A combination of high insurance premiums and infrequent loss events has led a significant number of California crop insurance clients to limit their purchases to catastrophic crop insurance (CAT) policies only, shunning more robust offerings like yield or revenue coverage. However, one crop insurance expert believes the state’s current severe drought may change that practice soon.

David Graves, manager for the American Association of Crop Insurers, told Insurance Business the record-breaking drought in California has left many policyholders responsible for large portions of their losses because they opted for low levels of insurance coverage.

“There are large numbers of farmers in California who, when they do go buy insurance, buy a CAT policy,” Graves said. “Well, you’ve got to just about lose everything [to qualify for a payout], and it only pays for a very minimal percentage of your loss. It could be as small as 25%.”

Not that there isn’t a reason for that. CAT policies are generally much more affordable for farmers who grow thousands of acres of high-price crops like grapes or citrus, which trigger much higher premiums for yield or revenue protection coverage.

California farmers may have also foregone beefier crop insurance policies due to a low rate of loss incidents, Graves said.

“If your farm doesn’t have a history of frequent losses, then you’re willing to basically roll the dice and self-insure,” he pointed out, noting that California hasn’t experienced a drought of this severity since the 1976-1977 drought.

However, farmers may reassess their buying patterns in the wake of this drought, which is already estimated to cause up to $5bn in losses from farming and related businesses, according to the California Farm Water Coalition.

“When you get into these periods of drought, there aren’t many farmers that can withstand a significant loss several years in a row,” Graves said. “These kinds of weather systems provide at least ample food for thought for the decision makers about what kind of risk management plan they’re going to operate for their farming enterprise.”

Graves now sees crop insurance purchases in California heading in the direction Midwestern buying patterns did several years earlier.

CAT policies were once very popular in the Midwest, he noted, until major loss events from hailstorms and other catastrophes underlined the importance of more a robust risk management approach, which typically includes revenue protection coverage.

“In wheat country, farmers have just about graduated from buying only CAT coverage,” Graves said. “I expect that will be the case in California in a few years as well.”

Source - http://www.ibamag.com/