Growing crop insurance concerns: the 2007 federal budget has agents seeking yet another language change to the Federal Crop Insurance Act.

Key Points

* Agents for crop insurers are petitioning Congress to extend a funding limitation to the Premium Reduction Plan, a section of the Federal Crop Insurance Act they say promotes unfair price competition.

* Compounding that is a decrease in the 2007 federal budget for the administrative and operating reimbursement that companies receive via the Federal Crop Insurance Program.

* Agents also object to a proposed "participant's fee" in the budget asking companies in the Federal Crop Insurance Program to pay for upgrades to the Risk Management Agency's computer system.

A healthy crop of corn should be "knee-high by the Fourth of July," or so the old farmers' saying goes. By late summer, when the corn's supposedly "as high as an elephant's eye," a group of agents and supporters hopes to have some closure on the future of the Premium Reduction Plan, a division of the Federal Crop Insurance Act.

Agents and other concerned parties are pressuring Congress this spring for reforms to the plan, which they say promotes unfair pricing competition among crop insurers because it allows participants to offer premium discounts to insureds.

The U.S. Department of Agriculture and its Risk Management Agency grant administrative and operating reimbursements to insurance companies that participate in the Federal Crop Insurance Program. The Premium Reduction Plan, instituted in 1994, authorizes companies that operate below the administrative and operating reimbursement subsidy to take the subsidy and pass it on to crop farmers as a discount.

The crop insurance year runs from July 1 to June 30; a current funding limitation to the Premium Reduction Plan kicks in July 1 and runs through June 2007. Plan opponents want to extend that funding limitation at least another year, if not indefinitely.

"The funding restriction is more or less a time-out," said Patrick O'Brien, director of federal government affairs for the Independent Insurance Agents and Brokers of America, which is spearheading the reform movement. It gives the U.S. Department of Agriculture and its Risk Management Agency time to fully examine the plan for feasibility. "We believe the product is flawed," he said. Congress is hoping to settle the issue prior to its August recess.

In addition to concerns about the Premium Reduction Plan, agents also oppose a proposed 2% across-the-board reduction in money the insurance companies would receive via the administrative and operating reimbursement, O'Brien said. The reduction is part of the 2007 federal budget, released Feb. 6.

"Those companies use that money to, among other things, administer programs and pay the agents who write the programs for them on Main Street, America," O'Brien said.

"This is a time-sensitive and a very techno-biological line of insurance that agents opt to write because it's the right thing to do for America's crop producers. When you reduce the A&O reimbursement to the companies, invariably you reduce the agent's commission as well," O'Brien added. "The amount of work they're doing isn't reduced, but the amount they're being paid to do it, does.

"The amount of money given to companies to operate this program in 1994 was high enough to see how they could operate below that number and still have a net savings--but that number has since gone down," he added.

The federal budget includes some $81 million in discretionary funding to administer the Federal Crop Insurance Program, compared with some $76 million for 2006. It also calls for instituting a new "participant's fee" from insurance companies--assessed as 5% of total premiums--to help upgrade the aging information technology system used by FCIP and the Risk Management Agency. The fee begins in fiscal year 2008.

O'Brien said updates to the program's existing computer systems already force participating companies to incur additional costs, as they must upgrade as well. Others in the industry agreed.

"We oppose this fee because we do not see the federal government's failure to fund current technology as something that ought to be borne by crop insurance companies who have made needed investments in technology," Paul L. Horel, president of the Crop Insurance Research Bureau Inc., Overland Park, Kan., said in a statement. "[The Risk Management Agency's] current system is woefully inadequate and is becoming more and more inadequate as each crop year goes by."

Horel added that since companies have no control over rates, they have no way to recoup these costs. "It would simply be another $15 million drain with no offset. Given the precipitous decline over the past 10 years in expense reimbursement, this concept will be a hard sell to Congress," he said.

PRP Advocate

One voice in support of the Premium Reduction Plan is Crop1 Insurance of Des Moines, Iowa. Billy Rose, chief executive officer for Crop1, did not respond to requests for an interview. On its Web site, however, Crop1 says that with the inception of the Premium Reduction Plan, the company has become a leader in the crop insurance industry, and that many of its policyholders use the savings they get from the program to increase their crop insurance coverage.

The site states: "Since 2003, Crop1 has helped farmers save more than $4 million in crop insurance premium without reducing their overall coverage. In fact, Crop1 has historically saved their customers up to 8.6% on crop insurance each of the past three years."

Currently, Crop1 is the only agency taking advantage of the program. New PRP applications were suspended in November 2004 until formal rule-making could be completed. The Premium Reduction Plan statute dates to 1994, but the plan's standards were not approved until early 2003, in response to an application made by Converium Insurance Cos. and Crop1, Converium's managing general agent at the time. Crop1 was acquired by property/casualty insurer Farm Bureau Mutual Insurance Company of West Des Moines, Iowa, in January.

Hard Row to Hoe

The Premium Reduction Plan rule, as written, is ambiguous, O'Brien said. It's really a long, two-part process. First, the insurance companies market to their customers the chance that insurers will be able to provide a discount. At the end of the reporting season, the companies look at their books and then must reapply for the administrative and operating reimbursement to actually give the discount.

"It's extremely misleading and anti-consumer in the sense that farmers can be led to believe that they can get a reduction in their policy, and it's not as easy as that," O'Brien said. If a company is able to generate savings that can turn into a rebate, the farmer won't get that until a year and a half after the company has written that policy, he added. "It's very controversial."

Farmers would be "well into next year's policy until they realize if they've saved money on this year's," O'Brien said. "That's why Congress made the lawful decision to suspend it. It hasn't been battle-tested."

IIABA is "getting a groundswell of support" from other trades, agents, insurance company personnel, and the American Association of Crop Insurers, O'Brien said. The AACI is a nonprofit trade group whose reinsured company members write more than 80% of the crop insurance sold by private companies nationwide.

The PRP statute is "severely out-of-date" and not representative of the true market conditions that companies are required to operate under, like the expense reimbursement, he said.

"Ultimately we would like to see this statute repealed altogether. Barring a full repeal, we would like to see an extension of the funding limitation until the program has been adequately studied," O'Brien said.

"It's definitely got legs at the state level as well," he added. Agents, insurers and even commissioners have likened the practice to a rebate, he said. And receiving a rebate is illegal in 48 states, because among other reasons, it "promotes unscrupulous activities," O'Brien said.

Other Budget Proposals

The 2007 federal budget again includes proposals to enhance crop insurance coverage and reduce costs to deliver the program in order to reduce dependence on ad hoc disaster programs, noted U.S. Secretary of Agriculture Mike Johanns at a Feb. 15 hearing before the House Appropriations Subcommittee on Agriculture, Rural Development, Food and Drug Administration and related agencies.

It also re-proposes changes included in the 2006 budget to encourage farmers to purchase more adequate crop insurance coverage by tying the receipt of direct payments, or any other federal payment for crops, to the purchase of higher levels of crop insurance. "This change would ensure that the farmer's revenue loss would not be greater than 50%," Johanns testified.

The changes are expected to "significantly improve" the Federal Crop Insurance Program and save the federal government some $140 million per year beginning in 2008; ensure the majority of farmers have crop insurance; and ensure the minimum coverage level is sufficient to sustain the producer in times of loss, Johanns testified.

Johanns also noted that crop insurance expenditures have grown nearly 50% from 2001 to 2007 with the implementation of the 2000 Crop Insurance Reforms. Since 2000, four ad hoc disaster programs have been authorized covering six crop years, adding up to more than $9 billion; a low national take-up level of catastrophic crop insurance (which provides up to 27.5% of the crop value for a total crop loss) is the cause.

"When natural disasters occur, that low level of protection creates the demand for additional disaster assistance," Johanns testified.

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Field Work

Federal Crop Insurance
Program, Fiscal Year 2005

Number of Policies       1.19 million
Premium Volume          $3.95 billion
Crop Value Insured   $44.29 billion *
Acres Insured             246 million

Data accurate as of January 16, 2006

* Estimate

Source: U.S. Department of Agriculture Risk Management Agency

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