farmgate: What Is The Health Of The Crop Insurance Industry?
With all of the crop production problems that have beset the Cornbelt this year, you may have a close relationship with your crop insurance agent. Not that you will be picking out curtains or anything like that, but this has certainly been a year for frequent communication and it has not come to an end. You may even be wondering about all of the claims that will have to be paid, and if crop insurance companies can weather the current storm. That’s a good question, too!
The crop insurance industry continues to diminish in size annually with companies buying each other. But are they making money and are the companies that you expect to send you an indemnity check in good financial health? Iowa State University economist Bruce Babcock conducted a health check up on the crop insurance industry after the USDA reported high profitability and the industry disagreed. USDA’s Risk Management Agency said the average annual rate of return on equity within the industry since 2000 has been 19%, which was 72% more than what might have been expected. In response, the insurance industry said the crop insurance industry is not as profitable as the property and casualty industry and there is more risk in crop insurance. This tit-for-tat is not new and causes Congressional inquiries into crop insurance that are frequently not clearly answered.
Economist Babcock says a simple and reasonable measure of profitability indicates, “that industry subsidies could be reduced by more than a billion dollars without adverse impacts on program effectiveness.” He says the big difference between crop insurance and unsubsidized insurance is that about 80% of the premium revenue is paid by taxpayers in return for the requirement to sell crop insurance to all farmers who want to buy it. And Babcock says that makes good reason to question the fact about a 72% rate of return above what might be otherwise expected.
While crop insurance products and premiums are the same from one company to another, because of federal equality requirements, there is some competition among the various crop insurance carriers. And Babcock says, “Those companies that are best at using the government-provided reinsurance make more money than others. In addition, companies compete with each other for market share by competing for crop insurance agents' books of business.” He says those companies that pay higher commissions to independent agents will tend to increase their market share. Thus, Babcock says, if all else is equal, examine the commission structure to find out which companies are doing well and which are trying to cut losses.
His examination of crop insurance agent commissions found that in the past 8 years, commissions have held between 15.5% and 17% as a percentage of total premiums paid. But in the same time, he says the dollar amount of commission paid per policy sold has increased fourfold. Adjusting commissions to general wage inflation, Babcock says, “the amount by which agents were able to increase their compensation because of increased profits of the crop insurance companies in 2008 was $1,015 per policy.” He multiplied that amount by the 1.148 million policies sold in 2008 to arrive at $1.165 billion, which he contends is overcompensation of crop insurance agents. And Babcock feels that’s an excessive support of the crop insurance industry.
If Babcock’s $1.165 billion is cut from industry revenue, there would be about $2 billion left from underwriting gains and expense reimbursement. He suggests that underwriting gains could be returned to the Risk Management Agency, or RMA could cut expense reimbursement to $426 per policy, and save $500 million per year in commissions. But he doubts that Congress would cut such a program that has pumped money into the pockets of crop insurance agents who live in rural areas. Nevertheless, he believes the same level of service can be provided to farmers at a much lower cost.
Summary:
Crop insurance companies and their agents will have a lot of work this fall, but they will be compensated for it. With an average commission exceeding $1,000 per policy, crop insurance agents could serve as an indicator of the health of the industry. While the industry says it is in challenging financial times, USDA disagrees, however there are difficulties in determining which side is correct. If agent commissions are the only inequitable factor, the financial health of the industry could be determined by those commssions.
Posted by Stu Ellis on November 4, 2009 12:35 AM to farmgate