Drought in U.S. starting to hit reinsurance industry

At least one major reinsurance company has set aside reserves to deal with future claims related to the worst drought to hit the U.S. farming sector in more than 50 years.

“Based on current estimates, Munich Re anticipates a net burden of approximately €160 million ($200 million) [before tax] from losses under crop failure covers, as a consequence of the persistent drought in large agricultural areas in the U.S.A.,” the company notes in a statement.

Munich Re chairman Nikolaus von Bomhard told CNBC that “we do think it will be severe and probably one of the severest losses for this market ever. It’s too early to tell what the exact claim will be because we have to wait until the harvest is done.”

A report by Milliman estimates that drought conditions in the U.S. Midwest could produce underwriting losses or more than $2.8 billion. The study covers Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin.

Already, crop insurers have paid out $822 million in claims this year because of the drought, Thomas Zacharias, president of the National Crop Insurance Services Inc. (NCIS), says in a statement.

The multi-peril crop insurance program (MPCI) is a private-public partnership in which private insurers write the primary layer of coverage and the U.S. federal government provides coverage for catastrophic losses. Under the program, 15 private companies are authorized by the U.S. Department of Agriculture’s Risk Management Agency to write multiple-peril crop insurance, the NCIS reports.

The prolonged drought, which the National Climatic Data Center has called the worst since 1956, is expected to cause a multi-billion dollar crop insurance loss, large enough to impact several reinsurers who underwrite crop and agricultural lines of business.