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Could Drought Cause First Crop Insurance Loss Since 2002?

Bruce Babcock, an economics professor at Iowa State University, said that crop insurers may report their first underwriting loss since 2002 because of the current drought in the Midwest that is the worst in more than 20 years
July 25, 2012

Bruce Babcock, an economics professor at Iowa State University, said that crop insurers may report their first underwriting loss since 2002 because of the current drought in the Midwest that is the worst in more than 20 years.

“The only way they would make a profit is if they saw this disaster coming, because of the low water tables and the low soil-moisture levels at the beginning of the season, and they opted to minimize their exposure in the Corn Belt,” Babcock, an economics professor at the Ames, Iowa-based university, said. “But the companies have made money year after year after year maximizing their exposure to risk in the Corn Belt because it’s been such a good run of years.”

Babcock said that crop insurers have profited in the past from maximizing their exposure to risks in the region for many years. The heat and the drought in much of the region has damaged crops and led to sharp rises in corn and soybean futures as well as estimates of insurance losses. The premiums farmers pay for multiperil coverage is subsidized by the federal government, and an agency of the Department of Agriculture sets the prices for the policies. Multiperil crop insurance in the U.S. is sold and administered by private companies. Babcock estimated that taxpayers may have to cover 50 percent to 80 percent of the underwriting losses from this year’s severe drought. Laurie Langstraat, a spokeswoman for the National Crop Insurance Services, said that the extent of the losses for the 2012 crop year cannot be accurately estimated at this time and that it is unclear whether the industry will see an underwriting loss or gain.

Read more on the effects of the drought on crop insurance: First Crop Insurance Loss Since 2002? (Bloomberg 7/19/12)