2017: Crop Insurance - New Markets, New Realities
This study presents an in-depth market analysis of the crop insurance industry, which has undergone significant structural changes over the past years. Historical underwriting results for multi-peril crop insurance are analyzed, along with the effect of poor results for private products. The study also reviews the transformation of the industry through M&A activity, which has been very active and is expected to continue at a high level. Challenges facing the industry and expectations for the future of crop insurance are presented.
2. Executive Summary
3. Crop Market Landscape
- Drivers of Premiums and Losses
- Loss Ratios by Major State
- A Long-Term Look at Profitability
- The Importance of Scale
- Crop/Hail and Private Products—Unsustainable Results
4. Ownership Evolution of Crop Insurers
- Changing Hands but Not Consolidating—Yet
- Drivers of M&A Transactions
- Valuation Analysis—Precedent Crop Insurer Transactions
- What Happened to the Quota Share Market?
- Economics for Reinsurers versus Primary
- Next Evolution in the Landscape
5. Comparing the AIPs
- Segmenting the AIPs
- Importance of Crop to Each AIP Owner
- Growth and Market Share Changes
- Writers of Private Products
6. Role of the Government—Assessing the Risk
- Program Summary and Participants
- Review of Program Changes
- Costs and Benefits of the Crop Insurance Program
- Future Changes to the Program?
7. Still an Attractive Business?
- Where Will Growth Come From?
- Major Challenges Facing the Sector
- Crop Risk—The Great Diversifier
B. Study Methodology
C. Crop Insurance Primer
IntroductionThe U.S. crop insurance market, at approximately $10 billion in premium, is one that has grown in both size and importance to property-casualty (re)insurers. Exposure to crop as a peril is considered an excellent diversifier—perhaps the best diversifying peril—for a broad portfolio of property-casualty risks. Some of the world’s largest (re)insurers are now owners of these crop businesses and in fact control the vast majority of the country’s crop premiums.
While crop insurance does not correlate with many other property-casualty perils, it is not without its risks—the biggest being exposure to weather and commodity price volatility, as well as regulatory risk of a large government-sponsored program. Both these risks have manifested in recent years, through volatile underwriting results and adverse changes to the economic risk and reward available to the private insurers that participate in the MPCI (multiple peril crop insurance) program.
The MPCI program has been popular among farmers for the past 30 years, with approximately 86% of farming acres currently participating in the program. While penetration has increased slightly, premium has grown substantially over the past decade. We review the drivers of this growth, which include commodity prices, types of coverage purchased, and deductible levels selected by the farmer.
In addition to growth in the program, the composition of the market participants has changed. M&A activity has attracted new entrants and has allowed true consolidation and some notable exits. One of the factors driving M&A has been acquisitions of primary crop insurers by reinsurers of the risk to ensure continued access to the risk class. As a result, the ownership profile of the crop insurers and the amount of premium flowing to the reinsurance markets have changed dramatically. The ownership base of the larger crop insurers appears quite stable, and these owners do not have a need for quota share support.
The next evolution for this market is continued quest for efficiency, implementation of technology, and value-added service capabilities as distinguishing features among the remaining 16 competitors. A component of this evolution inevitably will be further consolidation. While regulatory risk exists, it is likely to take the form of incremental changes. As future changes undoubtedly will not prove beneficial for private insurer participants, success will be defined by best-in-class operational capabilities, where scale is increasingly important.