Crop Insurance Is Not a Lucrative Business
April 2nd, 2007 by David Graves
Often detractors of agricultural support programs cite what they call large underwriting gains as proof that crop insurance is a lucrative business.
The fact is that without federal assistance, farmers would be unable to afford crop insurance and private companies would not write crop insurance, leaving farmers underprotected from significant risks. Moreover fewer and fewer companies are writing crop insurance today than in the past.
Unlike the Federal flood insurance program, private insurance companies share in the risk of writing crop insurance policies. By sharing the risk, loss adjustment is not compromised. Moreover, because crop losses are highly correlated (drought impacts a wide area), a private market has never been established for multiple peril crop insurance. Underwriting gains tend to run in cycles with multiple years of gains offset by large loss years (1988 drought, 1993 flood). Since 2002, the program has not suffered a widespread loss, even though several areas of the country have experienced prolonged drought (western Kansas, Nebraska and South Dakota for example).
Twenty years ago over 60 companies participated in the crop insurance program. Because of reductions in administrative and operating expenses, growing program complexity and oversight, and a need to take advantage of economies of scale, today only 16 companies write crop insurance business. Crop insurance is a specialized line of business that requires unique expertise and unique expenses. On an industry basis, expenses exceed the federal reimbursement, premiums are paid to the government and not held by industry, and so underwriting gains are the sole opportunity for profit.