Crop Insurance Industry Still Healthy

Crop insurance remains a stable ship in a sea of turbulence, according to industry officials.

The economy is in recession, industry subsidies were reduced through the 2008 federal farm bill and there are concerns that further cuts in federal programs may occur this year. "However, the industry is well capitalized and can pay claims in a timely way," according to Robert Parkerson, president of National Crop Insurance Services in Overland Park, Kans.

National Crop Insurance Services is a not-for-profit organization representing the interests of crop insurance companies.

"The crop insurance industry is not in the condition of other financial services firms," Mr. Parkerson added.

The industry is huge. There are approximately 12,000 licensed crop insurance agents in the United States, and premiums grew by almost one-third between 2007 and 2008.

Specifically, in 2007, agents wrote $6.6 billion in crop insurance premium covering $67.3 billion in liability. In 2008, there was $9.9 billion written in crop insurance premium covering $89.9 billion in liability.

For 2007, indemnity payments on crop loss were $3.5 billion, giving the industry a loss ratio of 0.54. So far for 2008, $8.6 billion has been paid in indemnities giving the industry a loss ratio of 0.87, but that number is likely to grow as more losses are finalized, industry officials said.

One of the industry issues is dealing with a proposed plan by the Obama administration to look at the crop insurance program as one of the ways of reducing budget deficits. Other key industry issues include climate change proposals and the vagaries of weather.

"We are very aware of it and its implications for crop insurance," Mr. Parkerson said, referring to climate change. "As climate changes, premium rates will have to be adjusted to reflect changes in risk," he said.

Moreover, initiatives to reduce climate change by curbing carbon emissions, for example, "open up a new demand for renewable energy and less carbon emissions," he added.

Specifically, the crop insurance industry is ready to introduce insurance products for new crops that are tied to making ethanol or biodiesel," he said. "We support the use of existing renewable fuel crops, such as corn, and newer crops, such as switchgrass, and plan to offer input to Congress as they deal with this emerging area.

"These crops could also be used in electric generating facilities to replace fossil fuels and help ensure the supply of energy feed stocks," he said. "We are hoping to be players in the business of reducing carbon emissions, and these are some of the things we have suggested to officials at the U.S. Department of Agriculture.

On the subject of premium subsidies, Mr. Parkerson said that while it is likely that Congress will continue to take a hard look at them, it is unlikely that Congress will approve wholesale cuts in crop insurance programs to finance other priorities.

"Congress knows that it has to be careful," he said. "They don't want to undermine the financial strength of this industry so that it will ultimately need a bailout. We don't want a bailout."

The issue came up because the 2008 Farm Bill made over 20 major changes to the program, marking the first time major amendments to the Federal Crop Insurance Act were made in a farm bill since the current federal-private program was instituted in 1980.

The 2008 Farm Bill also slashed the subsidies to be paid for the program by $6.4 billion over 10 years through reductions in payments to the companies to deliver the program and other adjustments.

But the recent budget plan adopted by Congress for 2010 did not contain proposals supported by the Senate that would have taken funds from the crop insurance budget and used them to fund more nutritional and food programs. "The Senate is still interested in funding more food and nutritional programs but is looking elsewhere for funding," Mr. Parkerson said.

At the same time, he acknowledged, the crop insurance industry "still believes we must defend our budget every year."

Pressing budget issues include calls by the Obama administration:

o To cut the crop insurance budget by reducing premium subsidies by five percentage points on all coverage levels.

o To increase the government's share on underwriting gains to 20 percent from 5 percent.

o To reduce premium on Catastrophic Crop Insurance (CAT) by 25 percent and charge a sliding scale fee for CAT coverage from $300 up to $5,000 depending on the crop value.

According to Mr. Parkerson, "The crop insurance industry opposed those cuts when his budget proposal was announced in February, and we still oppose those cuts."

"The 2008 Farm Bill made reductions in crop insurance by $6.4 billion, and we feel that, in order to maintain the financial stability of the industry, further cuts should not be made," he said.

Addressing another concern of agents--possible automation of the crop insurance program--Mr. Parkerson said the 16 companies involved in providing crop insurance are very much aware of the important role that agents and adjusters play in placing business and handling claims. Farmers' reliance on them limits the ability to automate the sales and claims processes, he said.

"Nothing dramatic is going to happen with the use of technology," Mr. Parkerson said. "The program is far too complicated to be handled by technology alone," he said.

"Agents will work with farmers to tailor plans that meet each of their needs," he said.