Crop Insurance Scores Well in Profitability and Effectiveness Analysis

October 8, 2009

Independent study by Grant Thornton LLP shows that Federal Crop Insurance Program compares favorably to property and casualty industry


OVERLAND PARK, KANSAS..A study released today by National Crop Insurance Services shows that over a 17 year period (1992-2008) the Federal Crop Insurance Program has been significantly less profitable than the Property and Casualty (P&C) insurance industry, is riskier than the Property and Casualty industry, and has consistently lower expense-to-premium ratios.

The analysis is the 2009 update of a study originally prepared in 2007 to respond to a critical report released by the General Accountability Office (GAO). The Multiple Peril Crop Insurance (MPCI) program is a public-private partnership jointly managed by 15 designated private companies and the Risk Management Agency (RMA) of the United States Department of Agriculture (USDA).

“One of the key elements of the analysis was that crop insurance averaged 14.2 percent per year in pre-tax net income over the period 1992-2008 whereas the property and casualty industry saw an average annual profitability of 17.5 percent,” said Robert Parkerson, President of National Crop Insurance Services, a trade association for the industry. Moreover, the report concludes that providing MPCI coverage entails greater risk than P&C.

The Grant Thornton update also addresses the issue of administrative and operating (A&O) expense reimbursements. Unlike P&C insurance, MPCI premiums do not include the insurer’s cost of delivering the program. Instead, MPCI program delivery costs are compensated by the Federal government via an A&O reimbursement paid on behalf of farmers. Under the arrangement with the RMA, MPCI companies expect to receive full reimbursement for their A&O expenses. However, in 2008, total expenses equaled 22.1 percent of gross premiums while A&O reimbursements totaled only 20.4 percent, resulting in a shortfall of $160.8 million. The report also examines the impact of further cuts in A&O reimbursements imposed by the 2008 Farm Bill effective for the 2009 year and discusses aspects of the legislation which will result in delayed reimbursement of A&O and underwriting gains starting in 2011 and 2012.

The study also compares the expense ratios of the MPCI program to those of the P&C industry. In each of the past ten years, the total expense to gross premium ratio for the MPCI program has been under 29 percent. For the past three years, the expense ratio has been under 25 percent, reaching a record low of 22.1 percent in 2008. Expense ratios for MPCI are substantially less than expense ratios for the P&C industry when put on a comparable basis.

The Risk Management Agency recently released a report prepared by Milliman, Inc., on the historical rate of return of the crop insurance program. “Once we have had an opportunity to thoroughly review the findings from that study and compare it to the results of the Grant Thornton report, we will release our analysis and provide more information to the public,” said Parkerson.

At this time, the private insurance companies and the Risk Management Agency are in the initial stages of renegotiating the Standard Reinsurance Agreement, which provides the financial framework for the private industry’s participation in the program. RMA’s financial integrity provisions impose stringent surplus requirements on MPCI companies. These requirements ensure that adequate resources will be available in the event of extreme or catastrophic weather events. With the additional regulatory oversight at the state level, the Federal crop insurance program is one of the most regulated insurance programs in the world. “The crop insurance industry is on strong financial footing, and we would like it to remain that way” said NCIS President Bob Parkerson. “Crop insurance is at the center of the farm economy – a strong crop insurance program benefits a much broader community than just farmers and ranchers. If you appreciate the low cost of food in this country, you can thank the crop insurance industry for bringing some stability to America’s agricultural industry,” added Parkerson.

NCIS is an international non-profit organization representing the interests of the private insurance companies that provide crop insurance and risk management tools to America’s farmers and ranchers.