Agents May Sue On Crop Insurance CommissionsThe Independent Insurance Agents & Brokers of America says itwill go to court if necessary to block expansion of a federalprogram that slices members commissions on crop insurance sold overthe Internet.

Maria Berthoud, IIABA federal government affairs senior vicepresident, said the group is currently appealing the premiumdiscount plan (PDP) to the U.S. Department of Agricultures nationalappeals division, and would “litigate if necessary” the decision bythe Federal Crop Insurance Corporation (FCIC) permitting theplan.

According to IIABA, the controversial farm insurance plan, if itwere expanded, could force its members to leave the market.

“This is the number-one legislative issue for us right now,”said Ms. Berthoud. “It is so bad that independent agents will leavethe crop insurance delivery system.”

“The bottom line is this: We feel that this particular premiumdiscount program is leading to some unfair competition,” said BobSkow, chief executive officer of the Independent Insurance Agentsof Iowa.

What has the association so upset is a decision by the FCICBoard to approve a PDP underwritten by Converium Insurance NorthAmerica Inc., formerly Zurich Re headquartered in Zug, Switzerland,and sold through Crop 1 Insurance Direct, headquartered in DesMoines, Iowa.

Crop 1 is a managing general agent. The plan offers cropinsurance over the Internet, through agents, farm cooperatives andother financial farm services at discounted rates. The discounts,the IIABA argues, are achievable because there is a reducedindependent agent commission involved and that saving is passedonto the farmer.

The program, which is underwritten by 17 insurance companiesnationally and a host of smaller underwriters, according to dataavailable on the United States Department of Agriculture Web site,handled close to $3 billion in premium about this time lastyear.

More than 15,000 agents are involved in the crop programthroughout the country. These agents, argued Mr. Skow, have spentmore than two decades building what in 1982 was a failinggovernment insurance system. By taking the program out of the handsof the federal government and privatizing it, they helped tofashion it into what he called one of the most successful federalinsurance programs today.

The disputed program began in Dec. 2002, when the FCIC approvedCrop 1 to sell insurance over the Internet after a seven-statetrial program in Iowa, Illinois, Indiana, North Dakota, Nebraska,Minnesota and Kansas. The primary mandate was to reduce costs butstill provide the service and coverage farmers need.

The IIABA executives contend that the plan has not demonstratedfinancial soundness, does not sell insurance through licensedagents as required under state insurance statutes, and deniesclients the advice and training required to properly apply forcoverage.

Mr. Skow said that a crop insurance policy is very complicated,much like commercial insurance, covering economic losses from cropdamage such as cases of drought, and requires agents to spend a lotof time with the farmer gathering much information to properlyunderwrite a policy.

Under the pilot program, not many farmers took advantage of theInternet program, said Mr. Skow. But if it were to becomesuccessful, agents would see their nominal commission rate on thepolicies of 15 percent cut by 5-to-10 percent, he said.

“There is a misconception in the Beltway [Washington, D.C.vicinity] that agents are getting rich from this program, but theircommission is typical to what they get for other services,” notedMr. Skow. “If agents took these [reduced] commission rates,” underthe PCP, “they would go broke.”

Eric Edgington, a spokesman for Risk Management Agency (RMA),the U.S. Department of Agriculture section in charge of running theprogram, said that Converium and Crop 1 had “to go through a lot ofhoops” to demonstrate the viability of the program. He added thatit met with all RMA regulations before approval was granted forselling insurance.

The program, he said, must meet with state regulations for theselling of insurance, and any violations would be dealt withthrough those channels. As for commissions, that is an internalissue between the company and agents, and not controlled by theagency, he said.

“We do not determine agent commissions,” Mr. Edgington said.

He said the approval of Crop 1s PDP plan does open the door toother companies to adopt similar programs.

Gene Grimsley, senior vice president of administration for Crop1, disputed IIABAs claims that Crop 1 is attempting to undercutagent commissions and circumvent agent participation in theprogram.

“We have addressed the issues raised and they have beensigned-off on by state regulators and [the FCIC],” said Mr.Grimsley.

Crop 1s program utilizes the Internet to save money inadministrative costs, he said. These savings are passed on to thefarmer, said Mr. Grimsley, in the form of reduced premiums.

It is not a rebate program, he noted, and both state and federalregulators have reviewed the program to ensure that is thecase.

Agents do receive lower commissions, he said, but the salesforce is primarily small agents, who would normally not be able tohandle many accounts. By using the Internet, the producers gain theadvantage of being able to pick up the percentage loss incommission by increasing their volume of accounts. The idea behindthe program is to eventually put the farmer in the position ofmanaging the information for himself, with the agent keeping an eyeon the account, stepping in when the client needs help.

“Once the policy is set up, its not real hard for the farmer tofollow,” Mr. Grimsley noted.

There are no existing books of business for Crop 1, the MGApointed out in an additional statement furnished by Mr. Grimsley.No agents are being forced to convert existing books to thisprogram, thereby suffering unwanted commission reduction.

Mr. Grimsley did not want to get into commission numbers, but hedid say that the commission rate is lower than the industryaverage, which is part of the discount plan approved by the FCIC toreduce administrative costs.

The provider also uses licensed agents in its service.Information is made available through cooperatives, farm lendinginstitutions and farm service centers, but farmers are directed toagents when they have policy questions or are seeking theunderwriting.

“It is fair to say that we are providing an opportunity forsavings that no one else has,” said Mr. Grimsley.

A section on rules governing rebates that appears on the RMA Website (www.rma.usda.gov) says thatsavings made through the reduction of commission to agents, usingthe Internet, can be passed on to the insured in the form ofreduced premium.

Ms. Berthoud said IIABA is also lobbying Congress to take acloser look at the program and its approval.

Reproduced from National Underwriter Edition, April 28, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.