Farming is a risky financial undertaking. Profits aresubject to the weather, supply and demand, and shifting marketprices.
For insurance agents who specialize in this niche, protectingtheir farming customers means working primarily with a federalinsurance program that has undergone a series of cutbacks in recentyears.
|As the current farm bill expires on Sept. 30, Congress looks tofurther reduce the budget of the Federal Crop Insurance Program(FCIP), squeezing agency commissions and threatening the importantrelationship-driven role independent agents play in protecting theU.S. agriculture industry.
|Read the sidebar "Types of Federal CropPolicies."
|"Farmers may live 15, 20 miles away from my agency. And 3 yearsago I would drive out there, sit down with them and go over policychanges," said Brian McSherry, president of McSherry Agency,Pontiac, Ill. "With the reduced compensation, I can't afford to dothat anymore. I have to call them or they have to come out to theagency."
|Background
|Today's FCIP program has its roots in Depression-era America.Following the severe agriculture damage from the Dust Bowl andGreat Depression in the 1930s, Congress shifted a major portion ofthe risk from farmers to the public sector and created the Federal CropInsurance Corp. (FCIC) in 1938 to help the industry recover.The program initially addressed crop losses and focused on themajor crops in the major producing regions. Farmer participationwas low as program costs were high: The government had insufficientreserves to pay claims.
||The farm bills of the 1960s and '70s offered free disastercoverage, but it wasn't until 1980 with the passage of the FederalCrop Insurance Act that crop insurance was expanded to include morecrops and other regions of the country. To encourage participation,the 1980 Act offered farmers a 30 percent premium subsidy limitedto the dollar amount at 65 percent coverage.
|At this time FCIP was sold though Farm Services Agencies (FSA)and farmer participation was about 30 percent, said Todd C.Henricks, president of Chapman-Henricks Insurance Agency in CerroGordo, Ill., and chairman of the Board for IIA of Illinois.Congress established a dual delivery system in which farmers couldchoose to buy policies sold by private agents who contracted withthe government for claims service, or from private companies thatboth sell and service claims. Because the private sectoroutperformed the government, all program delivery was assigned tothe private sector by the end of the '80s.
|After a nationwide drought in 1988 and wetgrowing season in 1993, Congress passed a series of ad hoc disasterbills to provide relief to needy farmers.
|In 1994 Congress enacted the Federal Crop Insurance Reform Actas a more permanent solution. Two years later, Congress created theRiskManagement Agency (RMA), operated under the U.S. Dept. ofAgriculture, to administer FCIC programs. RMA carries certainregulatory functions including rate setting, coverage options andsubsidizing policies. Approved Insurance Providers (AIPs) privateinsurance agents conduct much of the service, which includesmarketing, writing, adjusting, claims works and record keeping. Thefederal government provides reimbursement for some of theseservices. Additionally, the partnership ensures that the risk isspread across the government and the AIPs, said Mike Becker,assistant vice president of federal affairs, PIA National.
|Read the sidebar "Selling Opportunity:'Farm-to-Port'".
The program was a success. Farmer participation increasedafter the 1994 Act and today is at more than 86 percent, Henrickssaid. More than 250 million acres of farmland were insured in theprogram in 2010 at a value of nearly $80 billion, a more than 300percent acreage increase since 1988.Congress revised the farm bill in 2008 and reduced subsidies toinsurance companies: $6 billion, over a period of 10 years, hasbeen cut from the budget. The authorization for that legislationexpires on Sept. 30.
|In 2012, insurance policies are sold and serviced through 15RMA-approved carriers: ACE American, Agrinational, AmericanAgri-Business, American Agriculture, Austin Mutual, Country Mutual,Everest Reinsurance, Farmers Mutual Hail Insurance Co. of Iowa,Great American, Hudson, John Deere, NAU Country, Occidental Fireand Casualty Co. of North Carolina, Producers Agriculture and RuralCommunity. A list can be found at http://www3.rma.usda.gov/%20tools/agents/companies/indexCI.cfm.
|The carriers pay agent commissions and USDA reinsurers anycarrier losses.
|Related: Read the article "Crop Insurers, AgentsDismayed at New Proposed Cuts" by Arthur D. Postal.
|Types of policies
|Federal crop insurance policies are revenue based or yieldbased. Two million crop insurance policies were sold in 2010, withrevenue-based policies accounting for 56 percent of the total, andthe remaining 44 percent were sold as yield-based policies. Corn,cotton, soybeans and wheat account for 75 percent of insuredacres.
|Revenue-based policies were first offered in 1997. A farmer whochooses this type of insurance receives an indemnity payment whenhis actual farm revenue (either crop specific or the entire farm)falls below a certain percentage of the target revenue, whether theloss is caused by low prices or low production.
|In a yield-based policy, farmers are assigneda typical crop yield based on production history and are given acrop price based on estimated market conditions. The farmer thenselects a percentage of his normal yield to insure and a percentageof the price he wishes to receive in the event of crop loss.
|Agents can offer two types of yield-based coverage: crop-hailand multiperil. Crop-hail is not offered through the government andis provided through insurers. It covers hail, fire, vandalism andsome transportation.
|Multiperil, purchased before planting, covers loss due todrought, moisture, freeze and disease (see "Types of Federal CropPolicies," page 36). McSherry, who insures farms as small as 20acres to those as large as 3,000 to 4,000 acres, encourages agentsto thoroughly understand the differences in the multiperil policyforms, as they are complicated.
|"What are the farmers doing, why are they doing it, how arethey marketing, how are they planning, how are their farms spreadout," he said. "You really have to get into farmingoperations."2012 Farm Bill Proposals
|The 2012 farm bill would replace legislation enacted in 2008,which reduced subsidies to insurers for selling and serving cropinsurance policies, and increased what farmers paid inadministrative fees for coverage.
|The National Assn. of Farm Service Agency (FSA) County OfficeEmployees (NASCOE) has lobbied Congress to replace the privatesector insurance agents who sell and service crop insurancepolicies with federal government FSA employees. "It's unfathomablethat anybody would want to turn the program back 30 years "to atime when FSA employees were selling the policies," said MikeBecker, assistant vice president of federal affairs for PIANational. The program then was more costly, had fewer policies andwas underused.
|Independent agents are the key to the success of the cropinsurance program, Becker said, and NASCOE is advocating a strategythat will lead to inefficiencies and high costs that will not servefarmers well.
|In March, insurance companies and agents, intestimony on behalf of IIABA, asked the Senate AgricultureCommittee to "do no harm" to the existing crop-insurance-subsidyprogram. Ruth Gerdes, president of Auburn Agency Crop Insurance,Auburn, Neb., testified on the crop program's shift from a publicto a private delivery system and noted the efficiency of programdelivery by agents and the expansion of insured acres. In 2011,18,000 crop agents serviced 1.15 million policies. "The growth andoverall success of the FCIP is due to motivated programparticipants, good lawmaking, quality products and a dedicatedagent force," Gerdes said.
|A group of six industry trade groups (American Assn. of CropInsurers, Crop Insurance and Reinsurance Bureau, Crop InsuranceProfessionals Assn., IIABA, National Assn. of ProfessionalInsurance Agents and Reinsurance Assn. of America) said in a letterto the House and Senate Agriculture Committees that crop insurancehas contributed to more than $12 billion toward reducing governmentspending and deficit reduction since 2008. In the same time period,private crop insurance companies have given more than $27 billionto farmers and ranchers after disasters.
|A few days after the testimony, House Budget Committee ChairmanPaul Ryan (R-Wis.) released his budget proposal, which calls formore than $30 billion to be cut from the crop insurance program, at$5 billion a year.
|The Obama administration has proposed to reduce subsidies to theindustry by $8 billion over 10 years in its 2013 budget. Thisincludes a $300 million reduction in subsidies for administrativeand operative costs, which is used to pay agent commissions. The2013 budget proposal also reduces the ROI for crop insurers to 12percent (down two percentage points), and also reducesproducer-premium subsidies by two basis points, or two-tenths of apercent.
|"If they reduce that, it will reduce delivery to farmers,"Henricks said. "It's going to harm distribution becauseagents aren't going to take the time. Federal crop insurance isvery labor intensive to sell and service. You have to build arelationship with the farmer."
|These cuts fall on top of previous ones authorized in the lastStandard Reinsurance Agreement (SRA) from 2010, which acts as afinancial and compliance contract between the RMA and AIPs. Thelast agreement reduced how much private sector companies cancompensate their insurance agents. RMA is removing performanceincentives, Becker said.
|McSherry said his 2011 revenue has been reduced 50 percentbecause of the renegotiated SRA. "My goal is to provide anefficient and effective risk management tool to all of my farmclients," he said. "As a result of the new SRA, it will bedifficult for agents to continue that level of service." Tocompensate, the McSherry Agency laid off a part-time employee.
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