U.S. drought crop insurance losses to reach into billions, hit reinsurers

Just two or three weeks ago many insurance publications were suggesting that crop insurance losses resulting from the severe drought in the U.S. would not be large enough to hit the global reinsurance market. We’ve been cautious on this point, as we could see the increasing severity of the drought (the worst in more than 30 years) and the discussions within the commodities markets, amongst the weather risk management community and our reinsurer contacts which suggested the event was likely to become a reinsurance loss.

Now it’s become clear that the 2012 U.S. drought will cause a multi-billion dollar crop insurance loss, large enough to impact some of the reinsurers who underwrite crop and agricultural lines of business.  How large the loss will be for reinsurers is not clear as it’s difficult to predict how much of the loss will be picked up by federal insurance and how much will trickle down to reinsurers, but it’s becoming apparent that the amount of crop insurance losses from this drought could eclipse the $11 billion total crop insured loss of 2011.

Thomas Zacharias, President of National Crop Insurance Services, said; “It will be a major loss situation. The companies are in the field adjusting claims as we speak.” An economist from the NCIS has predicted that there will be as much as $20 billion of insured crop losses this year. With the drought likely to contribute a good portion of those losses it is fast becoming the largest single weather related insurance loss of the year in the U.S.

Subsidised crop insurance will mop up the majority of the loss, meaning that taxpayers will eventually be on the hook for financing many of the claims from the drought. However some of the losses will definitely hit the reinsurance market with Munich Re confirming that they are expecting a loss.

Nikolaus von Bomhard, Chairman at Munich Re, told CNBC news that they think it will be a severe loss and probably one of the severest crop insurance losses to ever hit the reinsurance market. “It’s too early to tell what the exact claim will be because we have to wait until the harvest is done,” he said.

Munich Re said in a statement; “Based on current estimates, Munich Re anticipates a net burden of approximately 160 million euros ($200 million) [before tax] from losses under crop failure covers, as a consequence of the persistent drought in large agricultural areas in the USA.” They said that these losses occurred in the second quarter but would not become quantifiable until later in the year. That suggests that their loss will grow as the drought conditions continue into Q3.

Swiss Re also said that they expect some impact, but as they are not a large player in the agricultural reinsurance market they don’t expect a meaningful loss at this time.

In 2011, crop insurance losses were more than $11 billion and it’s now clear that the government subsidised over $7 billion of that, so even if 2012 crop losses do clear $20 billion the loss for the reinsurance industry will not be huge. However it is becoming clear that this is another area that the re/insurance market could assist the taxpayer by taking more of the burden, perhaps through the use of alternative risk transfer tools such as a crop loss catastrophe bond or weather risk management techniques and index based insurance. The crop insurance market will likely come under increasing pressure to change and release taxpayers from the burden, in much the same way that they windstorm insurance market has. If that happens an opportunity would present itself for the ART and perhaps ILS markets to step in, if nothing else insurance and reinsurance rates for crops will likely see pressure to rise.

Aon Benfield also said that they expect an insured loss from this drought that will be in the billions in their July catastrophe report.