Drought in U.S. Seen Prompting Record Crop-Insurer Payouts
This year’s once-in-a-generation U.S. drought may prompt record insurance payouts and still leave some farmers with serious losses as indemnities rival those of a 1988 drought and a 1993 flood, the industry’s top lobbyist said.
The size of payouts will be known better in the next few weeks, Tom Zacharias, the president of National Crop Insurance Services, said today at a Bloomberg Government breakfast. The ratio of losses to premiums may be similar to those of the late 1980s and the 1990s, when floods and droughts paid out more than $2 for every dollar in premiums, said Zacharias, who declined to make an overall estimate. Premiums this year are close to $11 billion, Zacharias said.
Farmers who have already signed contracts to sell corn, soybeans or wheat may have to repay buyers with their insurance money after their crops fail, he said. Still, many farmers will have financial strains lessened by the program, which has replaced costly federal disaster bailouts, he said.
“In the absence of such a program, most of this would be in the form of taxpayer support,” Zacharias said. “The concept that farmers will be made whole through these indemnities is not quite right.”
With corn, soybean and wheat prices escalating along with estimates of the drought’s severity, government-backed revenue- insurance policies offered through units of companies such as Ace Ltd. (ACE) and Wells Fargo & Co. (WFC) will be paying out billions of dollars in claims, as the industry faces its first annual losses since 2002. The program is designed so that the larger the losses for insurers, the greater the share of the payouts the government will pick up.
The government also takes a share of the profit when premiums exceed payouts.
American Financial Group Inc. (AFG), which sells crop insurance along with property, casualty and supplemental health protection, yesterday reduced its earnings guidance for the year, saying the drought will lower profit. Evan Greenberg, chairman and chief executive officer of Ace, said last week that the dry conditions would affect second-half earnings, while Wells Fargo said it’s too early to speculate on the droughts effects on the company.
Keith Collins, a consultant to the crop insurance industry and a former chief economist with the U.S. Department of Agriculture, rejected as “fantastical” the notion that farmers may be better off collecting insurance than raising a crop.
“You can find a wide range of income indemnification” depending on individual farmer situations, Collins said at the breakfast. In cases where farmers have already committed to sell their production and have to buy it back or break a contract, “they turn an indemnification check over to their banker,” yet still need to to cover seed and fertilizer expenses for the next crop, he said.
In 2011, with a drought in Texas and other weather woes around the country, government-run crop-insurance programs paid out a record $10.8 billion. Of premiums paid that year, farmers chipped in $4.5 billion, while the government paid $7.4 billion, according to data published by the department.
Federal crop insurance dates to the Dust Bowl droughts of the 1930s. The program and subsidies were boosted in 2000 as lawmakers sought to use it as a way to avoid what by the 1980s had become near-annual disaster payouts. Those payments cost taxpayers $68.7 billion from 1989 to 2009, according to the Congressional Research Service.
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