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Thursday, October 29, 2015

The budget deal and crop insurance: The sky is not falling

The crop insurance industry and many farm lobbies have made Chicken Little “The Sky is Falling” claims about a single element of the current budget bill under which, it is estimated, annual average revenues for private insurance companies selling heavily subsidized crop insurance would decline by an annual average of $300 million between 2017 – 2026.
More specifically, Title II of the budget bill requires the USDA, through the Federal Crop insurance Corporation, to change the conditions under which private companies sell heavily subsidized crop insurance so that their underwriting gains would average 8.9% of all premiums paid into the insurance pool for policies where the companies retain risks of losses.  Under the current Standard Reinsurance Agreement, the USDA set a target “rate of return” for the companies of 14.5% of total premiums.

On an impressively bi-partisan basis — mainly because each of those congressional members have substantial agricultural constituencies — the House and Senate Agricultural Committee leadership have expressed outrage with the bipartisan budget bill. Their positions mirror those of the national crop insurance lobbies and, somewhat paradoxically, some major agricultural interest groups.
However, in fact there are no direct changes to the subsidies that farmers will receive when they buy federal crop insurance policies.  Taxpayers will continue to pay about 70% of the total costs of the program and on average over 60% of all premiums paid into insurance pools to cover indemnity payments for losses crop and revenue losses incurred by farmers.
In other words, the proposed change in insurance company reimbursements will have no impacts on the prices that farmers pay or the availability of crop insurance.  Why? Because the crop insurance policies and premium rates are determined solely by the USDA Risk Management Agency, and the structure of those policies and the subsidies farmers receive are left untouched by the budget bill.
The private insurance companies only sell and service those crop insurance policies, receiving direct subsidies for their operating costs from the government and, effectively, a guarantee that over the long term underwriting gains for the companies will be positive.  The budget bill simply reduces the underwriting gains the companies can expect to receive, which perhaps can be viewed as a cherry on the top of a pretty substantial cupcake.
Figure 1 shows the direct subsidy payments and underwriting gains private insurance companies have accrued from the federal crop insurance program since 2000.
Figure 1. Annual Underwriting Gains/Losses and A&O Recovery Paid to Crop Insurance Companies.
First, notice that the private insurance companies have only experienced substantial underwriting losses in one of the last 15 years.  This occurred in 2012 when the Corn Belt, the region that carries that largest amount of liability in the U.S., experienced one of the worst droughts on record.
The federal crop insurance program partnership with private companies is supposed to exist for “risk sharing” purposes.  However, risk sharing doesn’t seem to involve much risk when one of the partners, the private companies, seems to make a good amount money nearly every year at the other partner’s — the taxpayers’ — expense.  Second, underwriting gains come on top of the subsidies the companies receive for selling and servicing the federally subsidized crop insurance policies.   Those underwriting gains have amounted to $10.7 billion over the last 10 years, an average of $1 billion per year.
So, what is the likely impact of this bill on farmers?  None.  And on crop insurance companies?  They will make lower profits, about $300 million less a year beginning, perhaps, in 2017.  The bill requires a new agreement that will lower company underwriting gains by December 2016.
But, for insurance purposes the 2017 crop year begins in September 2016 when farmers plant crops — such as winter wheat — that are harvested the following May and that must be insured at the end of September.  In other words, it seems quite likely that this provision will have no impact on the crop insurance companies until 2018.
Further, the data in figure 1 show that in the mid-2000’s when about the same amount of policies were sold, many of the same private insurance companies happily survived on underwriting gains that averaged half a billion dollars a year, which is approximately the amount they would receive under the budget deal.  There could be some consolidation in the number of companies selling federal crop insurance policies.  This shouldn’t worry anyone outside of these companies; as the number of companies selling crop insurance has oscillated between 13 and 19 since 1995.
Currently 17 companies are marketing federal crop insurance products in spite of slight reductions in the underwriting gains built into recent agreements with the USDA.  Moreover, several of the insurance companies now selling crop insurance to farmers are held or directly owned by large financial firms that use agricultural insurance as a form of diversification for their other enterprises.
Claims that agriculture is being “raided” to pay for spending in other areas of the budget are also simply not true.  To illustrate, the biggest change in the 2014 Farm Bill included the termination the Direct Payments program, which amounted to savings of $5 billion per year.  However, the program was replaced with two more expensive price and income support programs, which are now estimated to cost the taxpayer over $6 billion per year.
So, were members of the House and Senate agricultural committees correct yesterday when they predicted the budget bill would eliminate the federal crop insurance program? Probably about as accurate as Chicken Little when she predicted the end of the world because an acorn hit her on the head.

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