Private insurance companies who participate in the federal crop insurance program have ended the negotiation process with USDA's Risk Management Agency (RMA) by signing the 2011 Standard Reinsurance Agreements (SRA), according to the USDA Press Release.
USDA projects "to achieve $6 billion in savings over the next 10 years, two-thirds of which will go toward paying down the federal deficit while the remaining third will support high-priority risk management and conservation programs."
The companies offer government subsidized policies to participants which provide protection from losses due to natural disasters, according to Businessweek. The agreement involves a 20 percent cut in funding over 10 years, capping administrative costs at $1.3 billion next year and allowing the cap to rise annually to $1.37 in 2015.
RMA negotiated for these reductions, asserting that the crop insurance companies were making excessive profits. RMA contracted with a private company to review historical rates of returns and determine a reasonable rate of return for the crop insurance industry. According to the USDA press release, the study showed that "over the past 21 years, the crop insurance companies averaged a 17.0 percent return when the average reasonable rate for that period was 12.7 percent. For the full results of the study, click here and scroll down to the "Milliman Materials." Businessweek reports that the new SRA will lower average returns to about 14.5 percent.
Lawmakers have differing opinions on whether the the crop insurance companies' returns have been excessive. Senate Agriculture Committee chairwoman, Blanche Lincoln, D-AR, "criticized the agreement, saying it will lower the overall farm subsidies." Representative Henry Waxman, D-CA, and other members of congress, on the other hand, "have called spending for the program wasteful."
Senator Tom Harkin, D-IA, has challenged the legality for planned cuts in the commissions paid to agents who sell these insurance policies, according to the Green Fields Blog of the Des Moines Register. Agents argue that an operating agreement cannot be used to impose caps on commissions, while Secretary Vilsack argues that the commissions, which "can run more than 20 percent of the premium," are "excessive and threaten the financial health of the companies."
For the full text of the 2011 Standard Reinsurance Agreement and past drafts, click here.
To read the USDA Press Release, click here.
To read the Businessweek story, click here.
To read the Green Fields Blog story, click here.
Posted: 07/14/2010
