According to catastrophe modeling firm AIR Worldwide, the drought in the US agricultural heartland continues to deteriorate crops in the Corn Belt with no meaningful precipitation relief in sight. After the hottest July on record, insured losses from the 2012 drought are now expected to surpass losses of other historical droughts. AIR estimates that losses resulting from farmer claims for the crop insurance industry may exceed US$13bn with potential losses as high as US$20bn.

Although the 2012 growing season began on a very promising note, it became clear by the end of June that the crop insurance industry was facing one of the worst agricultural droughts. By the end of July 2012, the area of the contiguous US affected by severe to extreme drought increased to 42%.

“AIR’s current estimate for this year’s crop insurance losses point to a gross loss ratio for the whole industry of 120-180%, which translates to payouts of US$13-20bn assuming US$11bn in total premiums,” said Dr. Gerhard Zuba, senior principal scientist at AIR Worldwide. “After government recoveries, which are available through the standard reinsurance agreement between crop insurers and the government, the total responsibility for the insurance companies and their private reinsurers, net after accounting for premiums collected, will be about US$1-3 bn, again on the basis of US$11bn of assumed total premiums for 2012. However, it should be noted that the exact value of the total premiums for 2012 is not yet available.”

“The drought of 2012 will greatly reduce the harvest of major crops such as corn and soybeans. The AIR model indicates yields as low as 40% below normal in some areas. These low yields and the expected shortage at harvest have already increased prices for these commodities. Since planting this spring, corn prices have risen by 142% and soybeans by 138% (as of August 24). With high prices and high-take-up rates, most corn and soybean farmers will not suffer a loss, as they bought revenue protection policies. Because their monetary compensation will be calculated based on the final harvest price in the fall, typical deductibles in the drought areas of the Corn Belt with respect to yield shortfalls of 20 to 25% will be compensated by the higher fall price for the commodities.”

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