Filed Under:Markets, E&S/Specialty

New Farm Bill Would Bring More Insurable Risks, Premiums to Crop Insurers

The crop-insurance industry and the agents who produce for it will be prime beneficiaries of a new five-year farm reauthorization bill now working its way through Congress.

Legislation now being debated by a Senate-House panel reconciling differing bills contains a provision establishing a new program to cover “shallow losses,” or losses incurred by farmers but not covered currently by crop insurance.

The four key members of the panel could meet as early as Thursday and a final bill could be completed by the end of January, according to industry lobbyists and congressional staffers.

The Supplemental Coverage Option (SCO) would be available for as an additional policy to cover part of the deductible under the crop producer’s underlying policy.

R.J. Lehmann, a senior fellow at the R Street Institute, says the SCO would cover up to 90 percent of a farmer’s crop revenue when elected in combination with a conventional crop-insurance policy.

Among the issues the reconciliation panel must deal with is that the cost of the SCO provision under the House bill would be $3.85 billion over the next decade, compared to $2.25 billion in the Senate bill.

The SCO provision was first introduced in the last Congress as the CROP Act by Rep. Randy Neugebauer, R-Texas, a key member of the House Financial Services Committee.

A spokesperson for Neugebauer says, “It’s not accurate to say it raises the subsidy program.” She says farm subsidies include Title I provisions like direct payments—which the new bill seeks to substantively reduce—price-loss coverage, revenue-loss coverage, etc. 

“The goal is to move to a more market-based, shared-risk program that only pays out in the event of a loss,” says the Neugebauer spokesperson, Heather Vaughn, who formerly was a staffer at the House Ag Committee.

But the provision does have its critics. Bruce Babcock, a professor in the Agriculture Department at Iowa State University, argues that, because SCO takes on the same type of coverage as the underlying coverage, it will lead to overpayment of farm losses.

He says, “If the coverage were limited to pure revenue insurance coverage and if the group plan were to cover deep losses, then the program would not just be another unneeded subsidy but rather an improvement in how risk-management subsidies are provided to farmers. But, alas, it is neither so I would characterize it as just another unneeded subsidy.”

Babcock adds, “It has the potential” to be helpful in managing farm risk if reworked.

At the same time, coverage of crop losses incurred by cotton producers will be covered by the crop-insurance program, instead of current policies which pay for losses by cotton farmers on a directly subsidized basis. Under existing law, cotton was designated a “commodity,” with the government directly subsidizing cotton producers, according to David Graves, manager for the American Association of Crop Insurers.

He estimates the arrangement under the new bill would bring $2.5 billion in crops into the insurance program. “A farmer may very well wind up buying more insurance,” he added.

In total, the changes will mean that “direct payments to farmers are going by the wayside in the next farm bill and that the Federal Crop Insurance Program (FCIP) will be the centerpiece risk-management tool for farmers,” says Jennifer McPhillips, senior director of federal government affairs for the Independent Insurance Agents and Brokers of America.

She says, “This is not to the detriment of taxpayers, but in fact the opposite. The FCIP is actuarially sound, but it relies on a broad pool of participants to function correctly. Insurance is all about participation as well as the ability to spread the risk to the largest possible number of policyholders, most of whom will never have a claim. Strong participation in the FCIP, coupled with the ability for farmers to buy up coverage, further strengthens the baseline of this program.”

For producers certified to sell crop insurance, Graves believes it will mean more work in terms of training staff and selling and servicing policies. While compensation for the extra effort is “not always automatic,” Graves says the supplementary coverage option “will bring new revenue to the program to help defray costs.”

He adds, “The farmers will also have to pay premiums for those new policies, which brings additional revenue to the table. When we look back on this in 10 years, we will see this bill as another landmark development in the federal crop-insurance program,” Graves said.

The Wall Street Journal estimates that, under the new system, the federal government will subsidize 65 percent of premiums, as opposed to the nearly 63 percent it is currently subsidizing.

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