USDA, Insurers Debate Profits

Industry Challenges Ag Secretary Comments on Rate of Return

Jerry Hagstrom
By  Jerry Hagstrom , DTN Political Correspondent
RMA furnished DTN 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% in 2012 and made only 7% in 2013. The rate of return for 2014 has not been determined. (DTN file photo)

BONITA SPRINGS, Fla. (DTN) -- A statement by U.S. Agriculture Secretary Tom Vilsack last week that crop insurance companies are making a 14% to 15% return on investment raised eyebrows here at a crop insurance industry meeting.

Brandon Willis, the administrator of the Risk Management Agency, sought to clarify the secretary's comments when speaking to industry leaders this past weekend. Willis acknowledged more recent years had been rockier for the industry than the industry's historical performance.

Vilsack did an interview with the website Politico last week on the one-year anniversary of the farm bill that also delved into crop insurance cuts. 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% on average of return on investment."

"The reality is that this entity and this operation could be quite effective at a 12% return on investment, and I think most taxpayers would be happy if their portfolio was growing by 12%," 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."

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%, the Obama administration has proposed reducing it to 12%. Willis also noted that before the recent drought years, the rate of return was much higher than 14%.

But Parkerson, who is now with ProAg Insurance, told DTN that the Risk Management Agency will not allow consideration of certain expenses before the rate of return is calculated.

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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.

RMA furnished DTN 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% in 2012 and made only 7% 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' rates 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. Willis 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, Willis said, but "The more people understand about crop insurance, the more they like it."

On Monday, the crop insurance industry issued a news release drawing on a speech from Tim Weber, chairman of the American Association of Crop Insurers and National Crop Insurance Services at the industry's annual meeting. Weber said crop insurers would defend themselves against political attacks this year.

"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. "No one knows the virtues of crop insurance better than the men and women in this room, and I challenge us all today to leave no attack unchallenged in 2015."

Weber said the industry will work to keep crop insurance affordable, making sure insurance is widely available; and ensure that crop insurance remains a function of private industry.

"We have a great story to tell, and if we don't tell it, then no one will -- certainly not the way it must be told," Weber said.

Weber added, "Make no mistake, crop insurance's days of flying under the radar are done," he concluded, "but we have a wonderful industry, supporting a sector that is arguably more important to America than any other, [and] we have lots of friends on Capitol Hill and in the farming community."

(CC/AG)

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Jerry Hagstrom