Crop Insurers Brace for Another Round of USDA Cuts

Dan Looker
Business Editor
Agriculture Online

6/22/2010, 4:22 PM CDT

Last week members of the crop insurance industry met with USDA officials to try to understand the Obama Administration's latest proposed reinsurance agreement with the industry. Tuesday, National Crop Insurance Services President Bob Parkerson said the industry has no choice but to accept the $6 billion cut in federal reimbursements for administrative costs over the next 10 years, if certain technical issues can be worked out.

"This is an extremely large cut," Parkerson said at a press conference Tuesday. It comes on top of $6.4 billion in cuts in the 2008 Farm Bill. Annually, the latest cut amounts to $600 million a year.

Except for covering certain risks like hail loss, insuring against potentially widespread crop losses from drought and multiple perils is considered too risky without government support. So USDA subsidizes the premiums farmers pay for the insurance. It offers reinsurance to back up large loss claims to the industry. And it reimburses part of the insurance companies' administrative and operating costs.

The final agreement proposed by USDA, the third, is slightly smaller than $8 billion in cuts first offered by the Administration.

USDA cites an independent study that shows the crop insurance industry has average a 17% return over the past 21 years. The new standard reinsurance agreement offered by USDA would provide an average long-term return of about 14.5%, the department's Risk Management Agency says.

Parkerson said he doesn't know exactly how the industry will adapt to the cuts but it's likely to result in lower commissions for the independent agents who sell coverage to farmers, especially in the most profitable Midwestern states. There, commissions have been a little above 20%.

Under the new agreement, they can't average more than 14.5% nationally.

"A big part of the reduction is going to happen with the agent workforce," said Keith Collins, former USDA Chief Economist and now a consultant with NCIS.

USDA says its reimbursement to the industry for 2009 is likely to be $3.8 billion. Collins and Parkerson said the cuts to the industry might not affect farmers directly yet. Indemnity payments are guaranteed by USDA. But service to farmers might suffer. And, Collins said, the lower returns could affect the industry when another widespread loss occurs.

"It limits the ability to build surplus for a really bad year," Collins said.

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