For agents specializing in farm and crop coverage, taking care of customers is an intensive process. Most deal with coverage through the Federal Crop Insurance Corp. (FCIC), which in 2012 insured about 282 million acres (see “Crop Insurance: The Nuts and Bolts”).The federal crop insurance program provides a critical baseline of coverage for farmers, and in throes of a serious drought, has helped farmers remain successful. In a sector marked by volatility and extreme weather trends, federal coverage and the availability of supplemental plans give farmers that extra cushion of coverage to maintain industry stability.

Gaynier compared the 2012 drought to the 1988 drought, before the FCIC made participation in the crop insurance program mandatory for farmers to be eligible for deficiency payments under price support programs, certain loans, and other benefits. The federal program was key in keeping farmers in business after many were shuttered in 1988.

According to National Crop Insurance Services (NCIS), an organization of national crop insurers, the FCIC is stabilizing and as a risk management solution, is largely successful. Gaynier's confidence is the program is heartening, but some still have reservations. Sam Martin, a manager of several corn and soybean farms in Watseka, Ill., said that if the drought worsens, the FCIC could “bite off more than it can chew.” The program may financially strengthen farmers that may not be able to afford premiums, but could become overwhelmed if the drought worsens and the government must assume more risk, Martin said.

The Corn Belt drought's effects on farmers were devastating, but the federal program eased the toll. An RMA spokesperson explained that the federal program worked as it was designed to work, responding to the drought, despite the large number of claims and heavy workload that resulted. Problems and issues were comparatively few—a testament to the value of crop insurance, the agency said.

Impact of climate change

Though there is much debate over climate change as a driver of inclement weather, some insurance companies are beginning to research and roll out policy options for climate change-related weather protections.

According to a survey conducted by Ceres, a nonprofit that analyzes sustainability practices among businesses, 23 of the 184 insurers who offer supplemental insurance options that were surveyed in its 2012 Insurer Climate Risk Disclosure Survey had developed climate change-related policies.

Future calamities, such as wildfires or continued deep drought, will affect farmers as they did last year. Insurers could find an opening for new coverage development, or find ways to adapt existing policies to respond to these uncertainties of inclement weather.

One such company is The Climate Corp., based in San Francisco, Calif. Formerly known as WeatherBill, the company offers field-level weather insurance for corn, soybean and winter wheat crops, paying policyholders if specific weather events occur during the growing season. Policies cover weather events such as heat, drought, excess moisture and freeze and coverage is customized to the crop and soil type in each field.

Jeff Hamlin, director of Agronomic Research at The Climate Corp., notes that FCIC program stipulations and limits lead to the demand for supplemental plans. Recognizing increasing weather volatility is another reason why farmers opt for the supplementary insurance plans, as their livelihood grows riskier, Hamlin said.

Companies with highly developed supplemental coverage options include Swiss Re and ACE. Swiss Re offers crop-shortfall protections and weather-based options. If a crop does not fall under FCIC guidelines, crop-shortfall plans are protective measures. Food and beverage, aquaculture, fertilizer, seeds, machinery and equipment are covered under Swiss Re's supplement plan.

Though Swiss Re's offerings do not specifically point to climatological change, its weather-based plans focus on meteorological shifts, which could provide a safety net for the continued drought or other future disasters.

ACE's agribusiness sector offers disaster protection, environmental insurance, professional risk insurance and others. Disaster and environmental protection needs could grow for farmers as catastrophic weather phenomena continue to barrage farms around the U.S. ACE also offers specific coverage for the renewable energy sector and additional farm coverage for hobby farms or equine services. When the federal program's specifications limit the level of coverage a farmer can choose, and weather patterns grow less predictable, options for coverage such as those from ACE are more attractive.

Another aspect of crop insurance that does not fall under the federal program is shipping and transportation of crops. A growing trend in the U.S. is the increase in exportation of grain in intermodal shipping containers by farmers, said Scott Beebe, cargo practice leader of Travelers Ocean Marine. “Shipping grain in unventilated intermodal containers carries substantial risk of overheating, which could cause spontaneous combustion,” he said. “Understanding the specific and unique risks of shipping grain and other crops is extremely important for farmers, now more than ever.”

Growth of risk modeling

Many insurers use risk modeling to analyze weather cycles and trends to produce plans for customers where certain disasters are more prevalent. After Superstorm Sandy, insurers writing coverage in the Northeast went back to the drawing board to adjust coverage options, as new risk modeling changed the insurance landscape in the region, according NAPCO's spring 2013 State of the Market report.

“The effect of severe weather on crops can be felt far beyond the farmer. Understanding the supply chain, and the potential risk exposures that affect that supply chain, are key to protecting the farmer and those who rely on the crops,” said Beebe, identifying additional areas where farmers face risks beyond the scope of the federal program.

As climate change analysis grows, risk modeling and data analysis will help shape how insurers develop coverage for farmers. With so few companies developing responses to the possible worsening threat of climate change, much less unveiling such policies for consumers, adaptations to this potential for future disasters are few. The Ceres survey did find that P&C companies were among the most prepared in climate change-based development.

Crop Insurance: The Nuts and Bolts

The federal government is a major subsidizer of the agriculture industry, including its crop insurance, subsidies and Noninsured Crop Disaster Assistance Program, which provides a minimal level of assistance to uninsured farmers should a national disaster seriously affect product output.

Farmers face numerous regulations and also benefit from federal programs, such as the FCIC, which controls which companies can operate as crop insurers and the types of coverages they can offer.

Companies participating in the crop insurance program offer customers the same products and price, leaving agencies to compete on service. Policy terms and conditions and premium rates are set by the FCIC.  

Because the FCIC sets policy terms, conditions and premium rates, insurers in the crop insurance program offer the same products and price, leaving agencies to compete on service.

In 2003, about 217 million acres were insured for about $41 billion in coverage and $ 3.5 billion in premium; by 2012, that number had grown to about 282 million acres were insured at about $117 billion in coverage and $11 billion in premium, according to the Risk Management Agency (RMA), which administers FCIC programs. The RMA operates under the U.S. Dept. of Agriculture (USDA).

Most major crops prevalent in a given region are covered by the FCIC. Hobby farms or small farms producing crops that are not primarily cultivated in a specific area would require other policies for coverage. For example, pecan farming is not prevalent in rural Minnesota, but cultivated wild rice is—that Minnesotan pecan farmer will not find a policy through the FCIC, but the one growing cultivated wild rice will.

The Standard Reinsurance Agreement stipulates that the federal government assumes some risk in insuring crops that fall under FCIC guidelines. Much like other existing crop subsidies, the government's action, or inaction, affects farmers and insurers; the indecision around the farm bill is a prime example. As budgetary and partisan concerns slow the passing of a new farm bill, farmers and insurers are caught in between.

According to RMA spokesperson Pat Engel, if the insurance company denies a claim, the insured has a right to pursue mediation and arbitration to contest the denial. After completing the arbitration process, the insured can pursue judicial review. The insured also has rights to administrative review and appeal, followed by judicial review, if the FCIC was directly involved in the denial of the claim.

The last farm bill was passed in 2008. The current bill, which was set to expire in 2012, was renewed through September 2013. Farmers begin planting corn and soybeans in May, and this short-term extension, with little done by legislators to move it along, leaves farmers uncertain how the possibility of eliminating or adding programs could affect prices and production.