Vilsack and RMA Administrator Have Different Views on Obama's Proposed Cuts to Crop Insurance

September 21, 2011 10:26 AM
 

via a special arrangement with Informa Economics, Inc.

Vilsack supports, but RMA administrator says 'crop insurance has already paid its share'


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USDA Secretary Tom Vilsack on Tuesday said the crop insurance industry should be able to cope with the additional $5.7 billion in cuts as part of President Obama's deficit-reduction proposals. (Proposed crop insurance cuts totaled $8.3 billion, including producer-specific cuts.) But a recent update on the crop insurance program delivered by Risk Management Agency (RMA) Administrator Bill Murphy confirms that the budget proposals contained in the administration's plan did not appear to come from USDA. In a Sept. 19 presentation to a crop insurance conference in Minnesota, Murphy noted relative to the farm bill and the budget, "Crop insurance has already paid its share."

Vilsack's argument... from 14 to 12. Crop insurance companies' return on investment would be trimmed from 14 percent to 12 percent under the Obama/OMB proposal. Vilsack said that 12 percent return "is what will sustain the industry. The reality of what we face today is that we're faced with an unprecedented need to get our fiscal house in order. That's going to required shared sacrifice."

Opposition widespread. Farm-state lawmakers from both political parties, and several crop insurance industry groups have noted their opposition to the proposed crop insurance sector cuts.

The following is what Obama/OMB proposed for the crop insurance sector:

Reduce subsidies to crop insurance companies. Crop insurance is a foundation of our farm safety net. Our Nation’s farmers and agricultural bankers understand the value of this effective risk management program, and currently 83 percent of eligible program crop acres are enrolled in the program. However, the program continues to be highly subsidized and costs the Government approximately $8 billion a year to run: $2.3 billion per year for the private insurance companies to administer and underwrite the program and $5.7 billion per year in premium subsidies to the farmers. The Administration has made a continued effort to improve the crop insurance program by covering more crops, while implementing it more efficiently.

In 2010, the U.S. Department of Agriculture (USDA) and the crop insurance companies agreed to changes that saved $6 billion over 10 years from administrative expense reimbursement and underwriting gains while also improving service to underserved States. The Administration believes there are additional opportunities for streamlining of the administrative costs of the program. A USDA commissioned study found that when compared to other private companies, crop insurance companies’ rate of return on investment (ROI) should be around 12 percent, but that it is currently expected to be 14 percent. The Administration is proposing to lower the crop insurance companies’ ROI to meet the 12 percent target, saving $2 billion over 10 years. In addition, the current cap on administrative expenses is based on the 2010 premiums, which were among the highest ever. A more appropriate level for the cap would be based on 2006 premiums, neutralizing the spike in commodity prices over the last four years, but not harming the delivery system. The Administration, therefore, proposes setting the cap at $0.9 billion adjusted annually for inflation, which would save $3.7 billion over 10 years. Finally, the Administration proposes to price more accurately the premium for catastrophic (CAT) coverage policies, which will slightly lower the reimbursement to crop insurance companies. The premium for CAT coverage is fully subsidized for the farmer, so the farmer is not impacted by the change. This change will save $600 million over 10 years.

The Administration also proposes modest changes in subsidies for producers. Today, producers only pay 40 percent of the cost of their crop insurance premium on average, with the Government paying for the remainder. This cost-share arrangement was implemented in 2000, when very few producers participated in the program and "ad-hoc" agricultural disaster assistance bills were regularly enacted. The Congress increased the subsidy for most insurance coverage by over 50 percent at the time to encourage greater participation. Today, participation rates are 83 percent on average, and the rationale for high subsidy rates has weakened. The proposal would shave two basis points off any coverage premium subsidy levels that are currently offered above 50 percent, saving $2 billion over 10 years. Farmers who have premium subsidies of 50 percent or less would not be affected.

 

Comments: Mr. Vilsack, meet Mr. Murphy. In this case, it's not Murphy's law, but a guy who really knows his stuff.

This is another sign that the cuts suggested by the administration certainly did not come from the agency level. And, it's important to note that the $8.3 billion in crop insurance/sector cuts were likely used to offset the around $8 billion in costs that Obama needed to extend the controversial Supplemental Revenue Assurance Program (SURE) for five years. SURE is delivered by the government, while the delivery system for crop insurance is the private sector. Some see the SURE approach as the Obama administration's coming push to bring more of the crop insurance sector into the government arena.

 

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