Private crop insurers may face losses exceeding $5 billion if this year’s U.S. drought is worse than one in 1988, according to Standard & Poor’s.
Hot, dry weather across much of the Midwest has damaged crops, led to a rally in corn and soybean futures, and boosted insurance loss estimates. The U.S. subsidizes farmers’ premiums for so-called multiperil coverage, which protects against a loss of revenue or production as a result of drought, hail, wind, frost or other natural causes. Private insurers sell and administer the coverage in the U.S. In return, the federal government backstops the firms with payments and reinsurance.
Losses among crop insurers will vary depending on how much government and private reinsurance they use, S&P said. The companies can withstand the losses because of capital levels and revenue from other businesses, according to the ratings firm.
American Financial Group Inc., which sells crop insurance along with property, casualty and supplemental health protection, last month reduced its earnings projection for the year, saying the drought will weigh on results.
Soybeans climbed to an all-time high today, and corn reached a record $8.49 a bushel on Aug. 10 on the Chicago Board of Trade. The Department of Agriculture has slashed its corn harvest forecast by 27 percent since June, after declaring more than half of U.S. counties as disaster areas amid drought conditions that stretched from California to New York.
Losses this year may rival costs from the 1988 drought and a 1993 flood, Tom Zacharias, the president of National Crop Insurance Services, an industry group, said last month.
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.
