Farm bill negotiations in Congress will potentially place serious pressure on the U.S.-subsidized multiperil crop insurance market, a new A.M. Best report concludes.

Here’s why: Typically, the federal government and approved insurance providers share in underwriting gains and losses, while government covers a greater share as losses grow. Concerns are zeroing in on recent farm bill proposals, A.M. Best said, because they recommend changes such as lowering the target rate of return (one proposal recommends dropping this from 14.5 percent to 8.9 percent). Others seek to limit subsidies for individual farmers.

Another point of worry voiced in the A.M. Best report: The new tariffs could cause major volatility for crop commodity prices.

As A.M. Best explains, price volatility on commodity crops has led to fluctuations in multiperil crop insurance direct premiums written, and in 2017, direct premiums written declined to $10.1 billion in 2017 after peaking at $12.4 billion in 2011. The renegotiated Standard Reinsurance Agreement in 2011 between the Federal Crop Insurance Corporation (FCIC) and insurance companies also has had a direct impact on private insurers’ crop insurance profitability, although yields and commodity prices helped the sector’s underwriting performance in 2016 and 2017. The sector’s combined ratio in 2017 deteriorated slightly to 84.1 compared to a combined ratio of 81.7 in 2016. However, the renegotiated standard reinsurance agreement, a large number of drought claims in 2012 and 2013, and price declines in 2013-2015 led to four years of underwriting losses leading up to 2016.

Over that time, the market has experienced major consolidation, as it has become a way for larger insurers without multiperil crop insurance business to improve diversification, while those with crop insurance operations see mergers and acquisitions as a way to diversify geographically and improve economies of scale. Pricing for multiperil crop reinsurance remains competitive with favorable terms and conditions, and capacity continues to grow. Reinsurers with excess capacity and experience in the crop insurance market have purchased approved crop insurance providers to maintain or grow their crop premiums. In other words, scale has become increasingly important in the crop insurance market, and those that lack it may continue to seek alternative options.

Despite the market headwinds and the threat of new legislation, A.M. Best still sees multiperil crop insurance as a good thing.

The ratings agency said it views both primary and reinsurance multiperil crop insurance as favorable in the long run. As well, A.M. Best said, “The marriage of insurers and agricultural technology firms also is allowing farmers and insurers to gather more data, optimize yields and customize products. The results are higher yields and greater efficiency for farmers, less risk and lower claims-handling costs for insurers, and more automation for both parties.”

Source: A.M. Best