Agents May Sue On Crop Insurance Commissions The Independent Insurance Agents & Brokers of America says it will go to court if necessary to block expansion of a federal program that slices members commissions on crop insurance sold over the Internet.

Maria Berthoud, IIABA federal government affairs senior vice president, said the group is currently appealing the premium discount plan (PDP) to the U.S. Department of Agricultures national appeals division, and would “litigate if necessary” the decision by the Federal Crop Insurance Corporation (FCIC) permitting the plan.

According to IIABA, the controversial farm insurance plan, if it were expanded, could force its members to leave the market.

“This is the number-one legislative issue for us right now,” said Ms. Berthoud. “It is so bad that independent agents will leave the crop insurance delivery system.”

“The bottom line is this: We feel that this particular premium discount program is leading to some unfair competition,” said Bob Skow, chief executive officer of the Independent Insurance Agents of Iowa.

What has the association so upset is a decision by the FCIC Board to approve a PDP underwritten by Converium Insurance North America Inc., formerly Zurich Re headquartered in Zug, Switzerland, and sold through Crop 1 Insurance Direct, headquartered in Des Moines, Iowa.

Crop 1 is a managing general agent. The plan offers crop insurance over the Internet, through agents, farm cooperatives and other financial farm services at discounted rates. The discounts, the IIABA argues, are achievable because there is a reduced independent agent commission involved and that saving is passed onto the farmer.

The program, which is underwritten by 17 insurance companies nationally and a host of smaller underwriters, according to data available on the United States Department of Agriculture Web site, handled close to $3 billion in premium about this time last year.

More than 15,000 agents are involved in the crop program throughout the country. These agents, argued Mr. Skow, have spent more than two decades building what in 1982 was a failing government insurance system. By taking the program out of the hands of the federal government and privatizing it, they helped to fashion it into what he called one of the most successful federal insurance programs today.

The disputed program began in Dec. 2002, when the FCIC approved Crop 1 to sell insurance over the Internet after a seven-state trial program in Iowa, Illinois, Indiana, North Dakota, Nebraska, Minnesota and Kansas. The primary mandate was to reduce costs but still provide the service and coverage farmers need.

The IIABA executives contend that the plan has not demonstrated financial soundness, does not sell insurance through licensed agents as required under state insurance statutes, and denies clients the advice and training required to properly apply for coverage.

Mr. Skow said that a crop insurance policy is very complicated, much like commercial insurance, covering economic losses from crop damage such as cases of drought, and requires agents to spend a lot of time with the farmer gathering much information to properly underwrite a policy.

Under the pilot program, not many farmers took advantage of the Internet program, said Mr. Skow. But if it were to become successful, agents would see their nominal commission rate on the policies of 15 percent cut by 5-to-10 percent, he said.

“There is a misconception in the Beltway [Washington, D.C. vicinity] that agents are getting rich from this program, but their commission is typical to what they get for other services,” noted Mr. Skow. “If agents took these [reduced] commission rates,” under the PCP, “they would go broke.”

Eric Edgington, a spokesman for Risk Management Agency (RMA), the U.S. Department of Agriculture section in charge of running the program, said that Converium and Crop 1 had “to go through a lot of hoops” to demonstrate the viability of the program. He added that it met with all RMA regulations before approval was granted for selling insurance.

The program, he said, must meet with state regulations for the selling of insurance, and any violations would be dealt with through those channels. As for commissions, that is an internal issue between the company and agents, and not controlled by the agency, he said.

“We do not determine agent commissions,” Mr. Edgington said.

He said the approval of Crop 1s PDP plan does open the door to other companies to adopt similar programs.

Gene Grimsley, senior vice president of administration for Crop 1, disputed IIABAs claims that Crop 1 is attempting to undercut agent commissions and circumvent agent participation in the program.

“We have addressed the issues raised and they have been signed-off on by state regulators and [the FCIC],” said Mr. Grimsley.

Crop 1s program utilizes the Internet to save money in administrative costs, he said. These savings are passed on to the farmer, said Mr. Grimsley, in the form of reduced premiums.

It is not a rebate program, he noted, and both state and federal regulators have reviewed the program to ensure that is the case.

Agents do receive lower commissions, he said, but the sales force is primarily small agents, who would normally not be able to handle many accounts. By using the Internet, the producers gain the advantage of being able to pick up the percentage loss in commission by increasing their volume of accounts. The idea behind the program is to eventually put the farmer in the position of managing the information for himself, with the agent keeping an eye on the account, stepping in when the client needs help.

“Once the policy is set up, its not real hard for the farmer to follow,” Mr. Grimsley noted.

There are no existing books of business for Crop 1, the MGA pointed out in an additional statement furnished by Mr. Grimsley. No agents are being forced to convert existing books to this program, thereby suffering unwanted commission reduction.

Mr. Grimsley did not want to get into commission numbers, but he did say that the commission rate is lower than the industry average, which is part of the discount plan approved by the FCIC to reduce administrative costs.

The provider also uses licensed agents in its service. Information is made available through cooperatives, farm lending institutions and farm service centers, but farmers are directed to agents when they have policy questions or are seeking the underwriting.

“It is fair to say that we are providing an opportunity for savings that no one else has,” said Mr. Grimsley.

A section on rules governing rebates that appears on the RMA Web site (www.rma.usda.gov) says that savings made through the reduction of commission to agents, using the Internet, can be passed on to the insured in the form of reduced premium.

Ms. Berthoud said IIABA is also lobbying Congress to take a closer look at the program and its approval.

Reproduced from National Underwriter Edition, April 28, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.

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