Study Shows Receding Returns for Crop Insurance Firms03/14/2017
Private crop insurance company returns have decreased significantly since the 2010 renegotiation of the Standard Reinsurance Agreement (SRA) between the insurance companies and the federal government, and are in line with benchmarks established by the U.S. Department of Agriculture’s Risk Management Agency, according to a new study released today by the National Corn Growers Association.
“The federal crop insurance program is the cornerstone of farm bill risk management programs, and it is more important than ever given the state of the farm economy,” said Steve Ebke, chairman of the NCGA Risk Management Action Team and a farmer from Daykin, Nebraska. “We commissioned an independent analysis of the crop insurance industry’s performance to determine whether criticisms against the insurers’ returns have merit. What we discovered is that the returns private crop insurance companies receive are much smaller than opponents claim, and they are well within the standards set by RMA.”
According to the findings, from 1998 to 2010, crop insurance companies had an average net return on retained premium of 14.1 percent. From 2011 to 2015, returns averaged 1.5 percent, a decrease of 12.6 percentage points.
Private crop insurance companies are part of a public-private partnership for delivering federal crop insurance to American farmers. Crop insurance companies are responsible for delivering policies to farmers and managing the claims adjustment process. Crop insurance companies bear a portion of the risks associated with crop insurance policies. In return for these services, companies receive compensation in the form of Administrative and Operating (A&O) reimbursements and underwriting gains.
The SRA establishes the levels of compensation for the companies. The 2010 renegotiations substantially cut A&O reimbursements and limited the share of underwriting gains that crop insurance companies could receive. As a result, net returns to retained premiums are expected to average approximately 5.7 percentage points lower compared to pre-2010 levels.
The study was commissioned by NCGA and conducted by Dr. Gary Schnitkey, professor of agricultural and consumer economics at the University of Illinois; Dr. Joshua Woodard, assistant professor and the Zaitz Family Faculty Fellow of Agricultural Business and Finance at Cornell University, and Dr. Bruce Sherrick, professor of agricultural and consumer economics and Director of the TIAA-CREF Center for Farmland Research at the University of Illinois.