Private Crop Insurers Oppose Funding Cuts

January 22, 2010

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, which represents the 15 insurers participating in the public-private cooperative program.

The cuts are included in a proposal for the 2011 Standard Reinsurance Agreement (SRA). The SRA is the contract under which the private insurance companies 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 Bob Parkerson, president NCIS. “The industry supports thinking about change, but it has to make sense for the government, industry and producers.”

RMA says the new agreement would better align the administrative and operating (A&O) subsidy paid to insurance companies closer to actual delivery costs, while also 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. Meanwhile, the number of total policies dropped slightly from 1.3 million in 2000 to 1.1 million in 2008.

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

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.

“This is likely to lead to more consolidation among the already shrinking industry and cause many of the 18,000 jobs associated with this industry, many in rural America, to be lost,” said NCIS.

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 in 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 told agents on its Web site after reviewing the SRA proposal.

In addition to the proposed cuts in the A&O subsidy, the SRA changes would impose additional costs of more than $100 million to comply with new program initiatives and information technology requirements, said NCIS.

According to NCIS, there have been various proposals to reduce overall federal spending on crop insurance over the past few years and the program is already dealing with having to find $5.6 billion in savings over the next 10 years under the 2008 Farm Bill. Now, NCIS maintains that RMA proposes to implement the “largest funding cuts ever for the industry” at its own discretion.

“We truly hope that USDA and RMA will be willing to sit down with us soon and go through a true negotiation process for this SRA,” said Parkerson. “The industry has many good ideas to offer, based on years of analysis, much of it by third party accounting firms. I know we can work this out to the benefit of all interested parties without wreaking havoc with a public/private partnership that has been working the way Congress intended for it to work for the last 30 years.”

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

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