According to Munich Re, the world’s largest reinsurer, global crop insurance claims in 2012 reached a massive $23 billion. Munich Re attributes as much as $15 billion of these losses in the U.S. due to the severe drought in 2012. Crop losses are growing with increasing insurance penetration and in years to come these figures could seem low making alternative forms of reinsurance protection all the more likely.
Munich Re’s estimate for U.S. crop insured losses, made in statements to Bloomberg, may actually be on the low side as many have suggested that the final toll to agricultural insurers from the 2012 U.S. drought could be as high as $20 billion. Aon Benfield suggested that figure in its recent catastrophe report, which we covered here. Meanwhile rating agency A.M. Best suggested crop insurance claims from the U.S. drought could reach up to $30 billion in a recent report on the topic.
Figures of this size put crop losses from drought right up with major hurricane events in terms of the resulting insurance industry losses. Some of these losses in the U.S. are absorbed by the government subsidised crop insurance program, but a good portion will trickle through to impact insurers and reinsurers.
Around 85% of farmland in the U.S. is insured versus just 20% globally, so it’s easy to see why the U.S. tops the insured loss figures. However, the way microinsurance for crops is taking off around the developing world should stimulate quite a steep upwards curve in the percentage of farmland insured over the coming years, so we can expect to see the global contribution to insured crop losses rise.
It’s not just drought that causes extensive crop losses every year, rainfall, frost, hail and other weather conditions can also cause billions of economic losses.
With pressure on global food supplies and prices regularly in the news we expect crop insurance, and therefore reinsurance, to become an increasingly hot topic in years to come. It’s also likely that the U.S. government will look to ways to bring the private reinsurance market in to reinsure crop insurers as the current subsidised programme is deemed to be becoming very costly.
Crop weather insurance is an area that the alternative risk transfer and reinsurance markets can provide innovative solutions for. From parametric or index-based covers triggered by weather and climate conditions, to weather derivatives, even industry loss warrants (ILWs) and perhaps in the future once global crop insurance exposures have grown sufficiently a crop catastrophe bond.