Crop Insurers, Agents Unhappy With New SRA’s $36 Million Subsidy Cut

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.

And while all the 14 insurers who 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.”

Agent groups said they fear that the cuts will lead to a reduction in commissions and effectively reduce the availability of crop insurance in rural areas.

“This is a fairly disastrous thing for the agents and brokers as well as farmers,” said Cliston Brown, spokesman for the Independent Insurance Agents and Brokers of America (IIABA). “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 further 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 (RMA) that oversees the federal crop insurance program, pooh-poohed Brown’s nightmare scenario.

“I think we will see a turnaround in the general decline in the number of companies in the program,” Davidson told IJ. “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 did not necessarily have to come out of agent commissions, noting that loss adjustment expenses, nonsales information technology expenses and other administrative costs could be targeted by insurers looking to do more with less.

“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, so much so that one additional insurer has submitted an application to participate in the program while two others have expressed interest.

“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.”