Proposed changes to the Standard Reinsurance Agreement (SRA) by the United States Department of Agriculture could induce challenging market conditions for the 16 private reinsurers participating in the Multi-Peril Crop Insurance (MPCI) program, a new report from Chicago-based Aon Benfield states.
The current SRA is set to expire after the 2010 crop insurance year, and early proposals drafted by the USDA agency that administers the program, the Risk Management Agency (RMA), indicate significant structural and economic changes terms are being considered for the new SRA.
The report predicts that the proposed cuts would likely reduce reinsurers' expected profit by 20 to 30%, which could lead to some companies withdrawing from the program or scaling back their capacity.
"Our study reveals that over a 10-year period, reinsurers participating in the MPCI program have experienced favorable returns due to relatively low loss experience resulting from few adverse weather events,” Joseph Monaghan, head of Aon Benfield's Agriculture practice group, said in a statement. "However, the proposed changes to the program would have the likely effect of reducing participants' margins, which could see potential reductions in capacity. Those reinsurers providing cover for the program on a quota share basis may reduce their participation as well, which could in turn reduce the ability of cedents to provide MPCI."
The crop study highlights that if the latest RMA proposals had been in place from 1998 to 2008, participating insurers' underwriting gains would have been reduced by nearly $560 million.
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