few weeks back that National Crop Insurance Services believe that the final toll will be more than the $11 billion of crop losses reported for 2011, with some suggesting it could reach as much as $20 billion once the extent of claims are understood. A portion of that will be picked up by subsidised, federal crop insurance programmes with the remainder trickling down to insurers and reinsurers. Interestingly, 2011 saw $7 billion of the total crop losses being paid for by the government subsidised program. If S&P are correct about their estimate, that private insurers will pick up at least a $5 billion loss, then it looks like the loss total will be much greater in 2012.

S&P said; “Farmers in the most affected states are expecting one of their worst harvests since the drought in 1988. As a result, crop insurance books of business will see some of the worst underwriting results since 1988. Primary insurance companies will share crop losses with the federal government and private reinsurance companies, making the underwriting losses easier to take.”

“Underwriting losses will be a drag on earnings, but by themselves, will likely not affect the capital of most insurers that we rate. Consequently, we do not expect to take any rating actions solely because of crop insurance losses at this time,” said S&P credit analyst Jason Porter.

Wells Fargo, Ace and a QBE subsidiary are three of the insurers expected to face the largest losses, it’s likely that they will all have reinsurance cover in place. “Insurers with higher concentrations of premiums in the most-affected states, such as Kansas, Illinois, Kentucky, Indiana, Missouri and Tennessee, will see a larger share of the losses,” said S&P.

The crop insurance losses from this drought look set to become the largest single loss event of 2012. S&P says that while this is the most meaningful loss faced by crop insurers in some time, it will be manageable in the context of companies’ capital levels and premium diversification.

However extensive the loss becomes, the extent of this drought will force farmers and the crop insurance industry to take another close look at alternative ways of hedging their risks, through weather derivatives, parametrically triggered insurance or perhaps even catastrophe bonds and other alternative risk transfer tools.