Weathering the Storm: How Davies Helps Farm Mutuals Adapt

With their deep roots in local communities, farm mutual insurance companies are facing unprecedented challenges. From catastrophic storms to tightening reinsurance markets, these insurers are feeling the squeeze. We sat down with Mark Brannon, Director and Consulting Actuary at Davies Group, to explore how actuarial analysis and a commitment to serving their policyholders are helping these companies navigate the storm and prepare for a brighter future.

Sitting Down With Mark Brannon

MA: Hi, Mark! Thank you for taking the time to chat with me about farm mutual insurance companies and how they’ve been affected by unpredictable weather. Before we get started, can you do an introduction and tell us about your role at Davies?

MB: Thank you, Madelyn. My current role at Davies is Director and Consulting Actuary in the Actuarial Solutions division.  I lead many consulting engagements in various practice areas, with personal and commercial property insurance as the primary focus of my practice.  I started my actuarial career in 1987 with the Cotton States Mutual Insurance Company in Atlanta, Georgia. I moved on to State Farm Fire and Casualty Insurance Company in 1990. I spent eight years focused on property insurance in several regions of the country, with the Southeastern states receiving most of my attention.  I joined the consulting firm of Merlinos  & Associates in 1998 in the Atlanta area, and property insurance continued to be a primary focus of my practice. Merlinos joined the Davies Group in 2021, and I continue to consult with property insurers across the country, focusing on serving mutual insurers who have been serving their communities for many years. The increased frequency of severe convective storms and tropical weather events has materially impacted recent experience for mutual insurers.

MA: Thank you for sharing your rich background with us. I’m very eager for us to dive right in. This entire discussion was born from a LinkedIn post you shared after attending the Minnesota Association of Farm Mutual Insurance Companies (MAFMIC) Conference in February. Can you tell us more about the event and share some insight on farm mutuals and what they do?

MB: MAFMIC is an association of farm mutuals in Minnesota that serves its members through advocacy, education, and services. I met with many company employees and board members at their annual convention in February. Due to the impact of severe weather events in the past few years, I heard about the current challenges in providing property insurance coverage to farmers in their areas of operation. The association is focused on providing resources and assistance to members working extremely hard to maintain their ability to provide insurance to their loyal policyholders.

MA: So, given your deep understanding of farm mutuals and your relationship with the MAFMIC, was there a particular moment or series of events that made you realize the severity of this industry’s challenges?

MB: In 2020, I worked with several small mutual insurers in the Northeast and Mid-Atlantic states, providing actuarial services related to ratemaking and loss reserving.  That August, a devastating Derecho storm and tornado outbreak produced unprecedented damage across the entire Great Plains and Midwest region of the country.  Many insurers could not survive the resulting wave of claims and had to either merge with larger, more stable companies or just go out of business.  This event produced shockwaves throughout the farm mutual industry. It began a process of major structural changes in how farm mutuals could operate with dramatically lower reinsurance availability and cost increases.  Reading about the impact of that event and seeing how events in 2022-2023 continued to impact farm mutuals and all property insurers adversely, I began to see how we could serve these companies to regain their financial strength and continue to serve their policyholders.

MA: What you said makes me curious about something. Correct me if I’m wrong, but many people providing actuarial analysis seem to focus on larger insurance segments. What drew you to specifically focus on the challenges and solutions within the farm mutual insurance space?

MB: State laws usually categorize farm mutuals as County mutuals or Statewide mutuals.  County Farm Mutuals are most vulnerable to losing their financial capacity to provide insurance due to their concentration risk, meaning that their insureds are all located within a fairly small geographic area, which results in highly volatile property losses each year.  They also have relatively low levels of surplus, which minimizes the cushion they have to withstand catastrophe losses up to their reinsurance retention. These county mutuals are operated by dedicated people, with farmers serving on many boards of directors.  These companies are the foundation for the local economy, which affects me most, realizing that so many lives are affected by whether these companies can survive or not.

MA: That makes a lot of sense. I want to revisit something you mentioned in your post. Catastrophic storms are the key driver of instability.  Could you elaborate on the specific types of losses farm mutuals face due to these extreme weather events?

MB: The past five or six years have seen an increase in the number and severity of severe convective storms and tornados in these regions.  Farmers have a lot of property exposure in addition to a primary dwelling—barbs, sheds, fences, irrigation systems, to name a few.  When a devastating storm destroys this property, it affects their living conditions and causes their businesses to shut down for a period of time.  Not to mention that there will be losses to what these farmers produce – livestock and crops will also be lost.

MA: And have you found that these trends are localized to specific regions, or is this a nationwide challenge farm mutuals face?

MB: The current crisis I am focused on is primarily in the Great Plains and Midwest region, but many areas in the West face their own issues related to drought and wildfire hazards.  So, different regions have their own mix of weather-related events that cause widespread damage.  In the past few years, all regions have seen increased losses above historical trends.

MA: That’s interesting, and it makes sense that every region will have unique challenges. How are farm mutuals coping with these rising costs?  Are some looking beyond traditional reinsurance for protection?

MB: Farm mutuals face three primary issues today—can you get any coverage at all, and if so, how much have your occurrence and aggregate loss retentions increased, and how expensive is the limited coverage you can buy?  A common situation in 2023 was that the farm mutual’s per-event loss retention doubled or even tripled.  For example, a company with a retention level of $2 million in 2022 saw an increase of 6 million in 2023.  That immediately exposes $4 million more of the company’s surplus to loss from an event that could occur any day during the year.  This weakens the company’s ability to ensure all loyal policyholders in the coming year.  Not to mention that the reinsurance coverage they secured costs significantly more. This financial stress requires the companies to implement rate increases, increase policy deductibles, and reduce the level of coverage from replacement cost to ACV, among other operational changes. This also moves companies to look for sources of capital to bolster their reserves.  There is a lot of activity currently in developing new sources of investment and funds to update their insurance policies and computer systems.

MA: I’m starting to see how all these factors affect one another and what they mean for the industry overall. I’d like to hear more about Davies’s role here. How would you say Davies’ actuarial consulting go beyond basic number-crunching to provide high-value guidance?  What specific insights can you offer that might not be readily apparent?

MB: As a consultant, my role is not just to provide the results of an actuarial analysis based on a current evaluation of their past experience, although that is the starting point.  Understanding the insurer’s history as well as their short and long-term goals is critical in crafting individualized guidance on how changes in underwriting guidelines, policy language, modifications to sub-limits and deductibles, and other changes can improve their immediate situation, as well as set them on their way to recovery and growth. Another area of expertise at Davies that benefits our client is our understanding of state regulatory requirements and our trusted relationships with state regulators in all states.  Guiding without understanding the state regulatory and policymaking operations can waste a lot of time, effort, and money.

MA: Speaking of time, effort, and money, I’d assume that for efficiency and effectiveness, response time is also critical in these situations. Can you provide an example of a client scenario where Davies’ rapid actuarial analysis was instrumental in a farm mutual’s decision-making?

MB: As 2023 entered the fourth quarter, we heard from companies whose reinsurance programs were renewed on January 1, 2024, and they needed material rate increases to meet the premium requirements.  Within a month, we can go from data gathering to producing our actuarial analysis for our clients and then have time to discuss how the company can achieve their needs by alternate means, such as raising deductibles, modifying coverages, and reducing policy counts in unprofitable areas.   Rate filings for this company were required, and we assisted them in preparing the actuarial support to include in the submission.

MA: It sounds like the team was ready to switch gears and meet the January deadline. That’s awesome! As you continue to work with farm mutuals and look toward the future, do you think the industry needs long-term reform in how farm mutuals do business? Could this include greater consolidation, the formation of co-ops, or other structural changes?

MB: Well, the answer is yes, and it has already happened over the past few years.   We will see continued consolidation through mergers and associations, a predominant solution in many cases.  New opportunities arise from the entrance of private equity, which provides capital and other resources to farm mutuals.

MA: This was so insightful, informative, and fun! Thank you for taking the time to share your knowledge with us, Mark. Are there any final remarks you’d like to share that I might have missed?

MB: The situation we are facing with not just farm mutuals but all small to medium-sized property insurance companies is mainly driven by the weather, which, in the short term, is not under our control and is very unpredictable.  But these are exactly the situations insurance was invented to address by pooling resources among like-minded property owners to create tools that enable all parties to sleep at night with peace and security.

Final Thoughts

Mark’s insights paint a picture of an industry in flux. It’s clear that while farm mutual insurers face challenges, they also possess the resourcefulness and dedicated personnel to adapt. Davies’ work highlights how combining actuarial expertise with a deep understanding of local markets is essential. With a combination of actuarial expertise, insurer determination, and perhaps a dose of policy reform, farm mutuals will weather the storm and emerge stronger than before.

On behalf of Davies, we thank Mark for sharing his valuable perspective.

Want to learn more about how Davies can support your business growth? Get in touch with Mark Brannon at Mark.brannon@us.davies-group.com

Learn more about our actuarial solutions by visiting https://davies-group.com/northamerica/solutions/insurance-services/actuarial-solutions.