Agents Cry Foul Over Crop Insurance Premium Discounts

Independent agents are up in arms over the federal government’s decision to expand a pilot program they say threatens to cut them out of the crop insurance loop.

The Risk Management Agency (RMA), the U.S. Department of Agriculture organ that oversees the federal crop insurance program, recently approved the application of a managing general underwriter and its carrier to offer insurance at discounted rates for all crops in 13 states.

Agent groups, most prominently the Independent Insurance Agents and Brokers of America (IIABA), are upset about the program because it allows the MGU, Crop1Insurance, to sell the discounted insurance directly to farmers online or over the phone.

The program was authorized by the Federal Crop Insurance Act and allows any insurer who can prove to RMA that it can operate at an expense level below the reimbursement amount established by the Federal Crop Insurance Corp. to pass on the savings to consumers. Crop1, whose market is the Occidental Fire & Casualty Insurance of North Carolina, was approved to offer what it calls the Premium Discount Plan last year and was re-approved in February by the RMA.

“On the surface it sounds like a great idea,” said Patrick O’Brien, a lobbyist for IIABA. “But crop insurance is a unique line of insurance. It’s not like auto or homeowners that can be done over the phone. There are rather technical questions that may come up. Agents can assist farmers with unit structures and yield guarantee weaknesses. It’s hard to believe that a grower will find this out from a computer screen. It’s just not the right idea at the right time for farmers. It severely undermines independent agents and undermines farmers’ overall ability to make sure they’re properly protected by this.”

Farmers don’t seem to mind the option, according to Crop1 Chief Operating Officer Rob Boysen. “We did $15 million [in premium volume] last year and expect it to grow significantly this year,” Boysen said. “It’s done real well. We actually have a lot of farmers telling other farmers about the program.”

Most farmers and agricultural producer lobbying groups wrote letters in support of the program during the regulatory comment period while agents were split on the matter, according to an RMA backgrounder. Overall annual premium volume of the crop insurance program is $3.5 billion.

Boysen said that while a “high percentage” of applications were submitted via the Internet, this was often done in consultation with a local agent providing counsel about the coverage options. While Crop1 works both with independent and captive agents, Boysen would not provide a breakdown of how much business was produced by each sector.

The IIABA’s O’Brien also charged that Crop1, the only provider to have applied to participate in the premium reduction plan, is on weak financial ground, citing Occidental’s “B+” A.M. Best rating.

“It’s gone under before,” O’Brien said. “There’s no telling if it won’t go under again.”

Boysen strongly disputed the charge.

“Occidental’s obligations under the PDP are guaranteed by its parents, IAT Reinsurance, which has over $500 million in surplus and is rated ‘A-‘ by A.M. Best,” Boysen said. “The reinsurance supporting the program has been placed with highly rated reinsurance companies so as to limit the liability which Occidental and IAT Reinsurance have retained net of reinsurance protection to less than half of a percent of IAT’s surplus.”

Boysen stressed that Crop1 and Occidental were required to provide documentation to RMA showing that they were financially sound and how they would save on operating and expense costs. Crop1 was formed to take advantage of the RMA’s pilot program.

RMA Administrator Ross J. Davidson echoed the sentiment.

“They primarily have to put forth a business plan and operational and financial plan and structure that would reflect their ability to offer top-quality service to [agricultural] producers at lower cost to them,” Davidson said. “If they cannot satisfy that requirement to stay within that threshold, they’re not authorized to offer the premium reduction plan or premium discount plan. It’s a matter of the company creating a cost structure that allows them to provide excellent service at lower cost and pass that on to the producer.”

O’Brien also charged that the pilot program was anti-competitive and vulnerable to cherry-picking by Crop1. He envisioned a scenario in which Crop1 would offer its discounts to all the largest and safest accounts. Davidson said that Crop1 has been warned in writing not to engage in such behavior and to offer insurance products for all crops and for agricultural producers of all sizes, though he said RMA has not received any policyholder complaints about the MGU.

“The one thing that underscores all of this is the fact that Congress anticipated that if there were some more efficient way to produce crop insurance that consumers should get the benefit of that,” Davidson said.

“The cost of risk management is always an issue with [agricultural] producers, who have a hard time keeping afloat anyway. This is just one way producers can receive that benefit.”