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Published July 20, 2010, 08:14 AM

Crop insurance companies agree to subsidy cuts

WASHINGTON — Agriculture Secretary Tom Vilsack announced July 13 that all 16 private crop insurance companies met a July 12 deadline to sign the five-year standard reinsurance agreement that USDA’s Risk Management Agency has been negotiating with the companies since 2009.

By: Jerry Hagstrom, Special to Agweek

WASHINGTON — Agriculture Secretary Tom Vilsack announced July 13 that all 16 private crop insurance companies met a July 12 deadline to sign the five-year standard reinsurance agreement that USDA’s Risk Management Agency has been negotiating with the companies since 2009.

Under the new agreement, crop insurance companies will be paid $6 billion less over 10 years than they would have been paid under the previous agreement. The Obama administration initially proposed cutting their payments by $8 billion, but the administration reduced the cut to $6 billion. RMA officials said the cut was appropriate because higher commodity prices had triggered higher premiums and, in turn, higher payments to the companies to operate the program. The agreement affects the operating payments, not the premiums.

Vilsack already had announced USDA would put two-thirds of the savings or $4 billion toward reducing the federal deficit.The other third or $2 billion will be used to improve certain risk management programs and to increase the conservation budget.

Ensuring funding

Meanwhile, a USDA spokesman responded to questions from 17 senators including Minnesota Democrat Amy Klobuchar about whether USDA had the legal authority to include a provision that restricts the commissions that companies can pay crop insurance agents.

“As a regulator of the crop insurance program, RMA has the authority to take steps to ensure the viability and integrity of the crop insurance delivery system,” spokesman Justin De Jong said in an e-mail. The cap on commissions, DeJong said, will “ensure that insurance companies have sufficient funds to pay the other operating expenses in years in which there may be little or no underwriting gain.”

In 2002, American Growers Insurance Co., which then was the largest crop insurance provider, failed in large part because of high commissions paid to retain and acquire agents, a USDA source noted.

“It is eight years later and there are numerous (approved insurance providers) whose expenses are now greater than their (administrative and operating expenses) due mainly to the escalation in agent commissions,” the source continued. “These AIPs are again relying on large underwriting gains to operate the program. The real possibility of even a modest loss year, such as 2002, creates a situation where several AIPs could be at risk for failure and thus jeopardize the entire delivery system.”

Cap complaints

The USDA official said that USDA included the cap on commissions because “even in the face of cuts in (administrative and operating expenses) imposed by Congress, AIPs have done little or nothing to contain the escalation in agent commissions and ensure they have sufficient funds to pay operating expenses without resorting to the reliance on uncertain underwriting gains.”

The senators questioned whether USDA could restrict compensation paid to contractors, subcontractors and agents of contractors, but the USDA official said, “The Davis-Bacon Act was created for this very purpose” and that other federal acts also restrict compensation.

Crop insurance agents have complained bitterly about the cap, saying that it will reduce quality of service to farmers. But farm leaders have said that under the old system, agent commissions have gotten too high for the amount of work performed.

The companies’ decision to sign the agreement despite protests from the agents also indicated a division between the companies and the agents over the issue. One crop insurance company lobbyist described the commission cap as a provision “to save the companies from themselves.”

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