Seeds Planted For Farm Insurance Growth
Rise in insurable exposures fuel 43 percent written premium gain over last five years
We all know the rough outlines of the farm sector–and perhaps that's one of the principle reasons farmowners coverage elicits so little excitement among property-casualty types. Recently released Census of Agriculture data confirm that farm revenues have been essentially flat over the past five years–at about $200 billion. During the same period, the number of farms actually declined about 4 percent to just 2.1 million.
The Census of Agriculture also confirms much of what we've heard about consolidation in the agriculture sector and the growing importance of mega-agri-businesses. By 2002, the top 3 percent of farms accounted for over 60 percent of total farm revenues.
Given the growth in these mega-accounts–which typically are not written under farmowners coverage–it's no wonder most carriers are loath to look to the farmowners line as a source of additional premium potential.
The farm sector's image notwithstanding, farmowners written premium growth has been anything but stagnant.
Over the past five years, this line's direct written premium has grown by 43 percent nationally–virtually the same increase as in the liability component of commercial multi-peril over this period.
While this sharp premium growth undeniably has been bolstered by the hard market conditions of post-2001, it's difficult to imagine that such strong expansion could have occurred in the farmowners line absent a steady, if not rising, level of insurable exposures covered by the line.
Indeed, MarketStance's calculations indicate the value of farms' insurable property exposures increased some $88 billion over the past five years–representing a healthy 4 percent average annual growth rate.
During this five-year period, net written premium in the farmowners line increased by almost $700 million–not bad for a stagnant economic sector.
As shown in the bar graph flagged "Harvest Time," premium increases considerably outstripped exposure growth from 2002-to-2004, thereby improving the line's aggregate underwriting results.
Put differently, carriers charged roughly 44 cents per $100 of farmowners' exposure in 2004–a significant increase of about 7 cents per $100 from the implicit rate at the decade's beginning.
As shown in the accompanying map, state-specific growth in farm property exposures has been quite disparate.
Some traditionally important agriculture states such as Texas, Illinois, Indiana and Iowa reported distinctly subpar growth in these property exposures.
In contrast, other states–including Wisconsin and Michigan–recorded very strong growth in farm-related exposures.
In many of the strong-growth states, rising building and structure valuations were a major part of the story.
In virtually every case, however, strong-growth machinery and equipment values also contributed to the run-up in property exposure growth.
Rapid increases in these equipment values are indicative of significant new investment in farm production equipment, and suggest the need for heightened premium audit activity to capture premium owed on these new additions to farm equipment stocks.
Rising premiums, variable exposure growth and a declining number of potential accounts are all interesting aspects of the farm sector. However, how useful are such facts to the typical farmowners writer?
Contrast, if you will, two groups of states–all taken from the top-10 states with respect to farmowners premium written in 2004.
In the first group, Ohio and Texas are two traditional farming states. Over the past five years, farmowners has recorded strong growth in direct written premium in both states, and both of late have had better-than-average underwriting results in this line.
What would you predict as the outlook for these states' underwriting performance this year and next? Hard to say?
What if you knew that both states have had surprisingly stable farm sectors–that is, close to par exposure growth and little, if any, loss in the number of farms? (Texas actually recorded slight positive growth in number of farms.)
Based on these additional insights, it might not be much of a leap of faith to prognosticate that their underwriting results, too, might remain fairly stable.
Contrast the above states' situations with those for the second group–Michigan and Wisconsin. This second pair of states recorded about average growth in farmowners written premium and had fairly average loss experience these past few years.
However, they have also experienced "top-tier" run-ups in farm property values–much of which is unlikely to have found its way into the exposure basis on which premiums currently are charged.
Combine this with the fact that both states are projected to experience continued runoffs in the number of smaller accounts, and you might well feel less than enthusiastic about the likely future course of these states' underwriting performance in the farmowners line.
To be sure, none of us has a crystal-clear window on future market conditions for farmowners coverage.
Before committing to a growth strategy for next year and beyond, it's important to realize that no insurance department regulations prohibit carriers from wiping as much dust as possible from the window into future market conditions.
A good knowledge of farm industry dynamics, indeed, can sweep quite a bit of that dust away.
Frederick "Fritz" Yohn is the developer of "MarketStance," a market analysis tool for U.S. commercial property-casualty insurers and a registered trademark of IntelliStance, LLC, in Middletown, Conn.
(For bar graph on farm revenue:)
Flag: Farmers Market
Head: Consolidation On The Rise
Even though farm revenues have been flat over the past five years, and the number of farms fell about 4 percent, direct written premium has grown by 43 percent–not bad for a "stagnant" line.
Source: MarketStance
(For bar graph on written premium and exposures:)
Flag: Harvest Time
Head: Down On The Farm, Opportunity Knocks
The value of insurable farm property exposures rose some $88 billion over five years–a healthy 4 percent average annual rate. Premium outstripped exposure growth, improving the line's aggregate underwriting results.
Source: MarketStance
(For map)
Flag: Go For The Green
Head: Mapping A Farm Market Growth Strategy
Some traditionally important agriculture states such as Texas (18.1 percent), Illinois (12.9 percent), Indiana (20.0 percent) and Iowa (18.4 percent) reported distinctly subpar growth in farm property exposures, while Wisconsin (49.2 percent) and Michigan (38.8 percent) saw booming growth.
Source: MarketStance
(Caption for farm photo)
Despite continuing consolidation and flat revenue, the farmowners insurance market has been anything but stagnant, with premium increases outstripping exposure growth.
"Rapid increases in equipment values are indicative of significant new investment in farm production equipment, and suggest the need for heightened premium audit activity to capture premium owed on these new additions to farm equipment stocks."
Fritz Yohn
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