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Crop loss payouts speed up

Now that crop insurers and USDA's Risk Management Agency (RMA) know the final market value of drought-damaged crops, the pace of indemnity payments is starting to pick up, a senior official with the insurance program told members of The Chicago Farmers at the group's annual holiday meeting in Chicago Monday.

"Just in the last week, about a billion dollars went out the door," said Thomas Worth, Senior Actuary for the USDA's Federal Crop Insurance Corporation.

The grand total of indemnity payments for all 2012 crop losses, according to the RMA Summary of Business as of December 10, is nearly $8 billion. More than half, $4.7 billion, has been paid on corn losses, with nearly $1 billion paid out on soybeans.

Last year, after drought in Texas and the southern plains, extremely wet weather in the Dakotas and flooding along the Missouri River, the crop insurance program paid $10.98 billion.

But, because most of the crop insurance risk is in the Corn Belt, RMA expected greater losses for 2012, and that's still possible. The agency, which sets the rules for selling federal crop insurance by private companies, will have a better idea sometime in February or March, Worth said.

Worth said he is often asked what the losses will be for 2012. "The bottom line is we don't know," he said.

What is obvious to RMA and the crop insurance industry is that the drought of 2012 hit in the region of the country that has the greatest liability, the Corn Belt.

"Corn and soybeans account for about two-thirds of our liabilities," Worth said. Add in three other crops--wheat, cotton and sorghum--and that's 85% of the insurance liability.

Although last year's payout of nearly $11 billion was a record, the crop insurance industry had a slight underwriting gain. That's measured by the loss ratio for the year, which divides the indemnity payments by premiums that are paid by farmers (and USDA through premium subsidies).

Even last year, the lost ratio was .91.  So far, the loss ratio for 2012 is .72.

After the drought of 1988, the loss ratio for the industry was more than 2, meaning it paid out more than twice as much as it brought in from premiums that year.

"It's hard to believe we're heading for something like that" after 2012, Worth told in a brief interview at The Chicago Farmers meeting.

As he explained to the group, the insurance program has changed since 1988.

The drought will not affect premium rates for farmers for 2013 crops, Worth said. The rates have already been set earlier this fall and losses from 2012 won't be reflected in rates until 2014.

USDA backs the private insurance companies with reinsurance. And if they aren't able to pay farmers, USDA will step in to make certain they receive indemnity payments.

The industry had a long stretch of underwriting losses in the 1980s and early 1990s, but it has not had an underwriting loss since 2002, when the ratio was 1.4

"This is the first really bad year in a long time," Worth said.

In the past decade, the crop insurance industry had underwriting gains of $11 billion, he said. It's not all profit, of course, but it's an indication of the strength of the industry going into this year's drought.

"Both the companies and the program are coming into this in a very strong position," Worth said.

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