Agribusiness: Hardening Property Markets Affect Tight Margins

Agribusiness’s already-tight margins could be at risk of shrinking further due to pressure from rising premium costs in the hardening property insurance market.

Like agricultural commodity markets, property casualty insurance is cyclical. Some years, in soft market conditions, agribusinesses benefit from falling costs and expanded coverage created through the strong competition among insurers for your business. When markets harden, general managers and CFOs must make tough choices regarding their insurance and loss control programs.  

Hard markets are characterized by quickly rising insurance premium costs by all insurers at the same time coupled with shrinking capacity by insurers. By capacity, we are referring to the dollar value of risk a particular insurer can absorb or reinsure. Agribusiness, in comparison with other industry sectors, has very high property values that need to be insured. During hard markets, insurance buyers are often forced to accept more risk, forego coverage, sacrifice investments, or revise budgets to accommodate skyrocketing insurance costs.

The hardening insurance market is an added challenge to an already difficult agricultural business environment. Delayed plantings, challenging harvests, commodity price fluctuations, and uncertainty with global markets are stressing the financial stability of agribusinesses and cooperatives throughout the supply chain.

The true impact of rising insurance costs and limited coverages is just now starting to show up on balance sheets. And for some unfortunate agribusinesses, the impact is not a blip on the financial radar…but rather a bang! Premium increases in the double and in a few rare cases, triple digit percentages, are not unheard of in this hard market.

Agribusiness_Hardening Market Graph

 DATA SOURCE: CIAB Q3 UPDATE

What is driving these drastic premium increases?

One factor – extreme weather conditions and the resulting damage.

Commercial property losses caused by severe weather have spiked in recent years. In 2019, there were 14 separate billion-dollar weather and climate disaster events across the United States, with a total cost of $45.0 billion, according to National Centers for Environmental Information. The total cost over the last 3 years (2017-2019) exceeds $450.0 billion — averaging $152.2 billion/year. East coast hurricanes and west coast fires contributed to the current hardening market conditions. And, areas in the Midwest which were never considered flood zones were impacted by heavy, torrential rains, resulting in catastrophic flooding.

Three tips for weathering the hard market:

Here are three tips every general manager or CFO can consider to help soften the blow of the hard market:

1. Avoid filing small claims

In a hard market, it is better to budget for small claims rather than to submit the small claims to insurance. This will help keep your loss-ratio low, which in turn helps make your business a more attractive risk to the insurance company – potentially mitigating premium increases.

2. Start renewal processes early

Starting the renewal process early will give you and your broker time to identify how the hard market may impact both your premium and coverage capacity. Developing a strategy 120 days prior to renewal is a better business approach than scrambling to obtain coverage a month prior to renewal.

3. Ask your current insurance broker for a budget six months in advance of your renewal

Whether your organization makes decisions via an insurance committee or board approval, we all need to be held accountable to someone. Organizational changes often occur when premiums spike and you don’t want to be one of them. If your broker won’t give you a budget, find one that will.

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Agribusiness leaders are doubly affected by a hardening property market due to existing challenges in the industry. By working with a broker who understands both agribusiness and the insurance marketplace, you will be more likely to receive proper advice, a pro-active renewal approach and hopefully, keep your renewal costs to a blip, rather than a bang.

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Jim Brunker is a partner and senior property and casualty account executive for M3 Insurance.

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