Crop insurance companies are warning that farmers will soon have fewer coverage options and fewer agents to interact with. This comes after the recent agreement between the government and the 16 crop insurance companies that sell subsidized policies.
Every few years, the USDA and crop insurance companies renegotiate the Standard Reinsurance Agreement. The SRA — which determines risk-sharing and reimbursement rates — lays out what the federal government and private companies are responsible for when delivering crop insurance.
During a July 22 hearing of the House Agriculture Subcommittee on General Farm Commodities and Risk Management, insurance industry representatives derided the current deal — which includes a $6 billion cut — saying it had essentially been forced on them. Committee members repeatedly expressed displeasure with the SRA and worried for their farming constituents.
To read witness statements, go to http://agriculture.house.gov/hearings/statements.html.
“As a farmer during the 1980s farm crisis, I learned how important good crop insurance is to managing risk and getting through tough times out on the farm,” said Iowa Rep. Leonard Boswell, subcommittee chairman.
“Today’s hearing was an opportunity to get feedback about what kind of coverage farmers need, what the government can do to bolster their safety nets, and the role of private crop insurance agents. After today’s hearing, I still have concerns regarding the Standard Reinsurance Agreement and the potential impact it will have on small rural communities in Iowa.”
SRA history, industry perspective
In a later press conference, Bob Parkerson laid out the recent history of the SRA.
“The SRA isn’t just the 45 pages that deal with the financial aspects” of crop insurance, said the president of National Crop Insurance Services, who had testified before the subcommittee. “It also has quite a bit of paperwork and support with four more (appendices).”
To read Parkerson’s testimony, visit http://agriculture.house.gov/testimony/111/h072210/Parkerson.pdf.
At the beginning of 2009, the insurance industry began to prepare for the coming negotiations, “when we knew the SRA wouldn’t hold up and they’d probably cancel.” Prior to the first draft of the new SRA, “NCIS and the 16 companies that are SRA-holders sent in … close to 500 pages of suggestions and material to support what we had wanted to do.”
Last October, the USDA’s Risk Management Agency “officially canceled the SRA. In December, they presented us with the first draft … which had a rather onerous $8.4 billion cut.”
A second draft was released in mid-February. In that draft, “they started hinting at a cap on agents’ commissions. They also continued on with something we’d been against: a reference price we felt was totally unfair and actually disconnected the program with the way it should be run in determining the prices for commodities. We wrote and talked to them a great deal over that issue.”
Eventually, in April, there was a sit-down between the sides.
“This is important and needs to come out: we weren’t able to sit down and work out any negotiations with their key people until sometime in April,” said Parkerson. “We traded and killed about six forests (in the form) of pages of paper before we got to that point.
“The key here is that after we met with them and had face-to-face discussions with RMA key staff … we were able to make some headway and thought that was very good.”
Then, about a month later, RMA produced a third draft. “They called that ‘the final draft’ and there was no negotiation, whatsoever,” said Parkerson. “We were told we had to take the third draft.”
The SRA required “giving up some legal rights guaranteeing agents couldn’t sue. Even though they’re independent agents we had to take responsibility for them. Second, they came out with the SRA hard cap.
“We would have liked to have dealt with those” prior to the final draft “but were told we couldn’t.”
Cuts and consequences
The SRA negotiations were even more cynical than the take-it-or-leave-it deal, said Keith Collins, a consultant with the industry who appeared with Parkerson. In light of how the government achieved the $6 billion cut, “it seems pretty clear that the (Obama) administration had a target for this negotiation and that target would be sizable because of the need to deal with the deficit.”
When the Obama administration, in its first SRA draft, proposed cutting $8.4 billion, “that was a signal to the (insurance) industry that they had a very big target in mind,” said Collins. “I think everybody knew that $8.4 billion was a stretch, an overreach, excessive. So, it was viewed as a tactical ploy: start out with a very big number and peel it back to what you really had in mind, which, as we saw, was more in the neighborhood of $6 billion.”
Taking this approach promoted the perception the government “had made a concession by going from $8.4 billion to $6 billion. In the end, $6 billion is a huge, unprecedented number and rivals the cut made in the 2008 farm bill.”
What about changes to the way SRAs are negotiated in the future?
“There were several congressmen who expressed concern about the way the last draft … was dealt with,” said Parkerson. “I do feel that what has happened is the USDA/RMA reached beyond what the House Agriculture Committee had in mind.”
In the 2008 farm bill, the House Agriculture Committee “put in a phrase that said we ‘could and should’ be able to sit down with USDA in open conversation and direct negotiation,” said Parkerson.
Also of concern is the $6 billion cut actually affects the agriculture baseline.
“That’s a huge amount of dollars to be taking away from American agriculture and budgets,” said Parkerson. “Several (congressmen) have indicated this was beyond the ‘haircut’ they anticipated (crop insurance) getting — particularly the capping of agent commissions.”
Parkerson said the current cut atop the 2008 farm bill (a $6.8 billion cut which, added to the current $6 billion adds up to $12.8 billion removed from the program in less than two years) “shocked some of the committee members.”
Another inevitability of the SRA: industry consolidation.
“I already know of a few who are talking about consolidation or looking, perhaps, to consolidate,” said Parkerson. “I know quite a few insurance agents talking about selling their agencies. There is going to be change. How much I can’t say.”
However, “I’d be willing to bet you a beer that we’ll see companies change and merge over the next couple of years. There will have to be. You can’t take $12 billion out of the program and not expect change somewhere. It’s going to happen.”
Parkerson wasn’t hopeful about industry-friendly tinkering on the new SRA and said the best chance for change will be the 2012 farm bill. “Our hope is that we can convince Congress to change the battleship’s direction and turn it a little during the 2012 farm bill. Perhaps that will correct some of the over-correction we’ve been given.”