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Crop insurance works well because it is a unique public-private partnership. History has demonstrated that without Government subsidies and reinsurance, farmers could not afford to pay the premiums that would be necessary for a national crop insurance program. History has also demonstrated that without the private sector delivery system, the federal government could never sell and service the program efficiently.
From 1938 until 1981, the USDA was solely responsible for delivering the federal crop insurance program. However, in those years, crop insurance was not a very extensive program and certainly not the national program that it is today. In fact, it was more or less only a token program – one that was available only for a few commodities in a few counties in a few states. In this time period, the private insurance industry marketed only crop hail policies.
Beginning in 1981 and continuing until the late 1980s, Congress authorized a transition period for the federal crop insurance program, during which it 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 it never insured more than a third of the eligible acreage in the country. Not until it was completely delivered by the private sector and after receiving increased funding in the 1994 crop insurance legislation did the program begin to approach its current level of success.
Congressional funding for the program has also played a significant role in helping achieve the program’s current level of success. Increases in premium subsidies have resulted in increased participation levels and increased coverage levels. Increases in coverage and participation have been shown to be directly linked to the amount of program funding. It can be assumed that any reduction in funding for the program will have negative impacts on farmers’ participation and coverage under the program, resulting in an increased demand and need for other less efficient forms of Federal assistance.
The modern crop insurance program is an indispensable marketing tool. Crop insurance often offers the courage producers need to market in advance of production as well as harvest. Today, it is more common place than ever, and the practice continues growing rapidly, for farm advisors to explore with producers how crop insurance offers the opportunity to more aggressively market, especially in times of high prices, extracting profits from markets, while they are available, in order to better control their financial destiny. With this courage, producers can extract profits from the market place at no cost to the Government. The importance of crop insurance in marketing farm commodities today cannot be over emphasized, and if the program continues to grow, marketing assistance will become an even greater benefit in the future. Without crop insurance, farmers would be less likely to implement marketing strategies which allows farmers to take advantage of price increases that occur during the growing season.
The biggest reason farmers have not taken advantage of high prices that have been available in past growing seasons is the fear of not being able to satisfy the terms and conditions of any associated contract. Crop insurance, as we know it today, provides replacement-cost coverage that allows farmers to act on marketing opportunities. Increased numbers of farmers using marketing tools is a strong indication that, as a group, they are gaining confidence in making money from the market rather than their crop insurance policy.
WASHINGTON, April 11, 2007 — Agriculture Secretary Mike Johanns today announced the appointment of Curt Sindergard to the Federal Crop Insurance Corporation’s (FCIC) Board of Directors.
The FCIC Board of Directors is responsible for the management of the federal crop insurance program. The board’s principal duties include reviewing and approving policies and plans of insurance, as well as related materials or modifications. Additionally, the board can reimburse organizations for their research, development, and maintenance costs for new products.
Mr. Sindergard, a corn and soybean farmer from Rolfe, Iowa, will serve as one of four producer representatives.
Other Board members include:
USDA’s Chief Economist, Keith Collins, Chairman.
Under Secretary for Farm and Foreign Agricultural Services, Mark Keenum.
Risk Management Agency Administrator and FCIC manager Eldon Gould (non-voting member).
Farmer/producer representatives:
Frank Bedford Jones, Jr., Lubbock, Texas, farmer-rancher.
Timothy M. Kelleher, Yuba City, Calif., lawyer and rice producer.
Luis Monterde, Purvis, Miss., specialty-crop producer.
Insurance representative:
Willard “Bill” Classen, Des Moines, Iowa.
Reinsurance/regulatory representative:
James “Mike” Pickens, Little Rock, Ark.
Information regarding FCIC Board meetings and related materials may be found on the Risk Management Agency’s Web site for FCIC.
The modern federal crop insurance program is an indispensable financing tool. Without crop insurance, many farmers would be unable to obtain financing. Crop insurance makes the process of farmers obtaining annual operating loans much easier, simpler and efficient. In the case of farmers who have purchased crop insurance, banks usually require less collateral because they consider these farmers to be better protected. Many younger farmers with less collateral would be unable to obtain financing without crop insurance.
Farmers understand more and more that crop insurance is another cost of doing business. However, the purchasing cost of crop insurance provides certain benefits for the farming operation, including greater ability to finance land purchases, enter into land rental contracts and arrange production input purchases. Protection provided by the program gives lenders much more confidence in extending credit.
The modern federal crop insurance program is an indispensable risk management tool. The program has grown more complex, including more policy choices and more stringent regulations, in becoming an efficient and effective risk management tool. An important factor in the growth of crop insurance is the growth in the number of policy options available to farmers. These additional options provide farmers with the capacity and the flexibility to insure a wider array of agriculture enterprises. They also permit the customization of risk management strategies to individual farm and farmer needs and requirements. And it is acutely important to know and understand that the expansion in policy options was a direct result of farmer requests and demands for more coverage options in more specific enterprise situations. The result has been vast improvements in the matching of farmer risk management needs to actual coverage.
Along with more complexity there are more regulations. And while regulations are certainly burdensome, they do generally serve to help enhance program integrity, which is a fundamental requirement for continuing a high level of congressional and public support for the crop insurance program.
The modern federal crop insurance program is such a huge success that it is the envy of the world. Other nations, such as France and Japan, have reviewed our crop insurance system and are starting their own programs. In recent years, especially since passage of ARPA in 2000, USDA has routinely testified before Congress that the federal crop insurance program is highly successful, especially in increasing the number of acres insured and the level of protection or coverage per acre. For the 2006 crop insurance year, the federal crop insurance program provided about 50 billion dollars of protection—a record level of coverage at that time. For the 2007 crop insurance year, projections indicate that farm risk protection will likely exceed 60 billion dollars.
Request for Applications: Non-Insurance Risk Management, Outreach, and Risk Management Education Grants.
The Risk Management Agency (RMA) of USDA announced availability of funds for partnership and cooperative agreements for non-insurance risk management, community outreach and assistance, targeted states, commodity partnerships, and small sessions programs. For more details, click here: Crop Insurance Grants.
The modern federal crop insurance program has grown more complex, including more policy choices and more stringent regulations. One factor important to the current level of success of the federal crop insurance program is the amount of monetary support provided by Congress to encourage farmer participation. However, another important factor in the modern program’s success is the growth in the number of policy options. A larger number of policy options, while increasing complexity, provide the program with the capacity and the flexibility not only to insure a wider array of agriculture enterprises but also to better customize risk management strategies to individual farm and farmer needs and requirements. Finally, more complexity generates more regulations. And while regulations are certainly burdensome, they do generally serve to help enhance program integrity, which is a fundamental requirement for continuing a high level of congressional and public support for the crop insurance program.
Often detractors of agricultural support programs cite what they call large underwriting gains as proof that crop insurance is a lucrative business.
The fact is that without federal assistance, farmers would be unable to afford crop insurance and private companies would not write crop insurance, leaving farmers underprotected from significant risks. Moreover fewer and fewer companies are writing crop insurance today than in the past.
Unlike the Federal flood insurance program, private insurance companies share in the risk of writing crop insurance policies. By sharing the risk, loss adjustment is not compromised. Moreover, because crop losses are highly correlated (drought impacts a wide area), a private market has never been established for multiple peril crop insurance. Underwriting gains tend to run in cycles with multiple years of gains offset by large loss years (1988 drought, 1993 flood). Since 2002, the program has not suffered a widespread loss, even though several areas of the country have experienced prolonged drought (western Kansas, Nebraska and South Dakota for example).
Twenty years ago over 60 companies participated in the crop insurance program. Because of reductions in administrative and operating expenses, growing program complexity and oversight, and a need to take advantage of economies of scale, today only 16 companies write crop insurance business. Crop insurance is a specialized line of business that requires unique expertise and unique expenses. On an industry basis, expenses exceed the federal reimbursement, premiums are paid to the government and not held by industry, and so underwriting gains are the sole opportunity for profit.
Myth: The crop insurance industry makes excessive profits
At least once a year, someone writes an article purporting that crop insurance companies make excessive profits. Over the years and across many national media reviews, none of these stories have resonated. Why?
Fact: Underwriting gains are not profits
The national media mistakenly characterize underwriting gains as profits. Underwriting gains occur when premiums exceed indemnities; the industry keeps a portion of the overage (underwriting gain). Conversely the industry pays a share of the loss when indemnities exceed premium (underwriting loss). Underwriting gains pay for private market reinsurance, expenses to operate the program not covered by the administrative and operating expense and taxes. Profits occur after all expenses are paid. Moreover, the industry uses profits to build capital for future catastrophic losses. Profits are typically invested, contributing to the health of the economy.
Fact: Crop insurance is a more risky business than other lines of insurance and subject to lower rates of return.
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).
Fact: The government has control of the program, the rates and the reinsurance terms.
Companies deliver the program within the government’s parameters. Thus, companies are not in a position to manipulate the program or its returns.
