EWG study challenges impact of $3-billion reduction in revenue cap

Dr. Babcock’s report, which was entitled Cutting The Fat: It Won't Kill Crop Insurance, shows lowering the rates of return for the crop insurance industry would have no impact on the availability of crop insurance policies or the premiums paid by farmers.

Update: The House and Senate passed the highway bill and sent it to the president for his signature. Efforts to remove language restoring the crop insurance cuts were defeated.

An analysis commissioned by the Environmental Working Group says the $3 billion cut in crop insurance subsidies in the budget compromise worked out to keep the federal government operating would not “kill the crop insurance program.”

The EWG, which has long been known for its website listing farm subsidy payments to farmers, asked Bruce Babcock, an agriculture economist with Iowa State University, to analyze the impact of lowering the cap on crop insurance company revenues from 14.5 to 8.9 percent.

The reduction, which the Congressional Budget Office said would save $3 billion in government spending over 10 years, was included in the budget compromise negotiated by congressional leaders and the White House just before the end of the 2014-15 fiscal year on Sept. 30. Ag leaders claimed the move was designed to “kill crop insurance.”

Dr. Babcock’s report, which was entitled Cutting The Fat: It Won't Kill Crop Insurance, shows lowering the rates of return for the crop insurance industry would have no impact on the availability of crop insurance policies or the premiums paid by farmers.

“The reality is that the cuts are a modest reduction in taxpayer support for crop insurance,” said Babcock, who has been a critic of the crop insurance delivery system. “Rather than devastating or killing the program the lower subsidies would not affect profits, but instead result in a more efficient, but still far from lean, delivery system for the insurance.”

The budget agreement, signed by President Obama in November, would reduce the target rate of return for crop insurance companies from 14.5 percent to 8.9 percent, a margin the EWG says is still generous and well above the rate of return enjoyed by the insurance industry as a whole.

Highway bill rider

To win support for the budget compromise from farm-state congressmen, congressional leaders agreed to reverse the cuts when Congress passed an omnibus budget bill in December. Instead, House and Senate conferees inserted the change in the highway bill that is scheduled for a vote before the current transportation legislation runs out on Friday.

House Agriculture Committee Chairman Mike Conaway praised House Speaker Paul Ryan and Majority Leader Kevin McCarthy for including the crop insurance restoration language in the highway bill.

“By including language in the highway bill conference report to fully repeal a provision that was designed to kill crop insurance, the Speaker and the Majority Leader are working to keep their promise to me and to all of rural America,” he said in a statement after the conference report’s release.

The proposed reduction in the gross revenue cap brought on a firestorm of criticism from farm and commodity organizations, who claimed the move amounted to reopening the 2014 farm bill. Leaders of the group said agriculture had already agreed to cuts of $23 billion in the Agricultural Act of 2014 (the latest farm bill).

“All we have left is crop insurance,” said Shawn Holladay, president of Plains Cotton Growers. “The proposed cuts to crop insurance would be pretty radical considering the money we saved in the last farm bill.”

EWG says the efforts to reverse cuts in spending are in sharp contrast to the normal budget stance in Washington.

Federal belt tightening

“Rhetorically, this is a Congress that applauds federal belt tightening, but in practice it hands out billions in taxpayer-funded giveaways to the crop insurance industry,” said Colin O’Neil, EWG’s director of agriculture policy. “It seems ridiculous to think that companies headquartered in tax havens such as Bermuda and Switzerland can’t get by on a 9 percent rate of return.”

Industry advocates argue that the cuts will “cripple” crop insurance companies, but Babcock’s analysis shows that the insurers’ cost of delivering each policy has ballooned from an average of $628 in 2001 to $1,670 in 2013.

This increase in costs was largely the result of increases in the wages paid to company personnel and the commissions paid to insurance agents, according to Babcock’s analysis. The costs per policy not associated with loss adjustment grew by 8.5 percent a year over the period.

The crop insurance industry is unique because the companies can only sell products approved by USDA, which also sets their price. Because crop insurance companies can’t compete on price or quality of service, they compete instead for the business of independent insurance agents by offering higher commissions.

National Crop Insurance Services has released a two-minute video defending the higher cap on gross revenues, noting the 14.5 percent was negotiated under a 2011 agreement between the government and crop insurers.

Returns not guaranteed

“But those returns aren’t guaranteed and haven’t materialized,” the NCIS said in its video. “Actual gross revenue turned out to be 5.7 percent – not even half the targeted amount. When you subtract expenses, crop insurers lost 1.4 percent from 2011 to 2014.”

The cuts included in the recent congressional budget package would lower returns by another 38 percent, further compounding private-sector losses and making it extremely difficult for crop insurance providers to stay in business, the NCIS said in a press release for the video, which can be seen here.

According to Babcock’s analysis, the average commission per policy grew by 9.1 percent a year, compared to the overall insurance industry average of 2.7 percent. In dollar terms, the average commissions paid to crop insurance agents rose from $358 per policy in 2001 to about $1,022 per policy in 2013.

“When you look past the rhetoric thrown around by crop insurance companies, the reality of the situation is clear,” Babcock said. “If we can’t make these very reasonable and responsible taxpayer savings by trimming the inflated costs of crop insurance in a way that won’t hurt industry profits or farmers, what can we cut?”

In a press briefing on the study, Babcock said it would be preferable if the insurance companies were required to bid on handling the crop insurance program for the government.

To read the study, go to http://www.ewg.org/release/fewer-taxpayer-giveaways-would-cut-fat-not-cripple-crop-insurance.

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