WASHINGTON -- The Agriculture Department's Risk Management Agency has proposed changes to the crop insurance program that Obama administration officials say will save taxpayers money and strengthen the program, but that crop insurance industry officials say will damage the industry and result in a lower level of service to farmers.
For farmers, the stakes are high. But figuring out who is right and who is wrong is difficult in this technical field. The proposal is for changes in the standard reinsurance agreement, the document that governs relations between the insurance companies and the government. It is renegotiated every few years to adjust to changing times.
The negotiations are expected to be completed by April or May, RMA Administrator Bill Murphy said in an interview. But the new agreement will not affect the 2010 crop year because it will not go into effect until 2011.
The negotiations will be dominated by the fact that as commodity prices have gone up in recent years, premium rates have gone up to cover the increased value of the crop. In turn, government administrative and operating expense payments to the companies have gone up because those payments are tied to the premium rates. RMA says the government's payments to the companies rose from $1.8 billion in 2006 to an estimated $3.8 billion in 2009.
Critics have said the companies and agents have gotten higher payments for serving farmers without going to additional work. An independent analysis of the crop insurance industry conducted by Milliman Inc. found that crop insurance companies had an annual average rate of return in the past years of 16.6 percent, while the insurance industry generally had a rate of return of about 12.8 percent. Murphy said he thinks the 12.8 percent rate of return to be reasonable.
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Congress in writing the 2008 farm bill already forced reductions of $6.4 billion in 10 years and used the money to pay for other Agriculture Department programs. Now crop insurance lobbyists say Obama administration officials have told congressional aides that they hope to cut the program by $4 billion in 5 years.
Midwest advantage
Murphy declined to confirm that figure, but said the real issues in the negotiations are the structural changes in the program that he thinks will improve the program in areas outside the Midwest and make the program cheaper for the companies to operate. Because losses in the Midwest are rare, though big and expensive when they occur, and losses in some other parts of the country are more frequent but less severe and less expensive, crop insurance companies prefer to do business in the Midwest and compete more for the business there, he said. That means farmers in the rest of the country do not have the same level of service and competition, he added.
Murphy said his first offer to the companies would "rebalance" the program so that the companies would have more of an opportunity to make a profit on insurance in other parts of the country.
When asked if Midwestern farmers need to worry that their insurance service will go down or become more expensive, Murphy said, "Midwestern farmers should not worry -- there will be plenty of profit to be made (by the companies), but in other areas there will be opportunity for expansion."
Government risk
He also said the government is going to assume more risk on the riskiest policies.
But lobbyists for the crop insurance companies and agents disagree with some of Murphy's assumptions and contend the cuts he wants are too deep.
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Murphy laid out the principles behind his proposal in an op-ed article in the Omaha (Neb.) World Herald Oct. 9 and said the "companies benefit from rapidly escalating profits at the expense of taxpayers" and that the program is in "urgent need of reform"
But David Graves, a lobbyist for the American Association of Crop Insurers, said in an e-mail response that Murphy's view "appears to be a misleading public relations attempt to disguise the detrimental consequences of the "concepts" and "numbers" contained in the first draft of the 2011 (standard reinsurance agreement) on the crop insurance program's delivery industry, rather than a well-reasoned analytical explanation of the government's proposal."
Graves said Murphy's comparison of data from 2006 and 2009 to demonstrate the need for reform was unsound and that he should have used a longer period to estimate sound premium rates and the gains and losses the industry is likely to see in future years.
Murphy also suggested that a drop in the number of policies written from 1.3 million in 2000 to 1.1 million in 2008, while administrative and operating payments rose indicated that those payments had risen too much.
Graves said Murphy's conclusion "is misleading because it omits the significant and substantial impact of government rules, regulations and other operational requirements on human resource and capital demands."
Graves also questioned the validity of the Milliman study, saying "Milliman and RMA have no accurate measure of the equity of the industry, so they assume one by allocating a portion of the entire property and casualty industry's equity to the crop insurance program. In other words, the equity of companies outside the crop insurance industry is assigned to crop insurance companies. This is done without regard to the reserves required by regulation and actually held by crop insurance companies and their reinsurers as back up for the policies they sell."
Murphy has asked the crop insurance companies to provide their response to the draft proposal by Jan. 15. Crop insurance lobbyists say they will comply with that request but are worried by the level of cuts demanded.
"If his proposed cuts are made in the delivery of the program, many companies and agents will be forced to withdraw from many areas of the country," Graves said. "The high-risk states, the so-called underserved farmers, and the smaller farmers will be hurt the most. Many will be unable to purchase crop insurance," he added.
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It's unclear how seriously either side's arguments should be taken since this is a business negotiation being conducted in public. Murphy dismissed industry complaints that he is conducting a public relations as similar to the character in the movie Casablanca saying he is surprised to see gambling in that city.
"We are in sort of the crazy season of the renegotiation," Murphy said. "I don't take anything personal. We are trying to get to the right number."
Congress roll?
Crop insurance companies and agents are likely to appeal to farm groups to support their position. It's unclear what reaction they will get.
During the farm bill debate, the farm groups said they preferred that Congress cut crop insurance rather than direct farm subsidies. The companies and the agents are likely to make the case that cutting crop insurance means taking money out of rural America.
The Obama administration may be planning to use the savings to increase the child nutrition programs, and farm leaders usually don't like proposals that cut farm programs for nutrition programs. But one state Farm Bureau president also noted that farmers' sympathy for crop insurance companies is limited because they remember that when one company wanted to offer cheaper policies on the Internet, the other companies and agents convinced Congress to stop it. The industry argued that company would cherry pick the biggest farmers, but some farmers still remember that crop insurance costs might have gone down.
Congress does not have a veto over the crop insurance agreement, but if the crop insurance companies and agents find the offer too much to swallow they could appeal to Congress to pass a bill instructing USDA to make changes. The industry disliked the Bush administration's unwillingness to negotiate with the companies as a group and convinced Congress in the 2008 farm bill to give USDA some direction in the negotiations.
House members and senators usually want to keep farmers happy because they vote in high percentages, but sometimes they have shown that want to please crop insurance agents even more because the agents talk to all the farmers at least once a year and are key local business leaders.
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Trying to get a better deal in Congress could backfire.
House Energy and Commerce Committee Chairman Henry Waxman, D-Calif., and seven other House members Dec. 17 wrote Agriculture Secretary Tom Vilsack to urge him to keep up the fight to reduce crop insurance costs.
"The crop insurance industry is making billions of dollars in excess profits from the current arrangement and will aggressively defend the existing program. We urge you to focus on the interests of taxpayers and farmers and reduce waste and abuse in the crop insurance program as USDA completes is work on these critical reforms," they wrote.
For a side-by-side comparison of the RMA offer and the current standard reinsurance agreement, see www.rma.usda.gov/news/2009/12/1209sra-side-by-side.pdf .
