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Will Proposed Cuts Harm Delivery of Crop Insurance?

March 24, 2010
By: Sara Schafer, Farm Journal Media Business and Crops Editor
 
 

Will proposed cuts harm delivery of crop insurance?


William Murphy is the administrator of USDA's Risk Management Agency.

> Seeking to Cut Excess Payments

USDA has proposed a Standard Reinsurance Agreement that intends to smooth out the highs and lows of insurance risk. It will also offer financial incentives to provide service to underserved crops, areas and farmers. It will produce significant savings to American taxpayers, while not affecting farmer costs.

Government payments to crop insurance companies have more than doubled, from $1.8 billion in 2006 to $3.8 billion in 2009, primarily because of the commodity price spike. The number of policies delivered has dropped.

We expect a final Standard Reinsurance Agreement by April. We believe it will lead to a stronger federal crop insurance program that helps all producers continue to manage their risk in every region of the country. In addition, we think it will be more financially sustainable and responsible for taxpayers. 



Steve Harms is president of Rain and Hail LLC, one of the nation's largest crop insurance companies.


> Complexity Adds to Costs

Delivering the federal crop insurance program has become increasingly challenging. The administrative and operating subsidy, designed to reduce the delivery cost to keep farmers' premiums affordable, has dropped from 36% of premium in the 1980s to 19% for 2009. A 2008 farm bill provision delays payments to companies beginning in 2011, adding to cash-flow needs.

At the same time, the program's expansion and additional coverage choices add complexity and boost costs for computer, training and loss adjustment. 

Given existing challenges, once the 2011 Standard Reinsurance Agreement is finalized, companies will need to reassess their geographic footprint and the number of employees and adjusters who assist agents and policyholders. Service processes and innovations will also need to be re-evaluated. 



Bob Parkerson is president of National Crop Insurance Services, a crop insurance organization.

> Deep Cuts Jeopardize Delivery

The Risk Management Agency (RMA) proposal to reduce funding $4 billion in the next five years in addition to the $6.4 billion cut mandated by the 2008 farm bill could degrade service.  

Cuts in payments to deliver the program and in underwriting gains will impair many of the 15 private insurance companies, especially the small and medium-sized ones. This is likely to lead to more consolidation in an already shrinking industry, especially given that RMA changes already require upgrading computer systems and technology, more training and new reports at an estimated cost of $100 million.

It could eliminate many of the more than 18,000 associated jobs. There will be fewer employees, fewer offices, less time with clients and an inclination to focus on the profitable customers. Farmers will have to travel farther, and some states may end up with one crop insurance company.



Bruce Babcock is director of the Center for Agricultural and Rural Development at Iowa State University.

> Large Amounts of Excessive Support

Applying economic analysis to the crop insurance industry indicates annual subsidies could be reduced by more than $1 billion without adverse impacts on program effectiveness. 

The crop insurance industry is not really competitive because the government sets the premiums and dictates the products companies can offer. They do compete through agent commissions, however; those with higher commissions tend to increase their market share.

Agent commissions received per policy sold increased by a factor of 4 between 2001 and 2008. Adjusting for general wage inflation reveals that the minimum pay necessary for an agent to provide the same level of service in 2008 as 2001 was $426 per policy. They actually received $1,442. Given that 1.148 million policies were sold in 2008, taxpayers provided $1.165 billion more than necessary.



Top Producer, March 2010

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