Crop Insurance Today August 2012 - (Page 10)

TODAYcrop insurance Crop Insurance Rate of Return Issues & Concerns By Frank Schnapp, NCIS In recent months, a variety of claims have been aired in the press regarding the cost of delivery of the Federal crop insurance program and the profitability of the private sector companies that deliver the program to farmers. These claims place the crop insurance industry in an unfavorable light, arguing that the industry is too profitable, that profits are guaranteed, and that Administrative and Operating (A&O) expense payments are excessive. Naturally, the companies participating in the program disagree. They argue that if profits were generous or excessive, new insurance companies would be entering the program on a regular basis. This is simply not taking place. At one time, 49 companies participated in the Federal program, but in recent years the number of insurers has not exceeded 16. One explanation for the negative press received by the program is simply misinformation. Discussions of the industry’s profitability often disregard recent funding reductions to the program, confuse basic financial concepts used to calculate industry returns, and fail to take into account that industry returns vary over time and differ across geographic regions. There are also serious questions about the data used to estimate the industry’s rate of return. Unfortunately, public statements regarding the rate of return have confused the issue even further. Industry leaders have met with the government to clarify the issues and look forward to continued dialogue. Among the con10 AUGUST 2012 cerns voiced about the rate of return estimates being discussed publicly are that they: • Confuse gross revenues with net income; • Assume that government A&O payments to companies on behalf of producers cover all program delivery costs, which they do not; • Fail to account for certain other operational costs such as reinsurance; • Ignore recent changes in the program; and • Fail to provide insurance companies with the reasonable rate of return indicated by government’s own study. Up till now, the crop insurance industry has not attempted to respond to the misinformation appearing in the press. However, in view of the ongoing attacks against the program, the moment seems right to present an overview of the industry’s finances as a counterweight to the distortions being presented to the public. How Crop Insurance Works In virtually every other Property and Casualty (P&C) line of insurance, insurance companies determine the rates they charge based on their own loss experience, expenses, and profit objectives. The Federal crop insurance program operates on an entirely differently basis. The Risk Management Agency (RMA) of the US Department of Agriculture establishes the rates that every farmer will pay. These represent expected indemnities only, without taking into account expenses or profit for the insurance company. Since no insurance company can operate without the ability to recoup its expenses or earn a profit, the government created a separate contractual arrangement by which it can enlist the services of the private sector in delivering the program to all eligible farmers while simultaneously providing participating insurers the ability to recoup their program delivery costs and the opportunity to earn a reasonable return. The Standard Reinsurance Agreement (SRA) is a cooperative financial assistance agreement that outlines the responsibilities of insurance companies in delivering the program and specifies the financial arrangements under which the companies operate. One section within the SRA establishes the amount of A&O the government pays to compensate insurers for their cost of delivering the program. Delivery costs would be included as part of the premium in any other line of insurance, but the government has chosen to Unfortunately, statements by government officials regarding the rate of return have confused the issue even further. Industry leaders have met with the government to clarify the issues and look forward to continued dialogue.

Table of Contents for the Digital Edition of Crop Insurance Today August 2012

“What is, and What Should Never Be....”
Developing Risk Management Plans
Crop Insurance Rate of Return: Issues & Concerns
2011 Research Review
RMA/AIP Data Mining Steering Committee
NCIS Adjuster Training in Full Swing
Industry Support of FFA
Crop Insurance & Specialty Crops

Crop Insurance Today August 2012