NATIONAL
CROP INSURANCE SERVICES
8900 Indian Creek
Parkway, Suite 600
Overland Park
,
KS
66210
FOR IMMEDIATE RELEASE
Monday, April 05, 2010
| Contacts: |
Laurie Langstraat
(913) 685-2767
lauriel@ag-risk.org |
Courtney Froemming
(703) 283-6601
courtney.froemming@ogilvypr.com |
Industry Calls for Long Term Analysis in Judging Crop Insurance
Market Performance
OVERLAND PARK, KANSAS...USDA's Risk Management Agency (RMA) released
late last Friday an update of their disputed Milliman study of
returns to private crop insurers participating in the Federal Crop
Insurance Program. While the report focuses on 2009 earnings, which
indeed represent the second highest ever, it is more reflective of
record-high crop yields than indicative of the future profitability
of the crop insurance industry.
RMA understands too well that conclusions can’t be drawn from data
representing such a narrow timeframe. A long-term view is essential
when analyzing a program based on a private insurance model, where
any year’s returns can vary due to weather or fluctuating crop
prices. In fact, when discussing the rating of crop insurance
policies in a recent interview, USDA’s Risk Management Agency
Administrator William Murphy indicated that a short timeframe is
inappropriate when making crop risk-based policy decisions, adding
that the analytical horizon had to extend back to the middle 1970’s
to ensure the policies were correct.
Corn and soybeans account for two-thirds of crop insurance business.
In 2009 these crops each had record-highs in total production. But
looking back to as recent as 2008, which was not a disaster year but
featured corn and soybean yields close to trend values, RMA reports
the rate of return on equity at 12.9%, less than half RMA’s estimate
for 2009. If the country had growing conditions in 2009 closer to
the severe flood conditions of 1993 or the severe drought conditions
of 1988, and crop yields were dramatically below trend values and
the return on equity in the crop insurance industry would have been
sharply negative with companies losing billions of dollars.
Beyond the obvious concern with using one year of data to judge the
financial performance of the industry, RMA’s analytical methods used
to estimate rates of return on equity have been challenged by the
crop insurance industry and are not a reasonable basis for
estimating expected returns to the industry. In fact, Milliman
itself cautions, “against drawing any strong conclusions on the
adequacy or excessiveness of the historical returns.” This is
particularly relevant in this case, as their analysis also fails to
take into account the $6.4 billion in funds that Congress already
cut from the crop insurance program in the 2008 farm bill.
An independent analysis by the firm Grant Thornton compared the
profitability of the crop insurance industry to that of the property
and casualty industry, an appropriate benchmark for judging
financial performance. Over a 17-year period (1992-2008), Grant
Thornton found that the Federal Crop Insurance Program is
significantly less profitable than the property and casualty
industry while having consistently lower expense-to-premium ratios.
And while there have been good years, and even very good years like
2009, the public-private crop insurance partnership leverages this
period to invest capital and build its reserves so that the program
can cover future expected losses.
The Federal Crop Insurance Program is a successful public-private
partnership that has become the primary stabilizing force in U.S.
farm policy and a key element of the farm policy safety net. And one
of the main reasons it has thrived is due to the mandated reserves
that invest returns from good years to protect farmers during
difficult years. In fact, the companies in the Federal Crop
Insurance program are required to hold reserves about twice the
amount currently held by the property and casualty insurance sector.
The program has grown from roughly 84 million acres in 1993 to the
record year of 265 million acres in 2009. This growth in the size
and importance of the program has happened in large measure due to
the private delivery system that allows the agents to offer tailored
coverage to meet producer’s needs. Crop insurance is essential to
making farmers credit worthy and otherwise able to secure loans from
banks to operate and modernize their operations. The program has
grown also in part because farmers know its value and they can
afford to pay the premiums.
The crop insurance industry hopes RMA and others in the policy
community will take the proper, longer term view of industry
performance. Such a balanced perspective is essential not only to
the health and sustainability of the private crop insurers but also
to the public-private crop insurance partnership, the foundation of
the U.S. farm program safety net today.
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