The squeeze is on for crop insurers and agents

/wp-content/uploads/2022/11/BR_web_311x311.jpeg


Iowa insurers and agents specializing in crop insurance are bracing for a big financial hit from a new agreement governing the federally subsidized program.

Farmers Mutual Hail Insurance Company of Iowa is among 16 insurance companies that recently signed a renegotiated agreement for the Multi-Peril Crop Insurance program. Under that contract, known as the Standard Reinsurance Agreement (SRA), the crop insurance industry faces $6 billion in cuts in the next 10 years, or $600 million per year.

“I think the agents and the companies both probably feel like (Congress) has gone too far this time,” said Steve Rutledge, president and CEO of Farmers Mutual, which is based in West Des Moines. Last month, Rutledge told a U.S. House subcommittee on risk management chaired by Rep. Leonard Boswell the same thing, as the subcommittee considered final revisions to the agreement. The cuts made through the SRA come on the heels of a $6 billion reduction made through the 2008 farm bill two years ago, he noted.

The SRA reductions, which will come in the form of cuts to potential underwriting gains by the companies and a cap imposed on agent commissions paid by the insurers, will be absorbed primarily by insurers and agents in the five “Group 1” states in the program – Iowa, Indiana, Illinois, Nebraska and Minnesota.

Farmers Mutual is among four Iowa-based crop insurance companies that together account for approximately 35 percent of the crop insurance market, which is expected to total approximately $7.5 billion in 2011.

The changes will have a devastating effect on the income of thousands of independent insurance agents in the state, said Bob Skow, CEO of the Independent Insurance Agents of Iowa. The approximately 6,000 licensed crop insurance agents in Iowa are being hit by “a double whammy” with the combined impact of the reduction in underwriting gains and commission caps, he said.

“We’re seeing between 30 and 40 percent reduction in agents’ compensation because of this move,” Skow said. “There are agencies that are in the process of letting folks go because of this. “

The 2008 farm bill authorized the U.S. Department of Agriculture’s Risk Management Agency (RMA) to renegotiate the agreement effective for the 2011 crop year. The agency said a new agreement was needed to address the effect of significant increases in commodity prices in recent years. Those price increases caused annual crop insurance industry payments to more than double from $1.8 billion in 2006 to an estimated $3.8 billion in 2009, despite an overall decrease in the total number of crop insurance policies written between 2000 and 2009.

The agreement was intended in part as a deficit-reduction move by the RMA. The agency also hopes the new agreement will encourage more farmers outside of the Group 1 states to use the program by providing companies and agents better incentives to offer it.

Two-thirds of the $6 billion in savings will be used to pay down the federal deficit, while the remaining third will support high-priority risk management and conservation programs. The new agreement “lays the foundation for a more sustainable federal crop insurance program,” U.S. Agriculture Secretary Tom Vilsack said in a July 12 press release.

That sustainability will cost Iowa insurers, however. Farmers Mutual, which conducts 75 percent of its business in the Group 1 states, estimates a double-digit reduction in profits. “The new agreement, combined with the cuts in the 2008 farm bill, will reduce our average expected profitability by more than 20 percent for the foreseeable future,” Rutledge said.

In a financial recap on the company’s website, Rutledge said the Multi-Peril Crop Insurance program produced “a very nice profit” in 2009 for Farmers Mutual, which, combined with good returns on its investment portfolio, would enable the company to increase its reserves by approximately 10 percent.

A study conducted last year on behalf of the RMA concluded the crop insurance industry has excess profits to spare. Last fall, the agency commissioned a study which estimated that since 2000, the crop insurance industry has received an annual average rate of return on equity of 17 percent, when an average reasonable rate of return for that period was 12.7 percent.

Another study, commissioned by National Crop Insurance Services Inc., refuted RMA’s conclusions, saying the RMA study did not apply generally accepted accounting principles in its assumptions.

Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University, said the crop insurance business is “too profitable” for the new agreement to cause an industry shakeout. In an article he wrote for the Iowa Ag Review last fall, he concluded the crop insurance industry, whose revenue totaled $3.2 billion in 2008, could absorb a $1 billion-plus reduction in revenue.

“There will be less revenue coming into the industry, for sure,” Babcock said.

Rutledge said concluding that the industry has had excessive profits ignores its volatility compared with other types of property and casualty insurance. The crop insurance industry hasn’t experienced a catastrophic year since the floods of 1993, and another such year could easily wipe out years of gains, he said.

“But we just haven’t had that catastrophic year, and we all know it’s going to happen; you just don’t know when,” he said. “That’s why the farmers buy the insurance.”

The private reinsurance companies that help cover the crop insurance companies’ risk exposure in the program will also be hurt, Rutledge said.

“Some of them may choose not to participate any longer,” he said. “They have their choice of any kind of business in the world; if there are better returns somewhere else, they don’t have to write crop insurance. I’m sure there will be several reinsurers that will stop writing crop insurance this year, simply because of the new structure of the agreement.”

Rutledge also said a few “large volume” agents have approached several companies, including Farmers Mutual, about selling their businesses directly to the companies simply because they are no longer sure they can survive under the new agreement. “At this point, we don’t even know the criteria under which the RMA might allow such sales,” he said.

Skow said the changes were made despite numerous attempts by his association to point out the ramifications to USDA officials. “It’s a major blow to the crop insurance program as we know it,” he said, “and everybody stood around with their hands in their pockets and said, ‘So what?’”

Rutledge predicts that within the next two or three years the number of companies participating in the industry will very likely decline. “I would not be surprised if half a dozen or more companies change ownership,” he said.

“I think you will see smaller companies merge or be acquired,” Rutledge said, adding that his company is actively seeking opportunities to grow.

“The face of this industry is going to change,” he said, “and everyone involved is fervently hoping that when Congress begins writing the new farm bill it will be clear to them that the health of the program is very much at risk.”