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We Already Gave at the (Insurance) Office

Tuesday, September 13, 2011

At a time when the agriculture economy is white-hot, sending government checks to mega-farms that don’t need the money is indefensible. But that hasn’t kept leaders of the agricultural community from arguing against cuts in farm subsidies now that those inequitable handouts are, at last, squarely in the federal budget cutters’ cross-hairs. The constant refrain from subsidy defenders is that farmers already gave at the office – the insurance office:

“ ‘There is a limit’ to the cuts that agriculture can absorb after $4 billion in cuts to crop insurance due to the renegotiation of the crop insurance agreement…” – Sen. Debbie Stabenow (D-Mich.), quoted in the Capital Press newspaper .

“In the 2008 farm bill Congress made cuts to the program [crop insurance] totaling $6 billion. I don’t think anyone involved in those negotiations thought that less than two years later the Department [USDA] would again cut such a massive sum of money out of a program our producers depend on with such intensity.” – Rep. Frank Lucas (R-Okla.), at a House Agriculture Committee hearing (PDF).

“… Johanns said the crop insurance program was cut by $6 billion in the 2008 farm bill and another $6 billion in 2010, with $4 billion used for debt reduction and $2 billion reinvested in conservation programs.” – Sen. Mike Johanns (R-Neb.), quoted by theindependent.com

“Unfortunately, the farm safety net has been tapped several times in the recent past as the bottomless money reservoir to pay for other things, many of them not related to agriculture. In fact, all told, nearly $12.45 billion total has been cut from crop insurance in the past several years.” – Jerry McReynolds, past president of the National Association of Wheat Growers, writing in Farm Policy Facts

At EWG, we understand the Ag Committee’s desire to preserve its budget baseline. We could support that if the money were shifted from subsidies to food, nutrition and conservation programs. But the notion that “cuts” to the crop insurance program should take agriculture funding off the budget chopping block is nonsense.

Let’s take a closer look at who really sacrificed in the heralded cuts to crop insurance in the 2008 farm bill.

Start with the cost to taxpayers of the heavily subsidized program. It more than tripled from $2.2 billion in 2000 to $7.3 billion in 2009. The cost of subsidizing the premiums paid by farmers also increased sharply, from $1.4 billion to $5.2 billion, mostly because high commodity prices are making crops more valuable – and more expensive to insure. The increase in the cost of crop insurance has wiped out any “savings” from farm subsidy payments that fell because crop prices are so high.

The 2008 farm bill “cut” crop insurance by $3.9 billion over five years (2008 to 2012). But according to a Congressional Research Service report, fully 70 percent of that “cut” ($2.8 billion) was nothing more than a budget gimmick that allows USDA to collect premiums for two crop years in 2012 and delay payments to crop insurance companies until the next year.

“None of these revisions would directly affect the final monetary amounts for participating farmers or insurers, but would still be scored as savings within the five-year horizon of the bill,” the Congressional report said.[i]

That leaves $1.1 billion in actual cuts. About half of that, $618 million, comes from reducing from 24 to 22 percent of total premiums the amount of “Administration & Overhead” reimbursements that USDA sends to insurers. Yes, that’s right. While millions of Americans struggle every day without proper health insurance, USDA pays companies to sell crop insurance.

Most of the rest of the 2008 “savings” were achieved by increasing from $100 to $300 the administrative fee that farmers pay for a free insurance policy that covers 50 percent of any crop loss they suffer. Free to farmers, that is, not to taxpayers. USDA picks up the entire premium cost for this so-called catastrophic coverage.

The other $6 billion in cuts came in 2010 when USDA renegotiated the Standard Reinsurance Agreement (SRA) between the government and the companies. Under the 1980 Federal Crop Insurance Reform Act, private insurance companies took over the selling and management of these policies. But the federal government – meaning taxpayers – provides the financial backing (underwriting) for any major claims and heavily subsidizes farmers’ premiums.

The agreement is the contract insurance companies sign in order to participate in the program. It determines, among other things, what percentage of a farmer’s premium the government will pay (the premium subsidy), how losses will be split between the company and the government, and how much the company can charge the government for advertising, for commissions to insurance agents and related management costs.

A close look at the new agreement shows that it was actually the very profitable crop insurance industry – not farmers – that gave at the office. And they didn’t give very much.

Start with the amounts taxpayers send to insurers for administration and overhead. According to the Congressional Research Service, [ii] these reimbursements exploded from $540 million in 2000 to $1.5 billion in 2009. They go to pay commissions to insurance agents based on how many policies they sell. The new agreement “caps” the administrative and overhead subsidies at $1.3 billion a year, about as much as the companies got in 2007 and 2.5 times what they got in 2000. The cap adjusts for inflation each year, increasing to $1.37 billion by 2015, and the agreement guarantees the companies at least $1 billion a year.

The standard agreement also outlines a complex process for determining how risks and profits are shared between taxpayers and insurance companies. Obviously, it is in the companies’ interest to hold on to the policies with the highest premiums and the lowest risk of having to pay on a loss. The best indication of who’s getting the sweetest deal is the companies’ rate of return. In the run-up to renegotiating the agreement, USDA’s Risk Management Agency contracted with Milliman, Inc., a consulting firm, to estimate that rate of return. The consultant found that over the past 21 years, a “reasonable” rate of return for a crop insurance company would have averaged 12.7 percent, but the companies were averaging 17 percent. Under the new agreement the companies are expected to make about 14.5 percent, still almost 2 points above the “reasonable” rate.[iii]

Here’s the point – the new SRA doesn’t take a dime out of agriculture’s pocket.

“The SRA does not affect policy premiums paid by farmers, which are based on RMA’s estimates of risk and on subsidies set in statute.” – Congressional Research Service[iv]

“The new SRA will have no adverse impact on farmers’ premium costs. In fact, some farmers may even see reduced insurance costs…” – USDA Risk Management Agency[v]

The only people who gave at the office were companies making more than a reasonable rate of return and Corn Belt insurance agents, whose commissions will now nevertheless be far higher than in 2006 even though the number of policies they service is essentially unchanged, according to USDA’s calculations.[vi]

To find USDA programs that have really been given a haircut, look no further than conservation. These programs have been cut below what was promised in farm bills every year since 2002. As of fiscal year 2011, conservation programs have been trimmed by $3.2 billion. Those are taxpayer dollars that would have gone directly to farmers, not to cash-flush insurers.

Mary Kay Thatcher, senior director of Congressional relations for the American Farm Bureau Federation, got it right when she noted that the cost of farmer premium subsidies has risen to $7 billion, making it the most expensive of farm programs. Thatcher is also right that this makes the program a ripe target for reformers such as EWG.

Taxpayers are now spending more on subsidizing crop insurance than on the recently targeted “direct payments” that farmers get regardless of need or crop prices. Government reports and academic studies confirm that substantial savings could be achieved by reforming the crop insurance program, while keeping in place a reliable safety net.[vii],[viii],[ix] With food stamps, conservation programs and an array of programs that support healthy, local food all under the knife, budget cutters have every reason to take a hard look at crop insurance.

 


 

[i] Chite, Ralph M. 2008. Crop Insurance and Disaster Assistance in the 2008 Farm Bill. Congressional Research Service Report for Congress, RL34207. Updated June 20, 2008.

[ii] Shields, Dennis A. 2010. Renegotiation of the Standard Reinsurance Agreement (SRA) for Federal Crop Insurance. CRS Report for Congress, R40966. August 12, 2010.

[iii] Testimony of William J. Murphy, Administrator of the USDA Risk Management Agency before the House Committee on Agriculture, Subcommittee on General Farm Commodities and Risk Management, July 22, 2010.

[iv] Shields, Dennis A. 2010. Renegotiation of the Standard Reinsurance Agreement (SRA) for Federal Crop Insurance. CRS Report for Congress, R40966. August 12, 2010.

[v] Testimony of William J. Murphy, Administrator of the USDA Risk Management Agency before the House Committee on Agriculture, Subcommittee on General Farm Commodities and Risk Management, July 22, 2010.

[vi] Testimony of William J. Murphy, Administrator of the USDA Risk Management Agency before the House Committee on Agriculture, Subcommittee on General Farm Commodities and Risk Management, July 22, 2010.

[vii] U.S Government Accountability Office. 2009. Crop Insurance: Opportunities Exist to Reduce the Costs of Administering the Program. GAO-09-445, April 2009. http://www.gao.gov/new.items/d09445.pdf

[viii] Babcock, Bruce A. 2011. Time to Revisit Crop Insurance Premium Subsidies? CARD Policy Brief 11-PB4. Center for Agricultural and Rural Development, Iowa State University. March 2011.

[ix] Smith, Vincent H. 2011. Premium Payments: Why Crop Insurance Costs Too Much. American Enterprise Institute. http://www.aei.org/docLib/Final-Smith.pdf

 

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