The Situation
According to the National Oceanic and Atmospheric Organization (NOAA), there were 18 natural catastrophe events (or “CAT losses”) in the United States during 2022 that resulted in property and other losses of $1 billion or more. Total CAT losses for 2022 amounted to $165 billion last year, up from $155 billion in 2021 and $114 billion in 2020. And even more shocking, the U.S. has sustained 341 weather and climate-related losses since 1980 which the Agency estimates to have cost a staggering $2.5 trillion.
Thankfully, the property-casualty insurance industry has been adequately capitalized and able to respond to the needs of customers filing claims, namely domestic agriculture cooperatives. However, therein lies the problem. Higher losses translate to higher rates—i.e., the premium charged per unit of loss exposure—which is logical to adequately compensate the insurance carrier for the increased risk of more frequent and several losses. Adding insult to injury, coverage terms and conditions are tightening because “replacement values” now exceed “market values” due to business material cost inflation.
How High Are Rates Going?
I conducted several channel checks recently with U.S. grain and farm supply cooperatives as well as the insurance brokers that serve them. What I learned was that the property insurance coverage remains “difficult” vs. other business lines from a coverage availability perspective and that agribusiness business insurance programs are experiencing rate increases of 25% to 75% (and even more in certain geographies such as the Dakotas.
Strategic Recommendations
For agribusiness organizations that are affected by higher prices and a tightening of coverage terms and conditions, there are a few basic steps to follow. First, find and work with an insurance broker that has access to multiple insurance markets—specialty and traditional—in the United States and London. Second, along with your brokers, assess how much financial risk your organization is willing to tolerate and whether alternative risk management structures (such as self-funded captive insurance arrangements) could make sense. Third, consider getting an outside opinion as to whether making investments to update your operating facilities (grain bins, fertilizer storage sheds, etc.) could ultimately result in more affordable coverage options in the future. Outdated infrastructure is undoubtedly a negative risk factor requiring higher premiums from the insurance company to compensate for higher replacement values.
Kenneth Scott Zuckerberg is the lead industry analyst for grain, farm supply and biofuel at CoBank.
