Insight and Intelligence on the London & International Insurance Markets 18 Mar 2018
Crop premiums and reinsurance rates heading lower
- 13 March 2018
Crop premiums and reinsurance rates heading lowerCrop insurers in the US anticipate lower premiums this year as prices for the nation's largest agricultural commodities - grains and soybeans - remained largely stable heading into 2018, while reinsurance rates may be down in the low-to-mid single-digit range.
That's the general view of brokers and insurers spoken to by The Insurance Insider ahead of the renewals season.
In recent years, M&A deals have sharply diminished demand for quota share coverage as larger (re)insurers have acquired primary carriers and kept the business in house. Also, since 2011 the industry overall has grappled with restoring profitability after regulatory changes squeezed margins and crop prices slumped, driving down premiums.
Aspen joined the acquisition dance by acquiring AgriLogic in 2016 but by the end of last year it had locked in a $68mn deal to sell a majority stake in the business to crop specialist CGB Diversified Services. However, Aspen retained rights to CGB quota shares.
With primary profitability returning in 2016, reinsurers remain eager to take up the risk where they can find it. This has put pressure on pricing despite the heavy losses sustained by the sector last year from elevated cat activity in H2.
"Reinsurers are in a spot where they still like this business" even as they shake off a disappointing 1 January renewal experience, said Joe Monaghan, Aon Benfield's head of US agriculture.
For instance, corn prices were flat in Chicago commodity futures trading, but the crucial volatility factor fell. The volatility measure dropped to a historic low of 15 percent and is used by US Department of Agriculture agencies to establish primary crop insurance rates.
As a result, premiums for government-backed multi-peril insurance will be down roughly 10 percent, according to Brian Young, president of the Crop Risk Services unit of Validus.
While Young said he expected reinsurance pricing to be flat for multi-peril crop covers at renewal, Monaghan said the trend is negative.
"What we're seeing now are rate decreases", Monaghan noted, pointing to reductions of 1-6 percent.
"It depends on how much hail is in your programme," he added, referring to prices from reinsurers.
As for dealing with the squeeze on margins imposed by regulatory changes that took effect in 2011, Young said carriers have learned how to stay profitable.
"Every company has somewhat adapted to the standard agreement in its present form," Young said, referring to the crop insurance contract designed by regulators.
On the hail side, where primary coverage rates are set by private providers and the federal government is not involved, prices have risen dramatically in some areas and not so much in others.
In eastern Washington, where large farms produce winter wheat and garbanzo beans, hail cover prices have risen 50 percent and doubled in some areas compared with two years ago, according to Josh Smart, practice leader and chief sales officer in Hub International's national agriculture practice.
The increases reflect hail events in 2014 and 2015, Smart said. For wheat growers, who till 30,000 acres on average, the cost of covering their crops against hail damage has risen to as much as $1.20 per acre. For multi-peril coverage, the cost ranges from $20 to $22 an acre, he added.
At Crop Risk Services, hail rate changes have not been as dramatic as those described by Smart in Washington, according to Young.
Hail coverage is often under-priced by insurers that also offer multi-peril cover as a way to attract farmers into doing business with them, as primary carriers must offer multi-peril policies at government-set rates.
The insurance provides carriers with a way to differentiate their products, along with service and supplemental coverage options for named perils. With hail, the differentiating factor tends to be how low a carrier will go on price, brokers and analysts said.
In recent years, carriers have sold roughly $1bn in hail coverage, while primary insurance premiums have ranged around $10bn a year since 2009, although in recent years much of it has covered prices rather than yields.
Insurers in the sector have been learning how to make the economics of the business work since a major readjustment in rates and cost reimbursements took place under the 2008 Farm Bill, legislation that resets US agricultural policy every five years or so.
The changes, first implemented in 2011, sharply reduced the profitability of crop insurance, as it cut expense reimbursements and narrowed the returns carriers could earn from underwriting gains.
A major drought delivered a huge blow to America's farmers in 2012, with widespread losses masking the effects of the 2011 changes, industry participants said.
Insurers lost $1.32bn on underwriting that year and coupled with the shortfall on the expense reimbursement side ended up with a net loss of $1.75bn, a study for the National Corn Growers Association said.
Another rocky year followed in 2013, but by 2016 growers and their insurers had struggled back. It was a near-record year for crop insurers, according to analysts at Conning.
Crop insurers had an aggregate combined ratio of 81.7 percent in 2016, a significant improvement from 104.0 percent in 2012 and 99.9 percent in 2015.
But now the Trump administration has proposed further cutbacks in crop insurance subsidies. While farm and agricultural industry advocates have widely panned the proposals, they are likely to be debated as part of the 2018 Farm Bill.
Since this is an election year for every member of the House of Representatives and a third of the Senate, observers have said it is unlikely there will be any action on the measure until next year, leaving the crop (re)insurance market in limbo.
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