Crop insurance industry says profits have fallen
February 10, 2015 |06:52 PM
BONITA SPRINGS, Fla. — The crop insurance industry said today that its rate of return on retained premiums for the four years since the inception of the 2011 Standard Reinsurance Agreement (SRA) — the business contract between the industry and the federal government — has fallen to 6 percent.
National Crop Insurance Services, the industry’s research organization, made the announcement in a news release from the national crop insurance industry convention here. Agriculture Secretary Tom Vilsack had said last week in an interview with Politico that the industry’s rate of return is 14 or 15 percent, and the industry would still be in good shape if the rate of return were reduced to 12 percent.
USDA Risk Management Agency Administrator Brandon Willis told the crop insurers last Friday that Vilsack was referring to the 14.5 percent rate of return goal of the SRA, rather than recent statistics. He also made available to reporters information from the RMA website showing that the rate of return has been low in recent years, particularly because there has been a drought and the companies have had to make large payments to farmers.
RMA’s statistics showed that the rate of return had been much higher through 2010.
Congress authorized USDA to renegotiate the SRA in order to save money. Congress also reduced some payments to the crop insurance companies to fund other farm bill programs, and farm groups supported those cuts rather than see cuts to their own programs.
But Willis also noted that the rate of return for individual companies is not public and that the rate of return for the program has not been calculated for 2014.
Crop insurance industry officials have noted that RMA and the industry are in disagreement over how the rate of return should be calculated because the industry believes that certain expenses should be deducted before the rate is calculated. The RMA disallows the deductions.
NCIS did not include in the release information on how it calculated the rate of return, but Tim Weber, chairman of NCIS, said that the industry calculations only measure gross revenue, not net profit.
“The actual financial pain has been far greater,” said Weber. “When expenses are subtracted from gross revenue, average net profit since 2011 has been less than 1 percent, with the industry experiencing negative returns in 2012.”
This “falls well short of the averages for other lines of property and casualty insurance,” Weber added in a speech to the convention.
Weber said that unexpected premium reductions implemented by USDA in 2012, $600 million a year in reduced funding under the SRA, increased regulatory burdens, falling crop prices, and bad weather have caused the poor financial performance.
The worst year, 2012, saw companies absorb $1.3 billion in underwriting losses when premiums collected failed to cover indemnities paid out during the record drought, he said.
“Companies need to make a reasonable return on their investment to stay in business ... but we cannot do it for free or, worse yet, a negative return,” Weber said.
Crop insurers at the convention expressed disappointment in Vilsack’s remarks to Politico and said the secretary had “misinformed reporters about industry returns while advocating for additional funding cuts.”
“The secretary is pointing to revenue projected by the USDA, not what has actually materialized in the marketplace,” noted NCIS President Tom Zacharias. “And the budget proposed by this administration would only further jeopardize the farm safety net.”
President Barack Obama’s proposed budget would strip an additional $1.6 billion a year from the crop insurance system, which, Zacharias said, “leaves farmers and taxpayers more vulnerable to the whims of Mother Nature.”
Weber also said that the industry would fight any attempts in Congress to cut the program.
“Those with an agenda or an anti-agriculture bent cannot be given free rein to define our industry or the policies that underpin the rural economy,” Weber said.
The industry will focus on “three pillars” of the program: education; keeping crop insurance affordable and available to as many crops in as many locations as possible; and making sure the private-sector delivery system remains “viable.”
National Crop Insurance Services, the industry’s research organization, made the announcement in a news release from the national crop insurance industry convention here. Agriculture Secretary Tom Vilsack had said last week in an interview with Politico that the industry’s rate of return is 14 or 15 percent, and the industry would still be in good shape if the rate of return were reduced to 12 percent.
USDA Risk Management Agency Administrator Brandon Willis told the crop insurers last Friday that Vilsack was referring to the 14.5 percent rate of return goal of the SRA, rather than recent statistics. He also made available to reporters information from the RMA website showing that the rate of return has been low in recent years, particularly because there has been a drought and the companies have had to make large payments to farmers.
RMA’s statistics showed that the rate of return had been much higher through 2010.
Congress authorized USDA to renegotiate the SRA in order to save money. Congress also reduced some payments to the crop insurance companies to fund other farm bill programs, and farm groups supported those cuts rather than see cuts to their own programs.
But Willis also noted that the rate of return for individual companies is not public and that the rate of return for the program has not been calculated for 2014.
Crop insurance industry officials have noted that RMA and the industry are in disagreement over how the rate of return should be calculated because the industry believes that certain expenses should be deducted before the rate is calculated. The RMA disallows the deductions.
NCIS did not include in the release information on how it calculated the rate of return, but Tim Weber, chairman of NCIS, said that the industry calculations only measure gross revenue, not net profit.
“The actual financial pain has been far greater,” said Weber. “When expenses are subtracted from gross revenue, average net profit since 2011 has been less than 1 percent, with the industry experiencing negative returns in 2012.”
This “falls well short of the averages for other lines of property and casualty insurance,” Weber added in a speech to the convention.
Weber said that unexpected premium reductions implemented by USDA in 2012, $600 million a year in reduced funding under the SRA, increased regulatory burdens, falling crop prices, and bad weather have caused the poor financial performance.
The worst year, 2012, saw companies absorb $1.3 billion in underwriting losses when premiums collected failed to cover indemnities paid out during the record drought, he said.
“Companies need to make a reasonable return on their investment to stay in business ... but we cannot do it for free or, worse yet, a negative return,” Weber said.
Crop insurers at the convention expressed disappointment in Vilsack’s remarks to Politico and said the secretary had “misinformed reporters about industry returns while advocating for additional funding cuts.”
“The secretary is pointing to revenue projected by the USDA, not what has actually materialized in the marketplace,” noted NCIS President Tom Zacharias. “And the budget proposed by this administration would only further jeopardize the farm safety net.”
President Barack Obama’s proposed budget would strip an additional $1.6 billion a year from the crop insurance system, which, Zacharias said, “leaves farmers and taxpayers more vulnerable to the whims of Mother Nature.”
Weber also said that the industry would fight any attempts in Congress to cut the program.
“Those with an agenda or an anti-agriculture bent cannot be given free rein to define our industry or the policies that underpin the rural economy,” Weber said.
The industry will focus on “three pillars” of the program: education; keeping crop insurance affordable and available to as many crops in as many locations as possible; and making sure the private-sector delivery system remains “viable.”
