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Insurers May Face $5 Billion in Drought Losses

Crop insurers may face losses that exceed $5 billion if this year’s U.S. drought is worse than one in 1988, according to Standard & Poor’s
August 31, 2012

Crop insurers may face losses that exceed $5 billion if this year’s U.S. drought is worse than one in 1988, according to Standard & Poor’s. Hot, dry weather across much of the Midwest has damaged crops, led to a rally in corn and soybean futures, and boosted insurance loss estimates. The U.S. subsidizes farmers’ premiums for so-called multiperil coverage, which protects against a loss of revenue or production as a result of drought, hail, wind, frost or other natural causes. Private insurers sell and administer the coverage in the U.S. In return, the federal government backstops the firms with payments and reinsurance.

“Insurers with higher concentrations of premiums in the most-affected states, such as Kansas, Illinois, Kentucky, Indiana, Missouri and Tennessee will see a larger share of the losses,” S&P analysts led by Jason Porter said in a report. “Farmers in the most affected states are expecting one of their worst harvests since the drought in 1988.”

Losses this year may rival costs from the 1988 drought and a 1993 flood, Tom Zacharias, the president of National Crop Insurance Services, an industry group, said last month. Federal crop insurance dates to the Dust Bowl droughts of the 1930s. The program and subsidies were boosted in 2000 as lawmakers sought to use it as a way to avoid what by the 1980s had become near-annual disaster payouts.

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