CHICAGO -- Aon Benfield released its analysis of the U.S. crop reinsurance market Friday, which reveals that proposed changes to the Standard Reinsurance Agreement by the USDA could induce challenging market conditions for reinsurers participating in the Federal insurance program.

The report reveals that the proposed cuts would likely reduce reinsurers' expected profit by 20 percent to 30 percent, which could lead to some companies withdrawing from the program or scaling back their capacity.

The Multi-Peril Crop Insurance (MPCI) program is a Federal initiative that provides American farmers with a range of insurance policies designed and delivered through 16 private crop insurance companies.

Participating insurers are subject to the Standard Reinsurance Agreement (SRA) -- a contract that defines reinsurance purchases, gain sharing and expense reimbursement.

With the SRA set to expire after the 2010 crop insurance year, terms are currently being negotiated for 2011 and beyond.

Early proposals drafted by the USDA agency that administers the program, the Risk Management Agency (RMA), indicate significant structural and economic changes that would result in a meaningful reduction in the expected future profits for crop insurers.

Joseph Monaghan, head of Aon Benfield's Agriculture practice group, said: "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.

"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 USD560 million.

Reinsurers state that while the period witnessed relatively few crop losses, the potential for significant losses still remains. Additionally, the RMA has proposed significant changes to the expense reimbursements. If these changes had been in place in 2009, crop insurer profits would have been reduced by more than $300 million.

Monaghan added: "In recent years, an increased number of reinsurers have started to write crop reinsurance, primarily attracted by the low volatility and diversification of this line of business. As a result, terms and conditions for crop reinsurance have become more competitive and insurers have benefited from lower pricing.

"Currently, quota share reinsurance is generally priced at low single digit expected margins by reinsurers. Reinsurers may be unwilling to support their renewal treaties at the expiring terms given the erosion in expected economics under the proposed SRA. Reinsurers may either discontinue their support for crop insurance or demand lower ceding commissions and profit commissions for continued support, which will in turn put pressure on participating insurers."

A full analysis of the MPCI program is contained within the Aon Benfield study.

Aon Benfield's Agriculture Specialty Practice Group designs innovative tools to help clients evaluate the profitability of their agents' portfolios, quantify commodity price/yield correlation and volatility, and accurately assess loss development. We have developed a producer-level Federal Crop Insurance Corporation (FCIC) fund allocation model, Aon Crop Reinsurance System (ACReS), which optimizes a client's cessions to both federal government and private reinsurance facilities.

SOURCE: Aon Corporation.