Cutting the Fat

It Won’t Kill Crop Insurance

December 3, 2015

Cutting the Fat: Policy Implications

The costs of delivering crop insurance have increased far faster than they would have if the companies had been subject to the same market forces as the rest of the insurance industry. Inability to compete on price meant that the dramatic increase in subsidies flowing to companies beginning in 2006 was reflected in a surge in costs, most notably by a dramatic increase in agent commissions. Because costs are still much higher than they would be if the crop insurance industry faced normal competitive pressures, the first response to a reduction in revenue from the program would be a reduction in the companies’ cost structure. Put in simple terms, a reduction in taxpayer support as called for in the budget agreement would remove some of the excessive industry costs.

Opponents of reductions in subsidies either do not understand that costs would adjust, or else they do understand and are being disingenuous about the effects in order to protect agent commissions and companies’ salary levels. Because company costs would adjust to a reduction in subsidies, farmers would be unaffected by the budget agreement as long as the reduction is not so severe that people would not want to continue as to work as agents or loss adjusters. The data suggest that the budget agreement’s required reductions are not large enough to cause compensation rates for agents and others in the industry to fall below industry standards. There is no reason to think that there would be a large exodus of agents or others from the industry.

Congress and the Administration will have trouble achieving a lower target rate of return by renegotiating the Standard Reinsurance Agreement. After costs adjust to reflect the cut in subsidies, the rate of return would rebound to the level needed to keep companies engaged in the program. Forcing companies to bid against each other for approval to sell federally subsidized crop insurance would be a more effective way to cut costs and reduce the rate of return to insurance companies.