With insurers anticipating crop claims that by some estimates could exceed $30 billion nationwide, Sherrick agrees “this could be a rough year for some insurance companies.” To an extent, that’s “the nature of the business,” the economist said.
Sherrick stressed crop insurers themselves are protected by federal and, generally, second-tier private “reinsurance.” Those protections help assure policyholder losses will be covered in a timely manner, despite the impact of heavy losses on company reserves.
As a diversified “multi-line” insurance/financial services company, Country Financial “prepare(s) every year to cover potential losses from premium, reinsurance, and potentially, surplus (funds),” according to Country spokesman Chris Anderson.
Given it’s reinsurance on federal crop policies this year, “we are risking less than 2 percent of our policyholder surplus,” and when loss levels exceed premiums paid, “we share the loss amounts with both private and government reinsurance agreements to ensure farmers collect on the insurance coverage they purchased,” Anderson stated.
“The system is simply designed to distribute losses in a very careful way, so that excess losses are generally borne by the government over the amount companies are exposed to,” Sherrick related.
“The short version is, I don’t think farmers have anything to worry about, regardless of the size of the aggregate losses.”
Some insurers may have reduced financial reserves from policy underwriting gains in part as a result of the current federal Standard Reinsurance Agreement (SRA). The agreement was rewritten in 2010, cutting federal reimbursements to companies by $6 billion over a 10-year period.
However, today there are few small “standalone” approved providers, and larger companies represent most potential claims exposure, Sherrick noted. Further, the SRA also reduced company exposure to more extreme losses, he said.
For every dollar of premium that insurers write, they are required to prove the private financial backing necessary to cover catastrophic losses. Each year, USDA’s Federal Crop Insurance Corp. reviews and approves each company’s operations plan to ensure adequate capital is available.
With dual government/private reinsurance in place, companies “won’t be exposed to more than their capital can stand,” Sherrick said. At the same time, this year’s expected claims volume could “strain the claims process a bit,” he warned, urging drought-affected farmers to consult with their agents or adjusters as soon as possible.
Tom Zacharias, president of the industry group National Crop Insurance Services (NCIS), sees 2011’s widespread weather-related losses and record $11 billion in loss payments, as a model for farmer expectations this season. In 2011, most payments were processed within 30 days of claims being finalized, Zacharias said.
Some 5,000 certified insurance adjusters already are assessing crop damage nationwide, NCIS reported. More than 2,000 adjusters are expected to attend NCIS-sponsored summer training sessions that will focus on drought issues.
Related story: Crop Insurance in 2012 from Farmdoc