Best's Review


What AM Best Says
A Crop of Problems

AM Best: Storms, floods, fires drive up losses for U.S. crop insurers.
  • John Weber
  • November 2020
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Connor Brach, financial analyst, and David Blades, associate director, industry research and criteria, both of AM Best, said insurers that write multiperil crop coverage are experiencing successive years of extraordinary losses.

Crop insurers endured a difficult year in 2019, and 2020 so far has had a pile-on effect. Blades and Brach discuss this line of business, the subject of a Best's Market Segment Report, More Hurdles for Crop Insurers in 2020 Following a Poor 2019.

Following is an edited transcript of the interview.

The report notes 2019 was the worst year for crop insurers in a decade. What were the reasons for those results?

Brach: Multiperil crop insurers suffered losses in 2019 due to unfavorable weather conditions. Heavy rainfall and historic flooding across the Corn Belt led to a record for the number of prevented planting claims.

According to the U.S. Department of Agriculture's Risk Management Agency, there were 72,000 losses due to excessive moisture conditions, which resulted in over $6 billion of indemnity payments to farmers for the year. On the private product side, crop hail writers struggled as well due to significant frost and hail activity during the growing season, as well as inadequate pricing.

David Blades AM Best

The early August derecho that passed through Iowa, specifically, caused extensive damage in that region, with nearly one-third of the crops being destroyed or damaged to some extent.

David Blades
AM Best

Have these challenges been exacerbated in 2020, given the pandemic and weather events?

Blades: No question, the challenge has definitely been exacerbated for MPCI companies. Weather events have definitely affected the 2020 results so far. The early August derecho that passed through Iowa, specifically, caused extensive damage in that region, with nearly one-third of the crops being destroyed or damaged to some extent.

The storm was concentrated in a 45-mile-wide region of the state to the west of Des Moines, going out toward the Quad Cities. While the impacted area included areas containing both soybeans and corn, the corn crops definitely seemed to suffer more damage, so that the insurers of crops in that area who were more concentrated in corn seemed to have been impacted the most.

From what we understand from speaking with some rated MPCI insurers, the way that the storms hit the crops, some of the stalks were broken off at the root, while others were simply laying over. There were some differences in terms of the extent of the damage.

All this added to the challenge of calculating the ultimate yield losses for the year. Again, we're going to continue looking at that and looking at the information we get from those companies. Based on the way the MPCI program works, the majority of the losses are expected to be retained by the approved insurance providers as per the 2020 standard reinsurance agreement.

Those providers with the largest percentage share of their respective MPCI book in Iowa will probably be hit the hardest though. Although windstorm events are common in Iowa, this one was particularly severe.

You [had] Hurricane Laura make landfall on Aug. 27. When all is said and done, it's expected that the damage to crops will be extensive in the states of Louisiana and Arkansas. Excessive moisture there due to the considerable rainfall that was associated with that storm created significant challenges to rice and corn farmers, specifically.

Crops that were damaged or that were not fully matured by the time that the hurricane hit are the ones that could lead to the sizable losses. You also have the ongoing wildfire activity in California, in the Pacific Northwest region, that posed a threat to crop hail insurance writers, specifically from the standpoint of crop harvest.

In particular, the wine industry, as you know, in that area is acutely impacted and is at significant risk, as basically smoking ash hangs or lingers over the grapes. Similar to the situation with Hurricane Laura, it's too soon to be able to estimate potential insurance damage with any clarity. Given the severity of the wildfires, the losses could be extensive.

Now, the bottom line is that the recent catastrophic weather events are complicated. The AM Best overall outlook for the remainder of 2020, prior to the weather events, was the expectation that 2020 would represent some improvement over 2019.

We'll wait until the year fully plays out, see how much profitability of crop insurance is compromised by the adverse weather activity and commodity price volatility. Again, the expectation is that they will have a meaningful impact.

Finally, the COVID-19 pandemic also impacted the MPCI market, as demand for products initially increased following the onset of the pandemic, as consumers rushed out to the stores and bought out products.

Subsequently, on the flip side, the decrease in demand from restaurants, from universities, from hotels was very dramatic. The decline in driving associated with shelter-in-place orders has decreased the demand for ethanol particularly, which has led to a loss in demand for corn.

As we point out in the report, approximately 38% of the corn that's produced in the U.S. is used in ethanol. Similarly, what we'll see in the losses, it will play out over time. It's something that's definitely had a meaningful impact on the 2020 crop results.

Are there government backstops to help insurers in these difficult times?

Brach: The multiperil crop insurance market is unique in that it's a government-created program that's being delivered by the private sector, with the risk being shared by both parties. The government provides support primarily through subsidies and reinsurance, as outlined in what's called the standard reinsurance agreement with the approved insurance providers.

Premium subsidies cover a majority of the approximately $10 billion in premium. In addition, the government also provides administrative and operating expense subsidies to insurers, which helped cover the cost of delivering the program to the tune of $1.6 billion in 2019. The SRA, the standard reinsurance agreement, also grants crop insurers the ability to cede policies to either the commercial or assigned risk funds in each state with varying degrees of reinsurance protection available, depending on the fund designation.

To what extent do federal trade deals filter through and impact insurers?

Blades: To answer that, we can look at the trade wars that the U.S. has had with China, specifically, in both 2018 and 2019. Those disagreements had an adverse impact on farmers. The U.S. raised its duty tax on goods from China in the summer of 2018.

China retaliated by imposing a 25% retaliatory tax on the U.S. agricultural products, such as soybean, wheat, corn, and other dairy products that were sold to private Chinese companies. The result was that some of these companies started to look to other countries for their soybean purchases in particular, for example.

The extent to which we've gotten past that, and the soybean farmers have gotten a relationship with those private Chinese companies back to where it was beforehand, that's still, again, playing out. I don't know if they've gotten back to that point yet. China is a very important market for soybean farmers, so the trade war with that country was very impactful on the farmers of that product.

Given the especially large soybean crop in 2018, farmers had to basically drop their prices in order to stay competitive. That also hurt their profitability.

It takes time to repair those relationships with those customers that felt compelled to seek out other sources for the crops that they once were purchasing from these U.S. farmers. There was definitely impact from that standpoint.

Are there steps that crop insurers can take to mitigate the losses?

Brach: Crop insurers are attempting to gain scale and geographically diversify their books of business, while also refining their view of risk through modeling in order to optimize their fund designation strategies.

We also see crop insurers acquiring or partnering with agricultural technology firms in an attempt to improve the resiliency of crops through data and analytics, including precision agriculture techniques.

Finally, we see third-party quota share, excess-of-loss, and stop-loss reinsurance, as well as crop-derivative contracts being utilized to further manage risk.



John Weber is a senior associate editor, AMBestTV. He can be reached at

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