Private Crop Insurers Oppose Funding Cuts

The private crop insurance industry is blasting a proposed restructuring in the crop insurance program they say would cut $4 billion – or $800 million a year – over the next five years. The proposal by the U.S. Department of Agriculture and the Risk Management Agency (RMA), which manages the federal insurance program, would also impose as much as $100 million in additional costs on private insurers, according to the National Crop Insurance Services (NCIS), which represents the 15 insurers participating in the public-private program.

The cuts are included in a proposal for the 2011 Standard Reinsurance Agreement (SRA). The SRA is the contract under which the private insurers deliver the federal crop insurance program to farm producers. The 2008 Farm Bill authorized RMA to renegotiate the agreement which was last negotiated for 2005.

“These are pretty dramatic cuts based on little or no supporting research and data,” said NCIS President Bob Parkerson. “The industry supports thinking about change, but it has to make sense for the government, industry and producers.”

RMA says the change would better align the administrative and operating (A&O) subsidy paid to insurance companies closer to actual delivery costs, while providing carriers with a revised but still reasonable rate of return.

“The new agreement will also provide insurance companies with greater flexibility for their operations and financial incentives to increase service to underserved producers and areas, while ensuring that taxpayers are well-served by the program,” according to the RMA.

RMA data shows that annual insurance industry payments have doubled from $1.8 billion in 2006 to an estimated $3.8 billion in 2009 based on the terms of the existing SRA. The number of total policies dropped slightly from 1.3 million in 2000 to 1.1 million in 2008.

In preparing to rework the SRA, RMA hired Milliman Inc. to review historical rates of return and determine what a reasonable rate is for the crop insurance industry.

Out of the $4 billion proposed in cuts, $2.2 billion come from A&O, and $1.8 billion come from underwriting gains. Private insurers and their agents have warned that the changes would reduce private insurers’ incentive to invest in the program and possibly force smaller carriers to exit the program.

The A&O subsidy includes money for commissions paid to agents, who expressed concern over the effects on farmers’ access to the program.

“Specifically targeting A&O, as this draft of the SRA does, would make it very difficult for many agents to continue to serve farmers and ranchers in certain areas, as well as provide the essential services they do to the program. We are letting Congress know that in these uncertain economic times, it is essential to preserve rural jobs and the safety net for farmers and ranchers, not attempt to gut the program in the way that this SRA would,” the NACIA group stated on its Web site.

The SRA changes would impose additional costs of more than $100 million to comply with new program initiatives and information technology requirements, said NCIS.

The crop insurance program must find $5.6 billion in savings over the next 10 years under the 2008 Farm Bill.

NCIS maintains that RMA is proposing the “largest funding cuts ever for the industry” at its own discretion. The NCIS hopes that USDA and RMA will be open to a true negotiation for this SRA, Parkerson said.

In 2008, the federal program protected $89.9 billion dollars in crop value in the U.S.

Midwest 2008* Top Crops by Acres Planted

*2008 is the latest year for which figures are available.
Source: USDA Risk Management Agency