Crop Insurance Industry Lends Perspective To Ewg’s Analysis Of Farm Programs

May 6, 2010

Overland Park, Kansas…The crop insurance industry cautioned today against relying on partial assessments of the Federal crop insurance program. The industry voiced these concerns again in light of the Environmental Working Group’s (EWG) report released yesterday which evaluated for the first time data from the crop insurance program.

The crop insurance program is founded on the principle that a public-private partnership, carefully structured and implemented, can result in the best overall performance for farmers and the taxpayer. It provides private sector financial accountability and a business person’s attention to cost-saving details. It also fully takes into account the unique public challenges of helping farmers simultaneously manage the risk of producing crops on hundreds of millions of acres. Because the program works, the acres and farm value insured has grown dramatically. In 2000, there were 206 million acres in the program with $34 billion in liability, and by 2008 there were 272 million acres insured with $90 billion in liability.

“Crop insurance has become a key element of the farm safety net for farmers,” said Bob Parkerson, President of National Crop Insurance Services (NCIS).

As a private sector oriented insurance program, policy makers have to confront a unique set of challenges and considerations while they pursue efficiency and protections that are accessible to all farmers. It’s important to understand these challenges in a public-private partnership where the crop insurance industry, farmers and the taxpayer are all sharing in the risks and liability.

“The industry, in partnership with private reinsurance companies, has taken on at least 80 percent of the liability in the program since 1998,” Parkerson noted.

The costs of the crop insurance program have grown relative to farm price and income support program, as EWG notes. But that growth reflects the coverage of more crops, livestock and livestock products; greater program participation; higher values of crop production over time; some substitution for ad hoc disaster payments; and, the availability of more insurance products — including 37 new crop or insurance plans introduced since 2000.

Attempting to evaluate performance using a few years of data is inadequate for crop insurance products. EWG cited insurance program’s historically high costs in 2009, for example. While the figure they cite overstates the cost (the USDA Risk Management Agency calculates the cost for the fiscal year at $7.3 billion rather than the $8 billion cited by EWG, (see, the more important omission is not acknowledging the long-term insurance principle at work. Costs were high in fiscal year 2009 in large part because there were also record-high losses of $8.4 billion. Over a long enough period of time, which reflects the variety of representative weather outcomes, losses and gains to the companies are more even and result in cost-effective financial returns to the industry. An independent analysis by Grant Thornton over a 17-year period (1992 to 2008) shows that the crop insurance program is significantly less profitable than the property and casualty industry, and has consistently lower expense to premium ratios.

“One of the major assets of the program has been its stability,” Parkerson added. “Farmers can depend on it and so can their bankers,” he added.

The stability is built into the program by the government’s requirement that the companies maintain sufficient reserves to handle back-to-back years with large losses. Taxpayers, too, share in this risk; that is the public side of this program. Without the public contribution it would not be possible to affordably insure farmers from widespread losses due to bad weather and similar risks.

An informed review of the crop insurance program and its proper role in the farm safety net should yield improvements that benefit farmers and taxpayers while preserving the private sector elements that have sustained the program and made it a success. The crop insurance industry welcomes the upcoming farm bill reauthorization and looks forward to working with Congress and stakeholders, like the EWG, to this end.