NU Online News Service, Sept. 26, 1:29 p.m.EDT

Obama-administration plans to further reduce crop-insurancesubsidies could accelerate a consolidation process in theagricultural insurance sector that is already long underway,according to Moody's.

In its Weekly Credit Outlook, Moody's says the administration'splan is credit-negative since it would lower the expected rate ofreturn to crop insurers, cap certain administrative expenses andset premiums for catastrophic coverages more along commerciallyavailable terms.

Crop insurance underwriters and producers have voiced opposition to the proposal, part of theadministration's deficit-reduction plan, to reduce crop-insurance subsidies by an estimated $8.3billion over 10 years. Tom Zacharias, president of National CropInsurance Services, Overland Park, Kan., says,  "Congressneeds to evaluate the economic impactof weakening the primary safety net onwhich farmers and our rural economy canrely." 

Moody's says, "In our view, the proposed regulation, whilesignificant, would be a continuation of a more than decade-longpattern of tightening constraints on crop insurers' permittedmargins and expense reimbursements, which has contributed steadilyover time to substantial consolidation in the sector."

The rating agency adds that the greatest impact of theadministration's plan will be on the smallest competitors in thesector, which will provide further consolidation opportunities forthe "more scale-efficient market leaders." Moody's adds thatnumerous adjustments to the program over the years have been"generally transferring somewhat more risk to the insurance sector,but also enabling the most efficient and expert insurers tocontinue operating profitably." As a result, the sector hassteadily declined from over 30 to a market structure where the fivelargest insurers account for approximately two-thirds ofindustry-wide direct premiums, Moody's says.

Moody's adds that it expects consolidation in this sector withor without the proposed legislation, but notes that the legislationwould accelerate the process.