Statement by RMA Administrator Eldon Gould before the House Agriculture Subcommittee on General Farm Commodities and Risk Management, June 7, 2007:

“The Federal crop insurance program has experienced extraordinary growth in the last quarter century. In crop year 2006, through the private sector delivery system, RMA provided $49.9 billion of protection (insured liability) to farmers on approximately 370 commodities, covering nearly 80 percent of eligible acreage of major U.S. crops. This coverage was offered through 21 plans of insurance and approximately 1.1 million policies insuring about 242 million acres. In 2005, crop insurance provided approximately $2.4 billion in indemnity payments to farmers and ranchers. For 2006, indemnity payments to farmers totaled approximately $3.4 billion. In 2007, we will reach an estimated $68 billion in insurance protection for American agriculture.

The Federal crop insurance program is working as intended and is meeting its targeted loss ratio.

It is useful to quote from a private agent, whose comparison of Crop insurance with other forms of insurance follows:
 
“Many local insurance agents laugh at me and ask why I sell Crop Insurance.  They would not consider writing it due to the workload as compared to other forms of insurance, most at equal or higher commissions.

“Life Insurance - One application and claim to file.

“Home Insurance - One application and most without ever having a claim.

“Auto Insurance - One application, occasional vehicle damage, and seldom a claim.

“Crop Insurance - One application, annual renewal, annual acreage report with acres and final plant dates, annual production report, communication with the Farm Service Agency so as to verify certified acres and then amending the acreage report, due to the fact that the government agency does not supply this information by the deadline required by the government for the insured and the insurance company.  More claims by far than any other line of insurance.  Must coordinate with hail insurance in order to supply 100 percent of the coverage necessary for today’s agricultural producer, as it only supplies a portion of the coverage either desired or required by a third party.

“Not only is the commission equal to or more per sale for other types of insurance, but with the same allotted time and staffing you can sell numerous policies of the other forms of insurance in the time you take on a crop insurance policy.”

Reimbursement of delivery expenses and the potential for underwriting gain does not over compensate for the risk taken by crop insurance companies.  Crop insurance is a risky business, especially when compared to other lines of insurance and taking into consideration the nature of the risk associated with production agriculture enterprises relative to the risk in other insured ventures.  Multiple studies have shown that crop insurance profitability is lower and more volatile than other lines of property and casualty insurance (Deloitte and Touché 2004, Price Waterhouse Coopers 1999 and 1997, Milliman and Roberts 2002).  Indeed any analysis of Best’s Aggregates and Averages will demonstrate this fact.  The Deloitte and Touché study reported a 10 year profitability measure of 7.9 percent for the crop insurance program with a standard deviation of 12.9 percent while other lines of property and casualty insurance ran a 12.7 percent return with an 8.9 percent standard deviation (1992 – 2002).

History has also demonstrated that without the private sector delivery system, the federal government could never sell and service the program efficiently. Government delivery cost twice as much and never successfully served farmers.

From 1938 until 1981, the USDA was solely responsible for delivering the federal crop insurance program. It was only a token program available in a few counties in a few states. The only policies offered by the private sector were crop hail policies.

Beginning in 1981 and continuing until the late 1980s, Congress began a transition period when the federal crop insurance program was delivered both by USDA, through a structure known as “master marketers,” as well as private sector companies, through a structure known as the “standard reinsurance agreement” (SRA). During this period, the program was not considered successful and never insured more that a third of the eligible acreage in the country. Not until the program became completely delivered by the private sector did it become successful.

A study released in September, 1989, by Arthur Andersen & Company concluded that USDA experienced delivery costs twice the amount of the private sector participants, on average.  Specifically, the study reported that for 1987 total delivery cost by private sector companies equaled 43.17 percent of premium while for master marketers the total was 85.30 percent.  

Agriculture production and marketing disasters result in highly correlated losses, which mean a large number of farmers experience losses from the same disaster.  Thus, crop insurance, especially on a multi-peril basis, cannot be priced attractively enough to be marketed successfully as a fully commercial product.  Therefore, a federal program is necessary to have crop insurance widely available to farmers, ranchers and growers across the nation. This is especially true when we provide insurance to farmers regardless of size, location and financial status.

Additional direct government subsidies would not support the financial infrastructure of American agriculture as crop insurance does. Just as homeowners would not have the capital to afford housing without insurance, capital would not be available to finance American agriculture without crop insurance.
 
Crop insurance is a multiple farmer benefit program.  The fundamental reason for the crop insurance program is to serve as protection against weather and market disasters.  Farmers need protection from these commodity production and marketing risks because generally they cannot afford the associated potential loss of revenue and capital. 
 
However, the benefit of crop insurance is greater than the potential for indemnities, just as home insurance is more important than the amount of indemnities that are paid. Benefits beyond indemnities are identified and summarized by the following three factors:
 
Credit and the Banker Factor:   Just as the overwhelming majority of home owners need a mortgage to buy a home, nearly every farmer borrows money on an annual basis to operate their farm.  Bankers and farmers have come to rely on crop insurance to help mitigate the risk of their production loans. 
 
Landlord Factor:  The president of the American Sesame Growers Association, Steve Chapman, recently testified before Congress that Sesame growers needed an insurance policy not because of the risk of growing sesame but because landlords demanded it.
 
Forward Marketing Factor:  One of the primary reasons farmers buy revenue insurance is to use the insurance policy as security when they forward market a portion of their crop.  Both RA and CRC allow farmers to forward market with less risk. This enables farmers to realize a much greater average return on their crops.