An often disastrous early growing season means crop insurance is paramount for many U.S. producers. With many of their farming constituents facing ruinous growing conditions, members of the House Subcommittee on General Farm Commodities and Risk Management put crop insurance center-stage during a Friday morning hearing.

Testifying before the subcommittee, William J. Murphy, Administrator of USDA’s Risk Management Agency (RMA),was peppered with questions regarding ongoing floods, drought, coverage levels and program intricacies. A 30-year veteran of crop insurance programs, Murphy told the subcommittee he’d never “seen anything like” the widespread 2011 disasters.

He also pointed out how crop insurance has spread through U.S. agriculture. “Fewer than 100 million acres of farmland were insured under the program in 1994. Today, over 250 million acres of farm and ranch lands are covered by federal crop insurance, for an overall participation rate exceeding 80 percent for the major crops.

“As the amount of insured acreage has increased, so too has the liability, or value of the insurance in force. In 1994, program liability was less than $14 billion. Industry estimates suggest 2011 program liability could exceed $100 billion.”

Other highlights of Murphy’s testimony (see here for his unabridged testimony) included:

  • RMA “partners.”

“There is a unique and successful relationship between RMA and our private partners, the 15 approved insurance companies, and the agents who deal directly with farmers and ranchers. Producers purchase federal crop or livestock insurance from insurance agents operating in their communities, who sell the insurance on behalf of the 15 insurance companies.

“This relationship leverages the respective strengths of the public and private sectors. The insurance companies provide federal crop insurance under reinsurance agreements with the Federal Crop Insurance Corporation (FCIC), administered by RMA.”

  • 2011 losses.

“My staff and I are closely watching all developments to insure that producers get the protection provided by their policies. The Prevented Planting coverage available in most policies has been of extreme importance this year in areas where standing water or waterlogged soil prevented producers from getting into their fields until past the time for planting.

“In drought-stricken areas, the compensation provided for reduced yields will be extremely important in helping producers to survive. In years like this one, the value of this critical safety net is made clear.”

  • Standard Reinsurance Agreement.

“On June 10, 2010, USDA released the new reinsurance agreement and announced that $6 billion in savings were created through this action. Two-thirds of this savings went toward paying down the Federal deficit, and the remaining third was used to support high priority risk management and conservation programs. By containing program costs, these changes also ensure the sustainability of the crop insurance program for America's farmers and ranchers for years to come.”

In late-hearing testimony, responding to a query by Ohio Rep. Jean Schmidt, Murphy expanded on the risk-sharing balance between the government and insurance companies. “The lower the loss ratio, the lower the claims, the more the companies assume the risk. The higher it gets, the more the government assumes risk. That’s why the government is involved in the program – if there wasn’t a need, we wouldn’t be here.”

The insurance companies “are concerned such a systemic loss could occur in the Midwest and High Plains that they wouldn’t be able to address it. That’s why (the government) is here and where we put the majority of our protection: the higher levels … above a $1.20 loss ratio.”  

  • Identifying “questionable behavior.”

“The 2002 farm bill required the Secretary of Agriculture to develop a Comprehensive Information Management System (CIMS) to be used by the Farm Service Agency (FSA) and RMA in the farm programs they administer.”

This has led to “a spot-check list of producers engaging in questionable behaviors which is provided to FSA for further investigation. With the assistance of FSA offices, RMA and the insurance companies conduct growing season spot checks to ensure that claims for losses are legitimate.

“These efforts have been highly successful as the cumulative cost avoidance from data mining and related activities from 2001 through 2010 is estimated to be almost $840 million, based on our analysis of the changes in loss experience for those people placed on the spot-check list. … We believe the targeted company reviews enabled by data mining will be more effective and efficient than the random review process of previous years.”

Rice, levees, claims

With major rice acreage in his east Arkansas district, Rep. Rick Crawford asked Murphy to provide insight “into differences in participation between crops and/or regions. For example, according to RMA data, about 68 percent of rice acres – particularly in Arkansas – were insured. By contrast, nearly all of Texas’ cotton acres were insured.”

Murphy was “happy to report we’re seeing increases. One of the concerns we often get is between major program crops and specialty. We’re at 83 percent participation in the major program crops and have come up to 75 percent for specialty crops.”

The introduction of the “additional subsidy for enterprise units has also been extremely helpful” Murphy continued, especially in east Arkansas for both rice and cotton. “It reduces the premium tremendously. Growers have flocked to those programs.”

Even so, “Arkansas, Mississippi, Alabama – that area – is where we’re seeing lower participation than other parts of the country. We’re actively working with commodity groups down there to improve the programs. We’re looking at the program dates to make sure they’re the correct (ones) we should be using.”

RMA is “even getting into the policies themselves. We’ve been having great meetings with rice growers and looking at additional coverage the growers would like to see for downed rice. Hurricanes come through the area and they have to deal with the additional costs of harvest. Hopefully, we’ll see progress in the next couple of years.”

Program integrity is “another big issue,” said Murphy. Farmers must be “convinced the premium dollars they’re paying out are only going to legitimate losses. Compliance officers are putting extra effort into that area to show that.”

At the end of the hearing, Murphy again addressed the need to increase rice and cotton coverage. “Rice growers, especially in the central-South, have wells to get their water. They’ll always be able to get water. It’s a perception of risk. They’re big concerns are hurricane and disease. And how often does that occur? It’s all a perception of risk.”

Crawford asked for clarification regarding crop insurance pay-outs in areas flooded following the Army Corps of Engineers deliberately breaching levees along the Mississippi and Missouri rivers.

Murphy said those crop losses are covered. “The Corps provided us with information of what would happen if they didn’t breach the levees – additional damage would have occurred to crops downstream. … (Insurance) companies have been informed and they tell me they’re now moving loss adjusters in to start working with (affected) growers.”

The pressure on RMA and insurance companies to quickly address claims was obvious. “Just about every part of the country is dealing with something (disastrous)” said Murphy in response to a question by New York Rep. Christopher Gibson. “I’ve talked to the companies and they’re very confident that they have an adequately trained workforce. They’re moving people around the country, which they routinely do when addressing situations like this. I do believe we’ll be able to make the (required) 30-day turnaround.”