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Drought Conditions to Drive Up Crop Insurance Payouts

July 27, 2012
Drought 2

Drought claims will drive up corn and soybean insurance payouts this year, but one insurance executive isn't discouraged.

"Crop insurance is a great business," Evan Greenberg told equity analysts in a July 25 conference call after the company reported first-half earnings. "Over any period of time it has been very good," said Greenberg, chairman and chief executive officer of ACE Limited, a multiline property and casualty insurer that provides commercial and personal insurance through operations in 53 countries. Rain and Hail Agricultural Insurance is one of the ACE companies.

Greenberg said crop insurance earnings are under pressure now, "But they're still projected to be reasonable."

The company's operating income in the first half of 2012 rose from a year earlier, but ACE trimmed its income outlook for the second half because of the higher expected payments to crop insurance policy holders.

Crop insurance profits over several years and geographic diversification help keep this year in perspective.

"The health of the crop insurance industry as a piece of the broader insurance industry, as best we know, is quite good," said Dave Miller, director of research and commodity services at Iowa Farm Bureau. Corn and soybean crop insurance payouts will be high for the 2012 crops, but insurance companies spread their risks across a wide geographic area and broad insurance markets—with backing from the federal government.

Greenberg said his company's provision for crop insurance payouts in the third quarter assumes the highest probable outcome, based on current weather and crop conditions. "We don't expect it is worse than that," he said. "But what we do know is there's still that question: Could it be worse? No one can predict the weather."

Greenberg declined to estimate the insurance industry's potential payments on crop insurance this year. "It's way too early to know," he said. "We have no idea."

Different States at Risk

This year producers and insurers are dealing mainly with major crop damage from drought in the Midwest. Last year, they faced floods, drought, tropical storm damage, and tornado losses in other regions.

Last year, the ratio of claims paid to premiums paid reached 0.9 on a national scale, reports USDA's Risk Management Agency, which manages crop insurance operations for the Federal Crop Insurance Corp. Federal law requires an expected national loss ratio of no more than 1.0, meaning that the amount of premiums at least equals claims paid.

Some states hit hard by drought this year reported low claims relative to premiums last year. The 2011 crop insurance ratio of claims to premiums was only 0.58 in Indiana, 0.28 in Iowa, and 0.44 in Illinois.

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