Congress has voted to eliminate a $3 billion cut in spending on the federally subsidized crop insurance program, because of dogged opposition from farm groups and insurers. They say a lower rate of return, which is how the cut would have been accomplished, would make crop insurance an unattractive line of business and result in companies abandoning the field.
On the same day Congress acted, economist Bruce Babcock, a crop insurance expert, said the cuts could be made with no effect on farmers. The industry has room to cut its overhead costs, he said. “Just make it (delivery of insurance) a competitive bid,” Babcock told reporters, “then you’ll really see what the competitive costs would be.”
Lawmakers initially agreed to cut crop insurance by $3 billion over 10 years, or $300 million a year, equal to a 3.5 percent cut in outlays, as part of a two-year budget agreement but backtracked because of opposition in farm country. Leaders put a provision to remove the cut in a House-Senate compromise transportation bill. The House passed the bill, 359-65, with only Republicans voting against it, on Thursday. The Senate gave final congressional approval, 83-16, sending the legislation to President Obama. “The message could not have been clearer: Do not target crop insurance,” said Senate Agriculture chairman Pat Roberts.
In a report commissioned by the Environmental Working Group, Babcock said insurers paid $2.089 billion in 2013 in delivery costs, “largely the wages, salaries and commissions paid to agents and employees.” The outlay was two-and-a-half times what the companies paid in 2001, an annual increase of 8 percent a year, when the average rate of inflation was 2.5 percent. “At 8 percent a year, there’s room to cut,” said Babcock.
The average commission to insurance agents grew the most, at an average 9 percent a year to reach $1,022 per policy in 2013. The cost of evaluating claims on policies rose by 4.4 percent and “other” costs, including salaries, equipment and office expenses rose by 7.2 percent from 2001-13.
Commissions soared, in Babcock’s analysis, because one of the few ways insurers could sell more policies was to make it more remunerative to agents to handle their policies. In the crop insurance program, the government dictates the premium for coverage and which policies can be sold in a county.
“Agents’ commissions would bear most of the brunt of the proposed cost-cutting because their commissions increased faster than the other components of the companies’ delivery systems,” said the EWG report, “Cutting the fat.” “Farmers won’t see any increase in premiums because premiums are set by the government, not the companies.”
USDA’s Risk Management Agency capped commission rates beginning with the 2011 crop year but “they are still higher than they would be if the crop insurance industry faced normal competition,” said the EWG report. The group said the report showed a $3 billion reduction in funding “would merely cut the fat from the industry’s cost of doing business.”
Insurers say agents collected larger commissions because commodity prices soared. Most farmers buy revenue insurance, which is based on the value of the crop. Babcock said commodity prices would have to drop substantially before most agents would feel the effects of the cap on commission rates. “It’s still a quite profitable profession to be in,” said Babcock.
The government pays 62 cents of each $1 in premium for coverage, as well as $1.3 billion for administrative and overhead costs this year. It also shoulders much of the burden for losses in catastrophic years. Some 279.5 million acres were insured in 2015, roughly the same area as the previous three years, with a liability of $100 billion. Insurers collected $9.4 billion in premiums, including the federal subsidy of $5.86 billion, and paid $3.45 billion in indemnities as of Nov 30, said RMA.