Crop Insurers’ Returns in Question
(BONITA SPRINGS, Fla.) – Financial returns for crop insurers have fallen nearly 60 percent below expectations since 2011, according to the National Crop Insurance Services, the industry’s main trade organization.
The Standard Reinsurance Agreement — the business contract between the federal government and private-sector insurers that went into effect in 2011 — targeted average returns on retained premium of 14.5 percent. Returns on retained premium have averaged only 6 percent over the four-year period.
And because these calculations only measure gross revenue, not net profit, the actual financial pain has been far greater, said NCIS Chairman Tim Weber. When expenses are subtracted from gross revenue, average net profit since 2011 has been less than 1 percent, with the industry experiencing negative returns in 2012.
This “falls well short of the averages for other lines of property and casualty insurance,” Weber noted when he spoke today at the industry’s annual convention.
Weber explained that unexpected premium reductions implemented by the U.S. Department of Agriculture (USDA) in 2012, $600 million a year in reduced funding under the SRA, increased regulatory burdens, falling crop prices, and bad weather have caused the poor financial performance.
The worst year, 2012, saw companies absorb $1.3 billion in underwriting losses when premiums collected failed to cover indemnities paid out during the record drought.
“Companies need to make a reasonable return on their investment to stay in business…but we cannot do it for free, or worse yet, a negative return,” Weber said.
Crop insurers at the convention expressed disappointment in recent remarks by the Agriculture Secretary, who misinformed reporters about industry returns while advocating for additional funding cuts.
“One of those reforms would be to take a look at what the average rate of return is on crop insurance. Today it’s roughly 14 [to] 15 percent on average of return on investment,” Secretary Tom Vilsack said during an interview with Politico.
“The Secretary is pointing to revenue projected by the USDA, not what has actually materialized in the marketplace,” noted Tom Zacharias, president of NCIS. “And the budget proposed by this administration would only further jeopardize the farm safety net.”
The President’s proposed budget would strip an additional $1.6 billion a year from the crop insurance system, which, Zacharias said, “leaves farmers and taxpayers more vulnerable to the whims of Mother Nature.”