Study: Drought Could Yield $2.8B in Losses for 12 Crop-Producing States

Due to prolonged drought conditions in the Midwest, underwriting losses for 12 major corn- and soybean-producing states could be more than $2.8 billion, a recent report warns—and the trade group representing the crop-insurance industry says insurers have already paid out $822 million so far this season.

The report, released by actuarial and consulting firm Milliman and authored by Carl Ashenbrenner, covers the states of Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin.

The report arrives at its loss estimate by projecting premiums collected in the dozen states, along with 2012's federal Multiple Peril Crop Insurance (MPCI) program loss ratio. Milliman notes that the loss ratio has been below 100 for the 12 states since 2002, when a minor drought led to poor yields (resulting in a 138.3 loss ratio).

The report projects a loss ratio of 147 for these states in 2012, determined by using current futures prices and forecasting corn and soybean yields—the two factors used to calculate farmers' guarantees and indemnities in the MPCI's revenue-protection plan.

Milliman projects total 2012 premium to be around $6 billion in the 12 states for corn and soybeans, reaching this estimate by adjusting 2011 premium for changes in price and acreage.

“Using the estimated 147 loss ratio, the indemnity is forecasted to be about $8.8 billion, for an underwriting loss of $2.8 billion,” the report states.

Milliman notes that private insurers will not absorb all of the losses, due to the Standard Reinsurance Agreement they make with the Federal Crop Insurance Corp.

Furthermore, the report notes that its projected underwriting losses are subject to “a considerable amount of uncertainty,” as other states and crops could offset underwriting gains and losses; futures prices could change significantly; and the drought could strengthen or wane in the coming months.

Meanwhile, according to National Crop Insurance Services, the crop industry's trade association, insurers have already paid out $822 million in indemnities this season. The group says it is still too early to estimate what the industry's losses will be for the season.