Crop Insurers, Agents Unhappy With $36 Million Subsidy Cut for 2005

The deadline for crop insurers to agree to the 2005 version of the federal crop insurance program’s standard reinsurance agreement (SRA) came and went June 30. While all the 14 insurers that participated in the program last year have signed on again, neither they nor the agents who sell crop insurance are happy about the $36 million subsidy reduction called for in the SRA over the next two years.

“This year certainly is starting out to be very challenging, so I think the crop insurance industry is justifiably very worried about what’s going on,” Paul Horel, president of the Crop Insurance Research Bureau in Overland Park, Kan., told the Associated Press. “It’s going to be real challenging for much of the industry to be profitable over the next couple years with this agreement.”

Agents fear the cuts will lead to a reduction in commissions and effectively reduce the availability of coverage in rural areas.

“This is a fairly disastrous thing for the agents and brokers as well as farmers,” said Cliston Brown, speaking for the Independent Insurance Agents and Brokers of America. “We believe the budget cuts called for in the SRA are going to come from one place and that’s agent commissions. Essentially, crop insurance agents who have these lines of insurance will no longer be able to make a profit selling it so they’ll have to stop.”

Brown also predicted consolidation within the crop insurance segment, noting that more than 50 insurers participated in the program when it first began.

Ross Davidson, administrator of the U.S. Department of Agriculture’s Risk Management Agency that oversees the program, dismissed Brown’s scary scenario.

“I think we will see a turnaround in the general decline in the number of companies in the program,” he told Insurance Journal. “Throughout financial services, property/casualty, commercial credit, etc., the entire market has experienced consolidation over time. That’s a natural trend in the financial services market that’s helped companies gain economies of scale.”

Davidson also argued that companies’ cuts do not have to come out of commissions, noting that loss adjustment expenses, non-sales information technology expenses and other administrative costs could be targeted by insurers.

“We on purpose did not go in and try to put limits on a particular expense category,” Davidson said. “And there were some who were suggesting that we do that. For one we don’t want to micromanage. Insurers may save through the underwriting side, not necessarily commissions. That’s up to them.”

Both Davidson and Associate Administrator David Hatch argued that the new SRA gave crop insurers more flexibility that could make up for the reduced subsidy.

“The new SRA allows insurers to transfer much more risk to the government,” Hatch said. “If they make the correct underwriting decisions then they will have the ability to make a sound return on their investment. If they don’t make good underwriting decisions, then they shouldn’t be in the insurance business.”

Robert Skow, CEO of the Independent Insurance Agents of Iowa and a former crop insurance agent, expressed outrage that the RMA’s new direction. “This is just mad math on the part of the federal government and the administration,” he told Insurance Journal. “There’s going to be a lot of agents and companies who, if this is forced down our throats, will not be able to service their customers. If an agent and company can’t make money on a product, they simply don’t offer it anymore.”

Skow argued that the federal subsidy represents about 21 percent of every premium dollar, and the margins will become increasingly slim.

“I would love to take the USDA out to one of my agents in a town of three or four thousand who’s working 60 to 70 hours a week just to scratch out a living,” Skow said. “We’re doing this at a very reasonable price for the federal government, and what’s the thank you? ‘Screw you, boys.'”

Skow also complained that agents were left out of the SRA negotiating process. Davidson said that was because agents were not a direct party to the contract. Davidson said that agent groups were invited to give their feedback though Skow said the USDA “blew us off and didn’t return our phone calls.”