Back in January we wrote that U.S. crop insurance losses had hit record levels of $9 billion for the year 2011, with much of those losses attributed to freezing weather across the Southern U.S. states, droughts in the Plains, flooding along the Mississippi river, severe rainstorms and hail from severe thunderstorms. That beat the previous record from 2008 which was $8.67 billion, but as we said at the time the total was expected to rise further.
As predicted, the total amount of crop losses that U.S. farmers faced in 2011 has now risen to $10.7 billion and it’s expected that the figure will break through the $11 billion mark when all claims are registered and assessed. That’s a 25% increase on the previous record losses experienced in 2008.
The Crop Insurance America website breaks down the losses a little and says that corn, cotton, wheat, soybeans grain sorghum, pastureland and rangeland, and tobacco were the top crops damaged by dollar loss amount. They also say that the average loss ratio is .90, meaning that for every dollar of cover purchased 90 cents was paid out on average across the U.S. However some states saw much higher loss ratios, topped off by Vermont which saw a loss ratio of 2.59. That means crop insurers focused on Vermont will have experience large deficits and even reinsurance would likely not be enough to cover those loss levels.
With weather related crop losses reaching such high levels it is bound to bring weather risk management solutions and weather-index insurance into the spotlight again. Instruments like weather derivatives, parametric insurance and index-based insurance can all be used to create crop insurance solutions and products using those techniques can settle much more quickly than traditional crop insurance which requires assessments of damage to be undertaken.
The high losses of 2011 are an opportunity for innovative insurers to step forwards offering alternative crop insurance mechanisms. In turn those insurers need reinsurance and it’s easy to see how the traditional and alternative reinsurance markets could help them out. Even catastrophe bonds could have a role to play in crop insurance at some point in the not too distant future.