The fresh approach to Rural Insurance - Rural Affinity

US DROUGHT

March 2012 saw the beginning of one of the worst droughts in US history, remarkable in its scale, severity and speed of its onset.

The year was marked by record temperatures nationwide, both for the month of July and the entire year. Temperatures started soaring almost overnight, and were combined with lowest precipitation levels on record across the American Midwest, the USA’s most productive agricultural regions.

The only other drought in the US which has affected more states was that of the 1930s Dust Bowl. In 2012, 24.1% of the US was in severe or extreme drought and in the Corn Belt – one of the world’s most productive maize and sorghum regions – 89.3% was in drought.[1]

The year had a promising beginning, but the drought struck during the pollination phase, crippling grain formation. The entire maize harvest was lost, and the sorghum harvest was only saved in some regions due to hurricane conditions in late August, bringing copious amounts of rain. The drought also had flow-through effects into other agricultural sectors. Livestock was hard hit, as the price and shortage of food forced farmers to bring animals to market prematurely.[2]

Despite the drought lifting for the 2013 season, the insurance losses were huge. In 2012 in the US, 1.1 billion crop policies were written generating $10.8 billion in premium, representing an insured area of around 110 million hectares. [3]  In Australia in 2012, there was approximately $150 million in written premium.

Around $17.29 billion was paid out in crop insurance payments related to the drought, representing a loss ratio of 160%. [4] In Australia in 2012, Rural Affinity estimates there was an estimated $90 million paid out in crop claims.

Drought cover is generally only available as part of Multi Peril Crop Insurance (MPCI) programs. MCPI programs tend to exist only in countries where premiums are heavily subsidized by the government. If it was not for the subsidy the cost of insurance would most likely exceed the growers profit potential.

The US is one of a handful of countries who have cover against drought through multi-peril crop insurance. The US government pays around 62c of each $1 in premium, and reimburses companies’ administrative costs.[5]  In years of large losses, the government covers more than 60% of claim payments, in 2012 this figure is estimated to be higher than 75%.[6]

Ultimately crop insurance capacity around the globe is largely provided by a small number of specialist reinsurance companies. Hence, the impact of the US losses will be felt in all agricultural insurance markets to some extent.