Crop insurance gears up for greater expectations, greater scrutiny

By Sara Wyant

© Copyright Agri-Pulse Communications, Inc.



BONITA SPRINGS, Fla., Feb. 9, 2015 -- Two weeks after the 2014 farm bill was completed, Risk Management Agency (RMA) Administrator Brandon Willis wrote a memo to Agriculture Secretary Tom Vilsack, listing the required crop insurance changes and the timeline of when those changes could be available. He changed the timeline three times, carefully noting the changes in red.

But in every single place where the timeline changed, it was because RMA was ahead of schedule not behind, Willis told participants attending the Crop Insurance Industry annual convention here.

“To be where we are today is a tremendous accomplishment. We should all be proud of it. Expectations were not just met, they were exceeded,” Willis told the crowd of crop insurance agents, approved insurance providers, reinsurers and industry experts.

But he also cautioned that - with crop insurance now being considered the “linchpin” or the “cornerstone” of the farm safety net, this type of heightened performance and scrutiny could be the new normal.

“It's tempting to believe that the recipe that put crop insurance in the position it is in today is the same recipe that will lead to success four years from today (when the current farm bill expires),” Willis explained. He offered two reasons why he believes more changes will be required.

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“First, there are greater expectations. People expect more from crop insurance today than they did five years ago.”

And secondly, “Whenever there is increased funding there is going to be increased scrutiny.”

In addition, he said members of Congress - including many who don't serve on the agriculture committees - have different expectations than in the past.

“They want to know when we are going to have crop insurance in their area for growers who don't have it now,” he added. In addition to several other changes under way, the RMA is already planning to add coverage for tomatoes, dried beans, dried peas, almonds and apples in 2016, looking to expand the Supplemental Coverage Option (SCO) to 40 additional crops, trying to add Stacked Income Protection (STAX) coverage in counties where there is no existing underlying coverage, and searching for ways to improve risk management for livestock.

Willis also said his agency will be “doing a top to bottom review of payments and everything we do … to make sure our processes are doing what they need to do for this day and age.”

At the same time, the crop insurance industry is gearing up for what they describe as “inevitable” political attacks as program offerings and costs continue to expand.

“Make no mistake, crop insurance's days of flying under the radar are done,” said Tim Weber, chairman of the American Association of Crop Insurers (AACI) and National Crop Insurance Services (NCIS), in his opening convention statement.

“We have a great story to tell, and if we don't tell it, then no one will - certainly not the way it must be told,” Weber said. 

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The National Sustainable Agriculture Coalition also expects Congress to take another look at the farm bill's crop insurance provisions, should lawmakers pursue what is called the reconciliation process. In a recent blog, NSAC explained that, “Under normal circumstances, because Congress only takes up the farm bill every five years, there would be no chance for these reform proposals to see the light of day in Fiscal Year 2016. However, it is possible that in the coming months Congress will pursue budget reconciliation - a process that instructs certain authorizing committees to make policy changes to reduce the deficit. If the Agriculture Committees were to be instructed to make spending cuts, crop insurance reform would certainly be on the table in FY 2016."

Weber and other crop insurers expressed disappointment in recent statements by Agriculture Secretary Tom Vilsack, who told reporters that the average rate of return on crop insurance ranges between 14 and 15 percent.

“The secretary is pointing to revenue projected by the USDA, not what has actually materialized in the marketplace,” said Tom Zacharias, president of NCIS.  “And the budget proposed by this administration would only further jeopardize the farm safety net."

Indeed, RMA points out that the Standard Reinsurance Agreement (SRA) - the contract between the industry and federal crop insurance providers that was last negotiated in 2011 - does not require but simply targets the rate of return on retained premium at 14.5 percent.

Depending upon the losses from each year, some years will be higher and some will be lower, as noted in the graph below, which illustrates the rate of return on retained premium from 2003 to 2013.


Returns were significantly higher before the most recent changes. Due to the 2012 drought and other changes, the rate of return was a negative 15 percent, while improving to 7 percent in 2013, according to RMA data.

Weber said returns on retained premium have averaged only 6 percent over the four-year period since the SRA was last negotiated.

“And because these calculations only measure gross revenue, not net profit, the actual financial pain has been far greater. When expenses are subtracted from gross revenue, average net profit since 2011 has been less than 1 percent, with the industry experiencing negative returns in 2012.”

This “falls well short of the averages for other lines of property and casualty insurance,” Weber emphasized.

In addition to changes made in the SRA, Weber explained that unexpected premium reductions implemented by the USDA in 2012 as a result of new ratings, $600 million a year in reduced funding under the SRA, increased regulatory burdens, falling crop prices, and bad weather have all led to poor financial performance in recent years.

The worst year, 2012, saw companies absorb $1.3 billion in underwriting losses when premiums collected failed to cover indemnities paid out during the record drought.

“Companies need to make a reasonable return on their investment to stay in business...but we cannot do it for free, or worse yet, a negative return," Weber said.

Both Rep. Mike Conaway, R-Texas, and Sen. Pat Roberts, R-Kansas, chairmen of the House and Senate Agriculture Committees, appeared via video at the convention to also underscore the crop insurance challenges ahead.

Conaway highlighted the growth in the crop insurance industry since 2000, while noting that “the last seven years have not been nearly as kind.”

“Despite some $17 billion in cuts to crop insurance, some are pushing for even more. They bill it as real reform, but we know that the real end game is to kill crop insurance,” he added.

“The farm bill debate gives us a glimpse of what we can expect as we consider future budget and appropriations bills. Opponents want to make your crop insurance information public so environmental groups can post information on their websites out of context and to your detriment. They also want to limit premium support, they would impose and AGI (adjusted gross income) test on crop insurance and they want to further slash A and O (administrative and operating expenses) even more,” Conaway said.

Roberts said he would continue to “protect, preserve and improve” crop insurance, which he describes as the “number-one risk management tool in every farmers' tool box.

“We have expanded coverage to more acres, crops and producers than ever before while avoiding costly ad hoc disaster programs.

“Those are a disaster to pass and a disaster to implement,” he added.

However, he agreed that crop insurance continues to be a target for cuts.

“Together, we must be willing to tell stories of those great successes of this public/private partnership.”

 

(This story was updated at 8:05 p.m.)

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