Reinsurance Analyst Fears Cuts In Agriculture Subsidy

NU Online News Service, April 12, 3:58 p.m. EDT

WASHINGTON–Proposed cuts in the subsidies provided crop insurers by the U.S. Department of Agriculture could lead some reinsurers that support the program to withdraw or scale back their capacity, according to an insurance brokerage.

A new report by Aon Benfield, based in London, also suggests the proposed cuts would likely reduce reinsurers' expected profit by 20-to-30 percent.

The report was issued by analysts at Aon Benfield against the background of ongoing negotiations between crop insurers and the Agriculture Department's Risk Management Agency on a new contract for 2011 and beyond.

The current contract, called the standard reinsurance agreement, expires this year.

The RMA wants to cut the subsidies provided the program in order to provide additional funding for food nutrition programs.

The agency is now circulating its third proposal with National Crop Insurance Services, Overland Park, Kan., which represents the 16 crop insurers. In a recent statement, agency officials said they hope to complete discussions with the NCIS on behalf of the insurers this month.

The subsidies are provided through the "Multi-Peril Crop Insurance" (MPCI) program. This provides American farmers with a range of insurance policies designed and delivered through 16 private crop insurance companies represented by the NCIS.

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

The industry's position was challenged by a new report put out by the Department of Agriculture. The 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 report by the department was an update of a study done by Milliman Inc. consulting firm, which basically repudiated the altered version. Jim Loughman, a spokesman for the company said in an e-mailed message that, "Milliman's study used data through 2008; it was updated with 2009 data by the USDA, but we did not include 2009 data in our report (it was not available when the report was done). Also, we did not participate in any way in the study's update, nor did we review the USDA's work."

The industry is saying in talks with the RMA that the report is misleading, and Aon Benfield analysts agree with the industry's position.

In commenting on the analysis, Joseph Monaghan, head of Aon Benfield's Agriculture practice group, said: "Our study reveals that over a 10-year period, reinsurers participating in the MPCI program have experienced favorable returns due to relatively low loss experience resulting from few adverse weather events."

However, he cautions, "the proposed changes to the program would have the likely effect of reducing participants' margins, which could see potential reductions in capacity."

Specifically, he said, reinsurers providing cover for the program on a quota share basis may reduce their participation as well, "which could in turn reduce the ability of cedents to provide MPCI."

"Those reinsurers providing cover for the program on a quota share basis may reduce their participation as well, which could in turn reduce the ability of cedents to provide MPCI."

The crop study supports the industry position that the Milliman study is misleading by explaining that, if the latest RMA proposals had been in place from 1998 to 2008, participating insurers' underwriting gains would have been reduced by nearly $560 million.