WASHINGTON, Nov. 28 - The USDA’s Risk Management Agency (RMA) announced today that it will go ahead with the first phase of plans to update the methodology used to set crop insurance premiums, leading to lower insurance premium rates for many corn and soybean producers in the 2012 crop year and potentially other crops in the future.
The changes provide a more accurate reflection of risks, current yield trends and improvements made through biotechnology, according to RMA Administrator William Murphy (pictured above). But for some growers and crop insurance industry sources, there are still a lot of unanswered questions.
“We are improving the formulation of our rate-making methodology, and are moving to establish the most fair and appropriate premium rates for today’s producers,” Murphy added during a conference call with reporters this morning. “The world has changed as far as corn and soybean production goes.”
“On average, these new rates should reduce corn farmers’ rates by 7 percent and soybean farmers’ by 9 percent (for the 2012 crop year),” Murphy said. But in some regions, the reductions could be as high as 12% for corn and 13% for soybeans. Conversely, rates could also increase in some states and counties within states. (See maps below.)
Murphy described the changes as one third of the base rate expected with full implementation of both corn and beans, with the other two-thirds expected next year. For corn, the RMA is incorporating reductions that were previously available through biotech yield endorsements, which were discontinued for 2012.
The rate adjustment is based on findings of an independent study, conducted by Sumaria Systems Inc., and a peer review process, which RMA plans to post on their web site on Tuesday.
Murphy said the “vast majority” of reviewers basically supported the concept of moving to the new methodology with the major change being a switch back to a rolling 20-year average of production data, a method used prior to 1995.
“There was some concern about how we adjusted for weather in the pre-1995 period, so we are going to be doing more analysis on that,” he added.
“We want to make sure we get it right before we do the full implementation, so this will give us time and then hopefully, for the 2013 year for corn and beans, we will have it finalized.” Murphy said that RMA also anticipates having the methodology finalized for 2013 spring wheat, rice, cotton, and grain sorghum.
Estimating the impact of this change on crop insurance purchases, premiums paid and the overall level of federal subsidy is difficult to determine at this point. With corn and soybeans making up about 65% of the crop insurance business, the potential impact could be substantial.
“Historically, when we have decreased the rates, growers have reacted by increasing coverage,” Murphy explained. “We expect that will probably also be the same in this case, but it’s kind of hard to put a number on it; so we don’t know what the producer subsidy change is going to be.”
The National Corn Growers Association, which has long pushed RMA to make changes that reflect current yield trends and production practices, praised the announcement.
“NCGA has been working on this issue for more than eight years,” said NCGA President Garry Niemeyer, a corn farmer from Auburn, Ill. “We are pleased to hear our farmers will no longer be facing the continued widening gap between the loss for corn and the premiums charged to growers for policy coverage. This is a day long coming.”
Other industry sources expressed concerns about the lack of transparency, the uncertainty over the process and the rate increases that some growers could face.
Tom Zacharias, President of National Crop Insurance Services, says this decision, which RMA plans to initally phase-in just two days from now, introduces a “great deal of uncertainty.”
“We don’t know exactly what the final rates are going to be and how the impacts will permeate throughout the system. This decision was late in the game for the magnitude of the changes,” Zacharias explained.
“It’s important that we deliver the program effectively. Let’s make sure we know that with some degree of certainty and we are comfortable with the process that’s going to be implemented,” Zacharias added. “Farmers need to be charged the right rate. Theres no equivocation on that. But with the new system, how well do you know what’s right -- based on the information available?”
Former USDA Economist and Federal Crop Insurance Corporation Board Chairman Keith Collins, who now serves as a NCIS consultant, questioned the process and the fact that RMA has not yet provided responses to a number of industry concerns.
RMA said updated data pertaining to prevented planting, replant payment, and quality adjustment loss experience was also used in determining rates changes---raising additional questions about how those changes will also impact growers.
“Most growers will probably be overjoyed that they will see their crop insurance premiums decrease,” observed a Washington-based insider who follows the industry. “But when you look at the map, you also see states like North Dakota with an average increase of 7 percent for corn and Mississippi with an average increase of four percent for soybeans. I’d hate to be the crop insurance agent who has to explain those types of increases.”
Some of the most stinging criticism came from the Illinois Corn Growers Association, a state where crop insurance premiums for corn are expected to decline by an average of 12 percent.
Illinois Corn Growers Association (ICGA) President Jeff Scates commended Administrator Murphy's decision, but said the decision “falls short of what was earlier proposed.”
"Illinois corn farmers, in partnership with the National Corn Growers Association, have been working on this re-rating process for nearly 10 years and across multiple administrations," Scates said. "It took persistence, but that investment of time and energy will pay dividends as corn farmers in Illinois have made progress toward a more equitable premium system that has historically benefited crop insurance companies with premium overpayments."
"House Ag Committee Chairman Frank Lucas really complicated this process," Scates said. "His arbitrary objection to RMA's established actuarial system, followed by obstructionary tactics aimed at politicizing an action that should have been an ordinary course of RMA business, meant that the re-rate did not correct farmer overpayment as much as it could have. Lucas' actions really demonstrate he isn't interested in regional equity and what's best for family farmers."
Scates said the federally supported crop insurance system “was designed to have a loss ratio of 1.0. In theory, farmer paid premiums paired with USDA paid premiums, should result in an equal number of dollars paid out in claims over time.”
Murphy said that prior to 1995, the FCIC’s historic loss ratio was about $1.40, reflecting, in part, major crop losses in 1983, 1988 and the flood of 1993.
“That means, for every $1.00 of premium we took in we paid out $1.40 to $1.43. Since that time, it’s been down around 84 cents, so we’ve all seen a major change that occurred out there.”
Murphy acknowledged that there has been a lot of concern expressed that “this hasn’t been a very transparent process and it’s not open to discussion.
“I wanted to address that head on-- one of the core responsibilities of the agency is to establish the rating methodology. We do occasionally make adjustments. Prior to 1995 we did use the rolling 20 year, but then when we anchored back to 1975 and that’s sort of where we’ve gone forward.
“So by making this partial implementation at least we are showing the direction we are going. We are opening up the opportunity to do further analysis and redo.”
RMA will release actuarial documents by November 30, reflecting premium rates and other program information that will be effective for the 2012 spring crop season. Growers are advised to visit with their crop insurance agents for more details.
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