A relentless drought, tenacious wildfires, extremeweather—over the past year, all of these have plagued the U.S.agricultural business, leading to lingering uncertainty for farmersand the agents and brokers that serve them.

Last year's extreme weather conditions have seriously impactedU.S. agribusiness and, in turn, the economy at large. The strengthand success of this industry plays into the nation's economiclandscape, from food costs to insurance premiums. More than justweather or soil affect how a farm operates—the larger nationaleconomy and legislative action affects how farmers produce andprotect their products.

Crop insurance agents are busy with farmers year-round,sometimes meeting with their customers four to five times a yearjust to develop policies, said Mike Gaynier, principal owner andagent of Michigan-based Spartan Insurance Agency, who has been acrop insurance agent since 1983.

Enter FCIC

For agents specializing in farm and crop coverage, taking careof customers is an intensive process. Most deal with coveragethrough the Federal Crop Insurance Corp. (FCIC), which in 2012insured about 282 million acres (see “Crop Insurance: The Nuts and Bolts”).Thefederal crop insurance program provides a critical baseline ofcoverage for farmers, and in throes of a serious drought, hashelped farmers remain successful. In a sector marked by volatilityand extreme weather trends, federal coverage and the availabilityof supplemental plans give farmers that extra cushion of coverageto maintain industry stability.

Gaynier compared the 2012 drought to the 1988 drought, beforethe FCIC made participation in the crop insurance program mandatoryfor farmers to be eligible for deficiency payments under pricesupport programs, certain loans, and other benefits. The federalprogram was key in keeping farmers in business after many wereshuttered in 1988.

According to National Crop Insurance Services (NCIS), anorganization of national crop insurers, the FCIC is stabilizing andas a risk management solution, is largely successful. Gaynier'sconfidence is the program is heartening, but some still havereservations. Sam Martin, a manager of several corn and soybeanfarms in Watseka, Ill., said that if the drought worsens, the FCICcould “bite off more than it can chew.” The program may financiallystrengthen farmers that may not be able to afford premiums, butcould become overwhelmed if the drought worsens and the governmentmust assume more risk, Martin said.

The Corn Belt drought's effects on farmers were devastating, butthe federal program eased the toll. An RMA spokesperson explainedthat the federal program worked as it was designed to work,responding to the drought, despite the large number of claims andheavy workload that resulted. Problems and issues werecomparatively few—a testament to the value of crop insurance, theagency said.

Impact of climate change

Though there is much debate over climate change as a driver ofinclement weather, some insurance companies are beginning toresearch and roll out policy options for climate change-relatedweather protections.

According to a survey conducted by Ceres, a nonprofit thatanalyzes sustainability practices among businesses, 23 of the 184insurers who offer supplemental insurance options that weresurveyed in its 2012 Insurer Climate Risk Disclosure Survey haddeveloped climate change-related policies.

Future calamities, such as wildfires or continued deep drought,will affect farmers as they did last year. Insurers could find anopening for new coverage development, or find ways to adaptexisting policies to respond to these uncertainties of inclementweather.

One such company is The Climate Corp., based in San Francisco,Calif. Formerly known as WeatherBill, the company offersfield-level weather insurance for corn, soybean and winter wheatcrops, paying policyholders if specific weather events occur duringthe growing season. Policies cover weather events such as heat,drought, excess moisture and freeze and coverage is customized tothe crop and soil type in each field.

Jeff Hamlin, director of Agronomic Research at The ClimateCorp., notes that FCIC program stipulations and limits lead to thedemand for supplemental plans. Recognizing increasing weathervolatility is another reason why farmers opt for the supplementaryinsurance plans, as their livelihood grows riskier, Hamlinsaid.

Companies with highly developed supplemental coverage optionsinclude Swiss Re and ACE. Swiss Re offers crop-shortfallprotections and weather-based options. If a crop does not fallunder FCIC guidelines, crop-shortfall plans are protectivemeasures. Food and beverage, aquaculture, fertilizer, seeds,machinery and equipment are covered under Swiss Re's supplementplan.

Though Swiss Re's offerings do not specifically point toclimatological change, its weather-based plans focus onmeteorological shifts, which could provide a safety net for thecontinued drought or other future disasters.

ACE's agribusiness sector offers disaster protection,environmental insurance, professional risk insurance and others.Disaster and environmental protection needs could grow for farmersas catastrophic weather phenomena continue to barrage farms aroundthe U.S. ACE also offers specific coverage for the renewable energysector and additional farm coverage for hobby farms or equineservices. When the federal program's specifications limit the levelof coverage a farmer can choose, and weather patterns grow lesspredictable, options for coverage such as those from ACE are moreattractive.

Another aspect of crop insurance that does not fall under thefederal program is shipping and transportation of crops. A growingtrend in the U.S. is the increase in exportation of grain inintermodal shipping containers by farmers, said Scott Beebe, cargopractice leader of Travelers Ocean Marine. “Shipping grain inunventilated intermodal containers carries substantialrisk of overheating, which could cause spontaneous combustion,” hesaid. “Understanding the specific and unique risks of shippinggrain and other crops is extremely important for farmers, now morethan ever.”

Growth of risk modeling

Many insurers use risk modeling to analyze weather cycles andtrends to produce plans for customers where certain disasters aremore prevalent. After Superstorm Sandy, insurers writing coveragein the Northeast went back to the drawing board to adjust coverageoptions, as new risk modeling changed the insurance landscape inthe region, according NAPCO's spring 2013 State of the Market report.

“The effect of severe weather on crops can be felt far beyondthe farmer. Understanding the supply chain, and the potential riskexposures that affect that supply chain, are key to protecting thefarmer and those who rely on the crops,” said Beebe, identifyingadditional areas where farmers face risks beyond the scope of thefederal program.

As climate change analysis grows, risk modeling and dataanalysis will help shape how insurers develop coverage for farmers.With so few companies developing responses to the possibleworsening threat of climate change, much less unveiling suchpolicies for consumers, adaptations to this potential for futuredisasters are few. The Ceres survey did find that P&C companieswere among the most prepared in climate change-baseddevelopment.

Crop Insurance: The Nuts and Bolts

The federal government is a major subsidizer of the agricultureindustry, including its crop insurance, subsidies and NoninsuredCrop Disaster Assistance Program, which provides a minimal level ofassistance to uninsured farmers should a national disasterseriously affect product output.

Farmers face numerous regulations and also benefit from federalprograms, such as the FCIC, which controls which companies canoperate as crop insurers and the types of coverages they canoffer.

Companies participating in the crop insurance program offercustomers the same products and price, leaving agencies to competeon service. Policy terms and conditions and premium rates are setby the FCIC.  

Because the FCIC sets policy terms, conditions and premiumrates, insurers in the crop insurance program offer the sameproducts and price, leaving agencies to compete on service.

In 2003, about 217 million acres were insured for about $41billion in coverage and $ 3.5 billion in premium; by 2012, thatnumber had grown to about 282 million acres were insured at about$117 billion in coverage and $11 billion in premium, according tothe Risk Management Agency (RMA), which administers FCIC programs.The RMA operates under the U.S. Dept. of Agriculture (USDA).

Most major crops prevalent in a given region are covered by theFCIC. Hobby farms or small farms producing crops that are notprimarily cultivated in a specific area would require otherpolicies for coverage. For example, pecan farming is not prevalentin rural Minnesota, but cultivated wild rice is—that Minnesotanpecan farmer will not find a policy through the FCIC, but the onegrowing cultivated wild rice will.

The Standard Reinsurance Agreement stipulates that the federalgovernment assumes some risk in insuring crops that fall under FCICguidelines. Much like other existing crop subsidies, thegovernment's action, or inaction, affects farmers and insurers;the indecision around the farm bill is a prime example. Asbudgetary and partisan concerns slow the passing of a new farmbill, farmers and insurers are caught in between.

According to RMA spokesperson Pat Engel, if the insurancecompany denies a claim, the insured has a right to pursue mediationand arbitration to contest the denial. After completing thearbitration process, the insured can pursue judicialreview. The insured also has rights to administrativereview and appeal, followed by judicial review, if the FCIC wasdirectly involved in the denial of the claim.

The last farm bill was passed in 2008. The current bill, whichwas set to expire in 2012, was renewed through September 2013.Farmers begin planting corn and soybeans in May, and thisshort-term extension, with little done by legislators to move italong, leaves farmers uncertain how the possibility of eliminatingor adding programs could affect prices and production.