Demand for Agricultural Insurance Coverages Expected to Grow
Increasing world demand for food is driving up commodity prices for corn, soybeans, wheat and other food staples. At the same time, the U.S. farming economy is strong, the federal crop insurance program is being changed, and today’s farmers are getting bigger and adopting new technologies. These trends promise to affect crop insurance, farmowners and agribusiness insurance, creating challenges as well as opportunities.
The U.S. has long enjoyed the least expensive food in the world with just 6.2 percent of Americans’ average income spent on food. In China, the average is 32.9 percent. This illustrates a need to decrease the cost of food per capita and increase the standard of living in other parts of the world.
The U.S. Department of Agriculture has reported that demand for corn has pushed U.S. supplies to their lowest point in 15 years. A recent Associated Press story blamed this on projected corn futures orders from the ethanol industry and noted that low supplies of other staples from wheat to coffee are contributing to the upward surge in world food prices. A severe drought in China is also expected to drive up wheat prices.
The new Standard Reinsurance Agreement (SRA) provides incentive to insurers to offer coverage in underserved states. At the same time, the government has capped agent commissions, which will cause the average commission to fall in most instances. These SRA changes will challenge insurers and agents to be more efficient.
The crop insurance industry in the U.S. had multi-peril crop insurance premiums of $7.6 billion in 2010, with an additional $681 million in crop hail premiums. The prices of corn, soybeans, wheat and cotton are all approaching December 2011 highs. These prices have the potential to increase MPCI written premiums to $11 billion in 2011.
Modern Farmers
Crop insurers and federal regulators are embracing new farming technology. GPS systems on planters and tractors now report acreage directly to crop insurers. Similar technology is being tested for harvesting equipment.
Farmers are planting more acreage using technology and they are using new hybrid and genetically modified seeds. Farmers can now use MPCI revenue products as a financial management tool to backstop their downside, allowing them to plant more acres.
Farmer operations continue to evolve into roles traditionally thought of as part of agribusiness. This challenges traditional farmowners insurers to provide the appropriate products and capacity to serve these modern farmers. For example, farmers are routinely purchasing equipment valued in excess of $500,000. These rising values affect replacement cost and all perils coverages, as well as equipment breakdown and lost time. Farmers cannot afford to have downtime during planting, spraying, irrigation or harvest seasons.
These larger farms also require increased capacity for grain storage and processing facilities. It is not uncommon for farmers to build grain complexes that rival traditional grain elevators in size. These facilities allow farmers to act as their own middlemen and increase their margins.
Increased limits and coverages are required for processing and storage of produce for grower-packer-shipper operations that are vertically integrated. Insurers are developing more sophisticated farmowners and hybrid agribusiness/farmowners products, such as the American Association of Insurance Services Ag Op policy, to meet the demands. Coverages for product recall and pollution are becoming more common.
Automobile exposures on farms are expanding as well. Corn growers with yields heading toward 300 bushels per acre need tractor-trailers to haul grain to storage facilities, making the traditional two-ton straight truck obsolete. Exposure increase is also seen with vertically integrated growers who haul produce from the field to the wholesaler and, sometimes, directly to the grocer.
Consolidation in the agribusiness service sector is resulting in larger, more concentrated insurance risks. Property and commodity values have created a need for higher insurance and reinsurance limits. Agribusinesses have started consulting services, which require professional liability.
The evolving and growing agricultural sector will continue to challenge the insurance industry while providing growth opportunities. Successful insurers within this segment will be those insurers that adopt new technologies and respond with more sophisticated insurance and reinsurance products along with the capacity the market needs.