US Crop Insurance Faces Pressure from Drought and Price Volatility

The US crop insurance sector is grappling with significant challenges due to lower commodity prices and adverse weather conditions, according to a new report by A.M. Best. The report anticipates further declines in crop premium levels for 2024, following a modest 3 percent drop in 2023 that left premiums at $20.8 billion. Corn and soybean yields are forecast to be slightly higher than in 2023. However, futures prices for these crops, along with wheat, have decreased moderately, remaining within producer deductibles.

"If prices continue to decline, yields come in significantly below expectations, or both occur, underwriting results for US multiperil crop insurance (MPCI) writers will likely remain under pressure," Connor Brach, associate director at A.M. Best, said.

The federal MPCI program dominates the US crop insurance segment, with most premiums written through this channel. In 2023, premiums for MPCI fell by 3.6 percent to $19.3 billion, while private crop premiums rose by 4.4 percent to $1.54 billion. Despite this, MPCI writers experienced weaker results, with a combined ratio deteriorating by 4.5 points to 107.3, indicating a $750 million underwriting loss. Crop insurers have struggled for consistent profitability since 2019, with combined ratios exceeding 100 in 4 of the past 5 years.

"These results are a notable deterioration from the 2014–2018 period, which benefited from profitable underwriting results in 3 years and an average combined ratio of 91.1," Mr. Brach said.

Geographically, the eastern United States had lower loss ratios compared to the western half, though New England states reported unfavorable loss ratios despite being smaller markets. Texas, the largest state for MPCI products, saw improvement but still ended with an unfavorable loss ratio of 147.3 due to drought and heat conditions. Drought has been the leading cause of MPCI losses for the past 3 years, resulting in over $6.6 billion in indemnities in 2023.

Merger and acquisition activity over the past 15 years has led to significant market concentration, with the top 5 MPCI writers seeing a 3.8 percent decline in premiums in 2023.

"This MPCI premium decline in 2023 reflects the impacts of commodity price drops, offset by the continued growth in demand for comprehensive coverage against perils, including adverse weather events, pests, and crop diseases," Mr. Brach said.

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