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Hidden Costs: Drought Crushing Crop Insurance Industry

Here’s another opportunity to lay out the real economic costs of climate change. Farmers had already prepared for extreme weather events by purchasing more and more crop insurance in recent years. So when a historic drought hit this summer, many crop producers had the ability to handle it, although livestock producers seeing a spike in their feed costs still face major challenges.

But for everyone who benefits from that relief from their crop failures, there’s the other side of the ledger. The insurance industry will take a massive hit from crop insurance payouts, and that could rebound back to the economy. The federal government will reinsure some of these losses from the industry. But others will come out of these companies directly, and rather than take reduced profits, the corporations could raise premiums or find other ways to pass the costs on.

Agricultural economists at the University of Illinois estimate the drought will trigger this year gross indemnities of roughly $30bn, with an underwriting loss of $18bn. Of that, the US government would shoulder around $14bn, while private sector insurers are likely to face a loss of $4bn, they said. Standard & Poor’s, the rating agency, put the losses of the private sector a notch higher at $5bn.

“The US drought is indeed a ‘catastrophic’ event,” Gregory W Locraft, insurance analyst at Morgan Stanley in New York, wrote in a recent note to clients, adding that it “is likely the largest [insurance] crop loss in history.”

Gary Schnitkey and Bruce Sherrick, at the University of Illinois, warned some of the US crop insurers are owned by publicly listed companies, “who may not have realised the scope of losses that their crop insurance subsidiaries could generate”.

Some of these companies are booking smaller profits. But the potential pass-through damage represents a cost from climate change that may not otherwise get calculated. Those costs are very real, in terms of economic activity.

And this doesn’t take into account all the other economic losses from a historic drought like this. In a smaller state like Arkansas alone, the cost is expected to be in the billions, when you take into account higher commodity costs, food production slowdowns, livestock issues, depletion of reservoirs, and so on. We simply don’t talk enough about the cost of inaction, relative to the massive amount of talk about the costs from actions to arrest the increase in overall temperature on the planet.

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David Dayen

David Dayen