NU Online News Service, April 12, 3:58 p.m.EDT

WASHINGTON–Proposed cuts in the subsidiesprovided crop insurers by the U.S. Department of Agriculture couldlead some reinsurers that support the program to withdraw or scaleback their capacity, according to an insurance brokerage.

A new report by Aon Benfield, based in London, also suggests theproposed cuts would likely reduce reinsurers' expected profit by20-to-30 percent.

The report was issued by analysts at Aon Benfield against thebackground of ongoing negotiations between crop insurers and theAgriculture Department's Risk Management Agency on a new contractfor 2011 and beyond.

The current contract, called the standard reinsurance agreement,expires this year.

The RMA wants to cut the subsidies provided the program in orderto provide additional funding for food nutrition programs.

The agency is now circulating its third proposal with NationalCrop Insurance Services, Overland Park, Kan., which represents the16 crop insurers. In a recent statement, agency officials said theyhope to complete discussions with the NCIS on behalf of theinsurers this month.

The subsidies are provided through the "Multi-Peril CropInsurance" (MPCI) program. This provides American farmers with arange of insurance policies designed and delivered through 16private crop insurance companies represented by the NCIS.

The statement said that RMA's goal is to have a contract signedby all parties by the end of June 2010, as provided by the 2008farm bill.

The industry's position was challenged by a new report put outby the Department of Agriculture. The report includes data for2009, and shows that the return on equity for the insurers during2009 was 26.4 percent, the second highest return in the past 21years and well above the reasonable rate of return for 2009, 10.7percent.

Moreover, the study says, over the past 21 years, the cropinsurance companies averaged a 17 percent return when thereasonable rate for that period was 12.7 percent.

The report by the department was an update of a study done byMilliman Inc. consulting firm, which basically repudiated thealtered version. Jim Loughman, a spokesman for the company said inan e-mailed message that, "Milliman's study used data through 2008;it was updated with 2009 data by the USDA, but we did not include2009 data in our report (it was not available when the report wasdone). Also, we did not participate in any way in the study'supdate, nor did we review the USDA's work."

The industry is saying in talks with the RMA that the report ismisleading, and Aon Benfield analysts agree with the industry'sposition.

In commenting on the analysis, Joseph Monaghan, head of AonBenfield's Agriculture practice group, said: "Our study revealsthat over a 10-year period, reinsurers participating in the MPCIprogram have experienced favorable returns due to relatively lowloss experience resulting from few adverse weather events."

However, he cautions, "the proposed changes to the program wouldhave the likely effect of reducing participants' margins, whichcould see potential reductions in capacity."

Specifically, he said, reinsurers providing cover for theprogram on a quota share basis may reduce their participation aswell, "which could in turn reduce the ability of cedents to provideMPCI."

"Those reinsurers providing cover for the program on a quotashare basis may reduce their participation as well, which could inturn reduce the ability of cedents to provide MPCI."

The crop study supports the industry position that the Millimanstudy is misleading by explaining that, if the latest RMA proposalshad been in place from 1998 to 2008, participating insurers'underwriting gains would have been reduced by nearly $560million.