The crop insurance industry is in the midst of a major transformation. Last December, the USDA and the Risk Management Agency (RMA) released the first draft of the Standard Reinsurance Agreement (SRA), the contract that private crop insurers and the government enter that includes financial commitments, policies and procedures and operational plans that are the foundation of the program. A revised SRA draft was released in February.
The RMA proposal substantially changes the program's structure, resulting in a funding reduction of about $700 million per year over the next decade. This $7 billion cut is in addition to the 10-year $6.4 billion in program reductions mandated by the 2008 Farm Bill.
There are several areas of concern for the industry:
o Overall funding reductions are excessive and unacceptable. Various proposals to reduce federal spending on crop insurance have been made over the past few years, including the President's 2010 fiscal year budget reduction of $5.2 billion, with primary reductions in farmers' premium subsidies. Congress rejected these proposals. Now, through discretionary action, RMA proposes to implement the industry's largest funding cuts ever, with all of the cuts coming from crop insurance companies.
o Excessive cuts in payments to deliver the program and in underwriting gains will reduce insurer returns and incentives to maintain investments in the industry to adequately service all producers. By reducing the rate of return on insurance investments, the proposed cuts will drive private companies--crop insurers and those providing them with financial backing, such as banks, parent companies and reinsurers--to invest capital in other enterprises. Over time, this will result in reduced service and fewer options for producers.
o Funding reductions will impair many of the 16 private insurers, especially those that are small and midsized. This could lead to more consolidation and cause the loss of many of the 18,000 jobs associated with insurance. In addition to the proposed cuts, the private industry has estimated additional costs of more than $100 million to comply with RMA's new program initiatives and information technology requirements.
o RMA proposed cuts also apply to the USDA-designated "underserved states." The cuts in delivery payments will more than offset the RMA proposed underwriting gain in those 16 states designated by USDA as underserved, reducing incentives to write and service producers there. Insurers operating in these states already have low returns; these cuts could cause them to reduce service levels just to break even. There is no mandate to keep taking losses in these states, opening the door to a lack of service in these areas.
The private insurance industry, in its counterproposal to the RMA-draft SRA, has offered to forgo $100 million per year in the risk profit/loss provisions, knowing that during this time of economic recovery, we all must be willing to give up a little.
In its draft SRA, the government has proposed that crop insurance companies take on additional risk and liability in the country's more profitable regions. However, the government proposes to reduce the potential gains that can be earned in these regions. The companies are willing to take on this increased risk but must be able to offset the risk by having the potential to earn adequate returns in good weather years.
NCIS hopes that USDA and RMA will engage in true negotiation for this SRA. The industry has many good ideas, based on years of analysis, much of it by reputable and independent third-party accounting firms. I am confident that we can work this out without wreaking havoc on a public/private partnership that has been working just the way Congress intended for the last 30 years.
