Crop Insurers Reluctantly Agree to $600 Million a Year Subsidy Cut

All 16 private insurance companies that participate in a federal crop insurance program have signed off on the new federal reinsurance agreement that cuts the subsidies they get by $600 million a year for the next 10 years.

The insurers reluctantly signed the 2011 Standard Reinsurance Agreements (SRA) with an overall $6 billion funding reduction.

“Our hands are tied,” said Bob Parkerson, president of National Crop Insurance Services. “The companies have no choice but to sign this SRA because, if they don’t, they cease operating and the safety net that America’s farmers and ranchers rely on so heavily would be disrupted.”

The USDA has contended that reductions are warranted because crop insurers have been making hefty profits. Industry groups argued that the companies need the subsidies to maintain high reserves in case of widespread crop disasters.

The agency says $4 billion of the savings will go toward reducing the federal deficit, while $2 billion will support risk management and conservation programs for farmers.

“The new agreement that we have now finalized lays the foundation for a more sustainable federal crop insurance program, reduces the federal deficit, and improves the farm safety net for producers by providing incentives for companies to sell policies in all areas so that farmers and ranchers across the country can access these critical risk management tools,” said Agriculture Secretary Tom Vilsack.

According to USDA, the new agreement will generally maintain the current Administrative and Operating (A&O) subsidy structure but limits payments based on high commodity price spikes.

The 2008 Farm Bill authorized RMA to renegotiate the agreement effective for the 2011 crop year. Due to significant increases in commodity prices in recent years, annual insurance industry payments more than doubled from $1.8 billion in 2006 to an estimated $3.8 billion in 2009 based on the terms of the previous SRA. Meanwhile, the number of total policies decreased from 2000 to 2009.

RMA contracted with Milliman Inc. to review historical rates of return and determine a reasonable rate of return for the crop insurance industry. The Milliman analysis showed that over the past 21 years, the crop insurance companies averaged a 17.0 percent return when the average reasonable rate for that period was 12.7 percent.

Premiums charged to farmers are not changing. Agent commissions, however, will be capped, which irks the Independent Insurance Agents & Brokers (Big “I”). The organization said the pact “unfairly restricted agents’ earning ability through arbitrary commission caps in an agreement in which the agents have no voice or ability to represent themselves.”

The Big “I” says the average commission rate has declined from 2008 to 2009. The agent cap does not impact the crop insurance budget, doesn’t save the federal taxpayer any money, and has no policy merit, according to the agents.

Vilsack said his agency “appreciates the efforts of the companies to negotiate a new agreement in good faith, with straightforward and constructive dialogue to develop an agreement that works for the companies, producers and taxpayers.”

Parkerson said that the private insurance companies will now need to evaluate how reductions will affect the quality of service they provide to producers, and work to maintain the financial reserves mandated by the SRA.

“I remember early on in this negotiation process reading that Secretary Vilsack said this is an easy product to sell,” said Parkerson. “It reminds me of a quote from Dwight D. Eisenhower when he said, ‘Farming looks mighty easy when your plow is a pencil and you’re a thousand miles from the corn field.'”

The sixteen companies that have signed the SRA are: