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Willis clarifies Vilsack statement on crop insurance rate of return

BONITA SPRINGS, Fla. — A statement by Agriculture Secretary Tom Vilsack last week that crop insurance companies are making a 14 to 15 percent return on investment raised eyebrows here at a crop insurance industry meeting, but Brandon Willis, the administrator of the Risk Management Agency, said Vilsack was referring to the program’s goal of rate of return on retained premiums and to the historical rates of returns.

In an interview with Politico last Wednesday in which he discussed the one-year anniversary of the farm bill and the Obama administration’s proposed cuts to crop insurance, Vilsack said, “One of those reforms would be to take a look at what the average rate of return is on crop insurance. Today it’s roughly 14, 15 percent on average of return on investment.”

“The reality is that this entity and this operation could be quite effective at a 12 percent return on investment, and I think most taxpayers would be happy if their portfolio was growing by 12 percent,” he said. “So I think first and foremost it’s a question of what’s a reasonable rate of return in a government sponsored and government supported program.” (See link to transcript below.)

Brandon Willis
Brandon Willis
At the Crop Insurance and Reinsurance Bureau meeting here, Bob Parkerson, a former president of National Crop Insurance Services, asked Willis about Vilsack’s statement.

Willis replied that the industry has “had a very few tough years in a row. The last few years the rate of return has not been there.”

Willis added that Tom Worth, RMA’s chief actuary, keeps him advised of the rate of return “every few months.”

In an interview after his speech, Willis added that while under the current standard reinsurance agreement the rate of return for the program is supposed to be 14 percent, the Obama administration has proposed reducing it to 12 percent. Willis also noted that before the recent drought years the rate of return was much higher than 14 percent.

Bob Parkerson
Bob Parkerson
But Parkerson, who is now with ProAg Insurance, told The Hagstrom Report that RMA will not allow consideration of certain expenses before the rate of return is calculated.

He said that John Deere wants to sell its crop insurance company and that others have merged. Crop insurance companies would not be for sale or merging “if the chicken was laying a golden egg,” he said.

RMA publishes the rate of return for the program, but the rates of return for the individual insurance companies are not public.

2015_0209_CropInsuranceReturn
RMA furnished The Hagstrom Report with a list of the rates of return since 2003. It showed that the rate of return was much higher in the early years, but that the program lost 15 percent in 2012 and made only 7 percent in 2013.

The rate of return for 2014 has not been determined

The crop insurance industry and farm groups have already told Congress that they oppose any cuts to crop insurance. The president’s budget calls for cuts to farmers’ premium subsidies rather than focusing on the companies’ rate of return.

Vilsack told Politico that the administration believed it should put such proposals on the table because there is bipartisan interest in cost savings.

The secretary said the new Agricultural Risk Coverage and Price Loss Coverage are expected to cost more than projected because crop prices are lower than expected, but that he does not believe those programs should be cut.

In his speech, Willis said that RMA would focus on the continued implementation of crop insurance provisions in the 2014 farm bill and program integrity in 2015, rather than undertake a renegotiation of the standard reinsurance agreement, which governs the relationship between the industry and the government.

But he said he could not speak to the renegotiation issue beyond 2015.

Willis noted that RMA had implemented many changes to crop insurance in 2014, including the new STAX program for cotton, the supplemental coverage option and whole farm insurance. He also noted that 18 “price elections” had been added for organic crops in 2014.

Media scrutiny of crop insurance has grown as the program has grown, he said, but “The more people understand about crop insurance the more they like it.”

He said he expected to give the same speech today at the crop insurance industry convention organized by NCIS.

Willis is a Democratic political appointee, but Sheri Bane, the CIRB chair, introduced him as “bipartisan … with a strong work ethic.”

Asked for a reaction to his introduction, Willis said, “I’ve heard worse.”

FarmPolicy — Unofficial transcript of Politico interview with Secretary Vilsack
USDA — Risk Management Agency
Crop Insurance and Reinsurance Bureau, Inc.