WASHINGTON – The proposed $3 billion cut in crop insurance subsidies in the recent federal budget deal would not “kill the crop insurance program,” contrary to claims by the crop insurance industry and its allies in Congress. It would merely cut the fat from the industry’s cost of doing business, according to a new analysis commissioned by EWG.
The report by Dr. Bruce Babcock, agricultural economist at Iowa State University, is titled Cutting The Fat: It Won't Kill Crop Insurance. It shows that lowering the excessive rates of return enjoyed by the industry, as proposed last month in the budget agreement, would have no impact on the availability of crop insurance policies or the premiums paid by farmers.
“The reality is that the cuts are a modest reduction in taxpayer support for crop insurance,” said Dr. Babcock. “Rather than devastating or killing the program, as some industry members may allege, the lower subsidies would not affect profits, but instead result in a more efficient, but still far from lean, delivery system for the insurance.”
The budget agreement, signed by President Obama in November, would reduce the target rate of return for crop insurance companies from 14 percent to 8.9 percent, a margin that is still generous and well above the rate of return enjoyed by the insurance industry as a whole. Some in Congress are now attempting to reverse the cut through a rider attached to a must-pass transportation bill, which is expected to go to the House floor in the coming days.
“Rhetorically, this is a Congress that applauds federal belt tightening, but in practice it hands out billions in taxpayer-funded giveaways to the crop insurance industry,” said Colin O’Neil, EWG’s director of agriculture policy. “At a time when many Americans are still tightening their belts, it seems ridiculous to think that companies headquartered in tax havens such as Bermuda and Switzerland can’t get by on a 9 percent rate of return. Congress has allowed this problem to balloon over the years, and it is high time to fix it.”
Industry advocates argue that the cuts will “cripple” crop insurance companies, but Babcock’s analysis shows that the insurers’ cost of delivering each policy has ballooned from an average of $628 in 2001 to $1,670 in 2013.
This increase in costs was largely the result of exorbitant increases in the wages paid to company personnel and the commissions paid to insurance agents, Babcock’s analysis found. The costs per policy not associated with loss adjustment grew by 8.5 percent a year over the period.
The crop insurance industry is unique because the companies can only sell products approved by U.S. Department of Agriculture, which also sets their price. Because crop insurance companies can’t compete on price or quality of service, they compete instead for the business of independent insurance agents by offering ever higher commissions.
According to “Cutting the Fat,” the average commission per policy grew by 9.1 percent a year, compared to the overall insurance industry average of 2.7 percent. In dollar terms, the average commissions paid to crop insurance agents rose from $358 per policy in 2001 to about $1,022 per policy in 2013.
“When you look past the rhetoric thrown around by crop insurance companies, the reality of the situation is clear,” Babcock said. “If we can’t make these very reasonable and responsible taxpayer savings by trimming the inflated costs of crop insurance in a way that won’t hurt industry profits or farmers, what can we cut?”