NU Online News Service, Oct. 29, 3:23 p.m. EDT
A vibrant farm industry is currently helping the crop insurance industry cope with the Agriculture Department's decision to substantively cut back its subsidy program, "but every year is a new year," the head of the trade group that represents the industry said last week.
"Obviously, with the new standard operating agreement, there is a reduction in profits," said Tom Zacharias, president of the National Crop Insurance Services, Overland Park, Kans.
These cuts include reduction in reimbursement for delivery expense, administrative costs and operating costs, as well as a reduction in expected underwriting gain for the companies.
The Agriculture Department is also installing a new data processing system that will require companies to modify their systems in order to report to the agency, Mr. Zacharias said.
Agents were impacted as well with caps on commissions.
While the strong prices, relatively small weather disruptions and high yields are tempering the impact on crop insurers and agents this year, the insurers and agents are still taking steps to deal with the subsidy cutback, Mr. Zacharias said.
"It is easy to make this kind of transition when the experience of this year has been good so far, specifically, a strong agriculture economy and relatively tame weather," Mr. Zacharias said
"There were some hailstorms that affected cotton yields in Texas, but we are optimistic that the number of crop insurance companies will remain stable in the short term."
However, he said, "if conditions change dramatically, then companies will respond," likely by either merging with existing firms or exiting the business.
He pointed to the decision of Rain and Hail Service Inc., Johnston, Iowa., to allow itself to be acquired by Ace last month. Ace agreed to buy the remaining 80 percent of Rain and Hail Insurance Service that it doesn't already own for about $1.1 billion.
Mr. Zacharias became president of NCIS in late August after Robert Parkerson, its long-time president, retired.
This was one month after the U.S. Agriculture Department completed negotiations that will result in a $6 billion cut in subsidies to the program over 10 years, a 30 percent cut.
Not only the companies were cut. A hard and soft cap was imposed on agents under a new standard insurance agreement signed by all 16 crop insurers in July.
Under the new Standard Reinsurance Agreement under the soft cap companies' base agent commission is limited to 80 percent of the administrative and operating expense subsidy at a state level. Companies may still use profit sharing (if they have a profit at the end of the year). However, under the hard cap, total agent compensation, commission and profit sharing, is limited to 100 percent of the administrative and operating subsidy at a state level.
Mr. Zacharias said that 2009 and 2010 "were both good years," adding that, "When prices are high and farm incomes are strong, farmers want to buy crop insurance, in the near term, and that will help deal with the cuts in the SRA."
"Companies can earn a profit on the risk they take, but potential underwriting gains have been reduced as well through the new agreement," Mr. Zacharias said.
As a result, he said, besides Rain and Hail two other companies have merged with reinsurance companies, which has provided them with greater certainty.
Agents, too, have been affected, Mr. Zacharias said, noting, "Yes, agents are voicing concerns. Their compensation has been reduced, and there is tension."
He said that the agents and companies are working on the issue of dealing with the hard and soft cap, noting that there is evidence of reduction in staff by insurance agencies "although we are unclear as to the numbers of that."
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