Ag Policy Blog

Renewed Debate on Crop Insurance Savings

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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The Government Accountability Office has added some fodder to the debate about crop insurance in a report released last week.

In a study requested by Sen. Dianne Feinstein, D-Calif., GAO auditors stated there is an estimated savings to taxpayers of $364 million a year if USDA were to lower the expected rate of return from 14.5% to 9.6%, the average rate of return. GAO cites that the rate of return in the casualty business has steadily declined to average more like 8.9% in recent years.

Second, GAO officials stated there are also federal cost-savings to be had if the portion of premium retained by the companies was reduced. Since 2000, companies have kept an average of 77% of the premiums collected. USDA receives the rest. Reducing the premiums maintained by the insurers by 5 percentage points would reduce company underwriting gains by up to 100 million a year.

For USDA to receive these gains, Congress would have to repeal language from the 2014 farm bill that specifically restricts USDA's abilities to negotiate such revenue changes with companies. Such language was inserted in the farm bill by both the House and Senate Agriculture Committees. The committees added that provision after former Agriculture Secretary Tom Vilsack negotiated more than $4.5 billion in cuts to crop insurance during the 2011 Standard Reinsurance Agreement -- the contract between USDA and insurers.

The GAO report was released Thursday. On Monday, the National Crop Insurance Services responded for the industry. The group pointed to a GAO report in the 1980s that crop insurance was a more equitable and efficient way to help farmers through a disaster. The crop insurers found it "disheartening that GAO recently recommended weakening farmers' primary risk management tool."

The insurance group also said "it's even more troubling that GAO would gloss over important facts about the returns crop insurance providers receive for delivering America's farm safety net."

The insurers stated they were not achieving the terms agreed to in the SRA with USDA. "GAO buried deep within its report the fact that actual returns have been 5 percentage points lower than USDA's target from 2011-2015."

Still, the reason that insurers have not achieved those rates of return is part of GAO's argument. The GAO stated insurers have been getting by with a lower rate so why not just go ahead and formally lower the rate of return.

The insurers added that GAO's data doesn't take into account insurers' full business expenses. The insurers' group states GOA is confusing gross returns and net returns.

Along with that, the National Crop Insurers Service also points to a study released this year by economists from the University of Illinois and Cornell University that insurance providers have rates of return averaging just 1.5% from 2011 to 2015.

The study cited by NCIS shows the net return for insurance companies have gone from $1.07 billion in 2011 to a -$1.749 billion in 2012. In 2013, insurers had a -$62 million and turned a profit of $239 million in 2014.

The GAO study and the response will likely add to the debate about crop insurance for the next farm bill. That debate likely will happen more on the Senate floor than in the House or Senate Agriculture Committees, which have maintained they will not cut the crop insurance title.

GAO report "Crop Insurance: Opportunities Exist to Improve Program Delivery and Reduce Costs…

Study on state of the insurance industry by National Corn Growers Association…

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