Crop Insurers Challenge USDA Profitability Study

NU Online News Service, April 7, 2:50 p.m. EDT

Crop insurers are challenging a new study on their profitability commissioned by the U.S. Department of Agriculture, saying it is misleading and should not be used to set the rate of return for crop insurers participating in the Federal Crop Insurance Program.

The issue is critical for crop insurers and agents. Under pressure to provide additional funding for a food nutrition program, the U.S. Agriculture Department is proposing to slash the subsidies it provides to the crop insurance program.

The department's risk management agency is circulating its third proposal with National Crop Insurance Services, Overland Park, Kan., which represents the 16 crop insurers. In a statement released Friday, RMA officials said they hope to complete discussions with the NCIS on behalf of the insurers this month.

The statement said RMAs goal is to have a contract signed by all parties by the end of June 2010, as provided by the 2008 farm bill.

The updated report includes data for 2009 and shows that the return on equity for the insurers during 2009 was 26.4 percent, the second highest return in the past 21 years and well above the reasonable rate of return for 2009–10.7 percent.

Moreover, the study says, over the past 21 years, the crop insurance companies averaged a 17 percent return when the reasonable rate for that period was 12.7 percent.

The study was prepared by Milliman Inc., a consulting firm.

But, in a statement, NCIS said that looking only at 2009 profits in establishing new rates is inappropriate, because the 2009 numbers are "more reflective of record-high crop yields than indicative of the future profitability of the crop insurance industry."

In its statement, the NCIS said that a "proper, longer-term view of industry performance" is more appropriate than looking at a single year's profitability in determining industry performance.

"RMA understands too well that conclusions can't be drawn from data representing such a narrow timeframe," the NCIS statement added.

"A long-term view is essential when analyzing a program based on a private insurance model, where any year's returns can vary due to weather or fluctuating crop prices," NCIS officials said.

The industry statement said that beyond the obvious concern with using one year of data to judge the financial performance of the industry, it also questions the analytical methods the agency is using to estimate rates of return on equity.

NCIS officials said the methods have been challenged by the crop insurance industry in the past "and are not a reasonable basis for estimating expected returns to the industry."

In fact, NCIS officials said in their statement, "Milliman itself cautions against drawing any strong conclusions on the adequacy or excessiveness of the historical returns."

Moreover, the statement said, "This is particularly relevant in this case, as their analysis also fails to take into account the $6.4 billion in funds that Congress already cut from the crop insurance program in the 2008 farm bill."

Charles E. Symington, Jr., Independent Insurance Agents and Brokers of America senior vice president of government affairs, said, "While well-intended, the current SRA draft contains some alarming proposals that could potentially cause more harm than good."

"There are over 18,000 crop insurance agents across the country who are mostly small business owners in rural towns. These agents provide jobs and are active in their communities. Furthermore, the crop program depicts a delicate balance between America's farmers and ranchers and the federal government. This balance has served as a necessary safety net for our agricultural community while enabling American farmland to flourish. In this time of great economic strain, it seems imprudent to fundamentally alter a successful program," he concluded.