Crop insurance losses begin to mount amid drought

Thousands of farmers are filing insurance claims this year after drought and triple-digit temperatures burned up crops across the nation's Corn Belt, and some experts are predicting record insurance losses — exacerbated by changes that reduced some growers' premiums.

G.A. "Art" Barnaby, a Kansas State University Extension specialist in risk management, estimates underwriting losses on taxpayer-subsidized crop insurance will hit nearly $15 billion this year. He expects a staggering $25 billion in crop insurance claims to be filed by growers across the nation, driven primarily by one of the worst droughts in the U.S. decades. His loss estimate is based on a loss ratio of $2.50 for every dollar paid in premium.

The U.S. Department of Agriculture's Risk Management Agency made changes to the insurance program in the past year which are expected to increase the underwriting losses from the drought. The changes meant farmers in some states paid smaller premiums this year for corn and soybeans. Not only that, the agency adjusted yields for those crops upwards to reflect recent trends, Barnaby said.

"Anyone that is concerned about whether this will be sustainable over time will have to ask the question whether this was a good idea to cut rates," said Barnaby, who 20 years ago helped develop the insurance program. "Now, as a farmer, I like paying a lower rate. But my guess is the rates were not cut that much to be noticeable, but in aggregate they do make a difference."

The rate reductions were based on the assumption that new technology, such as genetically modified, drought-resistant seeds, would eliminate or reduce big losses, Barnaby said. "So it is ironic they got hit the first year out."

Under taxpayer-subsidized crop insurance, farmers pay about 40 percent of the premium cost and the federal government picks up the rest. The government sets the rates and the underwriting rules, but the private companies get to pick the contracts they want to take a risk on. Coverage is based on both yield and price. An underwriting loss or gain represents the difference between premiums paid and amount of claims paid.

For the past decade, the crop insurance program has actually had an underwriting gain, Barnaby said. In 2009 and 2010, the government made $1.4 billion from the crop insurance program because premiums collected exceeded loss claims paid out. That money went into the general treasury.

Even though the crop insurance program paid out a record $10.8 billion in crop insurance claims last year, it still enjoyed a $1.1 billion underwriting gain because record premiums were also paid. Insurance companies pocketed most of that gain, however, and the Risk Management Agency lost about a half billion dollars.

The agency does not yet have a firm sense of the extent of crop insurance losses because the fall harvest is still under way in the Corn Belt. Also, many of the payouts on revenue insurance policies are based on October crop prices.

But as of Monday, more than $1.42 billion had been paid in insurance claims filed early, according to Agriculture Department statistics. Texas led the nation with $518.6 million in claims paid. Kansas was second at $223 million, and Colorado was third with $66 million.

The final tally is expected to be much, much bigger.

In Kansas, for example, the vast majority of insurance claims paid so far have been for winter wheat (about $143 million in claims paid) from the dry southwest corner of the state. New crop insurance claims from Kansas farmers are being paid out at a rate of nearly $30 million a week, with the bulk of the payments for corn, soybeans and other fall-harvested crops still to be paid, said Rebecca Davis, director of the Risk Management Agency's regional office in Topeka.

While Kansas did review rates for both corn and soybeans last year, premium rates vary by county and some rates actually went up last year, Davis said.

Among those farmers waiting to for a crop insurance adjuster to come out to check out his corn fields is Larry Kepley, who grows wheat, corn and sorghum on about 1,800 acres in the arid southwest corner of Kansas. He had about a third of a wheat crop this year for which he has received that crop insurance payment of about $100 an acre. It was too dry to plant any sorghum, but even his irrigated corn fared so poorly that he had to cut it for hay and file a claim for the loss.

"You don't make money from insurance, but you can kind of hold things together if you have it," Kepley said. "If we wouldn't have had it, we would have been in a lot worse straits of being able to pay expenses and put out another crop — and so it gives us a chance to at least do that."