The U.S. Department of Agriculture said all 16 crop insurance companies have agreed to sign Standard Reinsurance Agreements for the 2011 crop year. Though there had been industry complaints about the significant spending reductions in the federal crop insurance program, all the companies had been expected to agree to the negotiated arrangement.
Cuts to the program are expected to total $6 billion over the next decade. Though $2 billion of the projected savings will be directed into farm programs, the remaining $4 billion will be used as a federal deficit offset.
The negotiations between the companies and USDA's Risk Management Agency -- a process that takes place every five years -- had been an uphill struggle for the companies because of their recent years of substantial profits. In the past decade, the number of policies has declined, but from 2006 to 2009, the payments to insurance companies went from $1.8 billion to an estimated $3.8 billion as commodity prices have spiked. The new agreement, according to the USDA, will limit the companies to a projected 14.5% long-term return.
Each of the 16 companies will be required to submit a plan of operation to the USDA by July 26, but they are preliminarily approved to write new crop business on the program.
There may not be as long a list of companies the next time a negotiation comes around, according to recent predictions from Laurie Langstraat, a spokeswoman for the National Crop Insurance Services, the organization that represents the companies. "There might be a couple of companies after a year or so who will need to evaluate whether they can continue in the business," she said. "I'll bet you'll see some consolidation as we go forward" (BestWire, July 6, 2010).
A provision that's especially controversial for producers is a new cap on agent commissions -- limiting companies to paying commissions that total no more than 80% of their reimbursements for administrative and operating expenses. A second cap says the total cost of commissions and profit-sharing deals with producers can't exceed 100% of the A&O reimbursement. Traditionally, agents -- who are the means by which the federal program's products are distributed -- have profit-sharing arrangements with the companies, which have historically made much of their profits from underwriting gains (BestWire, July 6, 2010).
In 2009, the top five writers of multiperil crop insurance in the United States were Wells Fargo Insurance Group, with 16.5% market share; Ace INA Group, 16.2%; NAU Country Insurance Co., 10.6%; Great American Property & Casualty Insurance Group, 9.2%; and Allianz of America, 8.1%, according to BestLink, which provides online access to A.M. Best's Global Insurance & Banking Database.
(Jesse A. Hamilton, Washington bureau manager: Jesse.Hamilton@ambest.com)