News Room
Crop Insurance Industry Fights Back Re: Farm Bill Cuts
House farm bill action on crop insurance programs gets industry attention
by Jim Wiesemeyer,via a special arrangement with Informa Economics, Inc.
U.S. crop insurance industry lobbyists are starting to fight back as farm bill writers cut their programs in order to find budget offsets for additional farm bill spending.
Message received. Talks with crop insurance industry officials make it well aware the crop insurance industry is not enamored with the House version of the Farm Bill. More to the point, it scares the heck out of them, as one put it, not just because it reduces the opportunities for profit but creates a scenario that could cripple the private sector's future participation.
A raid underway? One industry contact said, Cutting the expense reimbursement another 2.9 percent and raiding underwriting gains for, at a minimum, 12.5 percent will put entire program at risk. It is such a poorly crafted policy to sacrifice the long-term viability of the program for relatively short-term benefits.
Easy pickings. Another crop insurance official said the House farm bill action was done, =E2=80=9Cnot because they had evidence that profits were excessive or that companies were somehow making money off of the reimbursement but based upon the reality that there were limited places to get the dollars needed to fund other programs. Insurance companies are easy targets. Who is going to feel sorry for them? How many constituents would come to their defense?
A recent congressional hearing on the crop insurance industry, said one industry leader, =E2=80=9Cwas nothing more than a contrived hatchet job based upon opinions and half truths and almost totally devoid of facts. They chose the best 5 years the program has ever had and portrayed this as the norm. They incorrectly equated underwriting gains as profits - they are two entirely different things. Most companies' average expenses currently are 26 percent. Reimbursement averages less than 21 percent. Who makes up the 5 percent difference?
Companies do. These are subtracted from whatever underwriting gain there may or may not be. The past 5 years 17 percent has been typical. Subtract 5 percent from 17 percent and the true profit is only 12 percent - well within what is considered reasonable. That is a best-case scenario. What about years where the underwriting gain do not exist or are negative? This happens and will happen again.
Weather woes ahead. When a nation-wide drought event occurs, companies will experience huge underwriting losses that will be exacerbated by big deficits in expense reimbursement, crop insurance industry officials explain. Under the current structure, one industry insider said, this would be bad enough, under the House version of the Farm Bill, Closses will be unsustainable for many if not most current writers. The topper was when they decided to they would "tax" us, at a minimum, 12.5 percent on the quota share. The reinsurance community just loves that one!
The only explanation for all of this, conclude industry officials, is the need to find bucks somewhere and Ccrop insurance was one of the few areas they could get it. Another contact added, The only way they could justify this was to make the industry out to be bandits and highwaymen. Of course they also had to ignore all of the studies that have been done over the years that consistently show the same thing - the average rate of return in the crop insurance business is well within industry norms (10-15 percent).
Study results finally revealed. Several crop insurance industry contacts noted a study commissioned by USDA's Risk Management Agency (RMA) in 2002, prior to the last SRA negotiation. It was done by Milliman Roberts. RMA promised to share the study with the Industry, but an industry contact said that =E2=80=9Cwhen it showed what the Industry had been saying all along they chose not to share it. It was finally acquired through a Freedom of Information request.
Comments: There are always two sides to an issue and the above gives the crop insurance industry their side in what to date as been a one-sided argument of grabbing funds to offset increases in farm bill spending elsewhere. I will have more on this issue ahead -- especially because House Ag Committee Chairman Collin Peterson (D-Minn.) has indicated that whenever the new farm bill is completed, his next priority is a review of USDA's RMA and the crop insurance programs, including new legislation.
Source: AgWeb.com
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