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Crop insurers are back in the green since the shakeout in 2002-2003 that led to consolidations and to the insolvency of one long-time player. Today, 16 private companies hold Standard Reinsurance Agreements with the U.S. Department of Agriculture's Risk Management Agency to provide crop insurance. That's down from 18 in 2003.

"The companies that are remaining are very healthy," says Eldon Gould, who has been RMA administrator since November. "Today, the companies are very sound financially and well-managed."

"The status of the industry is pretty good at this point in time," concurs Robert Parkerson, president of industry group National Crop Insurance Services. "The thing that is improving for the companies is the fact that we're beginning to learn more about the business. I guess we're learning by experience."

The industry was hit hard in 2002-2003, with the insolvency of Iowa-based American Growers Insurance Co. and consolidation among other companies. But RMA notes that new players have entered the business. "(They) are not doing it for their health," Gould contends, but because crop insurance has proved a viable business.

The new companies are Austin Mutual and its managing general agent, Crop USA; Westfield Insurance Co. and its MGA, John Deere Risk Protection Inc.; Stonington Insurance Co. and MGA Agro National LLC; and Agrinational Insurance Co. and MGA Agriserve Inc.

"It's not good for anybody when a company goes under," says Gould. "Over the long haul they need to make a profit if they're going to continue being part of our delivery stream."

And profitable they are. In 2005, companies and their commercial reinsurers made an estimated $850 million to $900 million in underwriting gain, a return on retained premium of about 30 percent, Gould reports. In 2004, they posted an underwriting gain of about $700 million, and a return on retained premium of about 22 percent. For 2003, those numbers were $380 million and 15 percent.

Compare that to 2002, when companies suffered an underwriting loss of $46 million, with a 2 percent drop in return on retained premium.

In crop year 2005, RMA and its private-sector partners provided $44 billion of protection to farmers on about 370 commodities, covering nearly 80 percent of major crops. "This coverage was offered through 22 plans of insurance and approximately 1.2 million policies insuring about 246 million acres," Gould reported in March.

On the indemnity side, 2004 saw payments to farmers and ranchers of about $3.2 billion, including about $218 million for four hurricanes in the Southeast and about $337 million for a brief freeze in the upper Midwest. Indemnity payments in 2005 totaled about $2.5 billion.

Gould, a hog and grain farmer from northern Illinois, has used multiperil policies on wheat, and catastrophic coverage on corn and beans. He submitted claims about 10 years ago after a series of years with winterkilled wheat.

He looked at buy-up coverage every year but had never bought because of fairly consistent yields. He notes a saying in Illinois: "It always rained five minutes before it was too late." But "2005 would have been a great year to have invested in crop insurance in northern Illinois," he notes. "I had a wake-up call."

Gould sees a dramatic shift in how his fellow farmers use crop insurance. "As margins get thinner and as operations get larger, they're looking for better and more sophisticated ways to manage risk." Risk management used to be about managing price risk. Now producers consider yield risk and revenue per acre. In recent years, more farmers are using crop insurance to forward-price their crop early in the marketing year. "Crop insurance gives you the courage to do that. . . . It has been a great plan."

"I think there's been a lot of progress in that area," says Art Barnaby, a crop insurance expert at Kansas State University. "It really opens up a lot of flexibility when you price the crop." Revenue assurance and crop revenue coverage policies are sold as the foundation for providing a "backstop" to forward-price grain by guaranteeing inventory and allowing corn and soybean producers to price their crop up to three years ahead of harvest and be fully hedged.

Economist Bruce Babcock of Iowa State University adds, "Traditionally, you sell crop insurance separate from marketing decisions. The best agents now are the ones who can combine the two."

Still, RMA faces an uphill battle in its aim to replace ad hoc disaster assistance with crop insurance. Gould notes that in recent years Congress has passed four disaster bills covering six crop years, carrying a $10 billion price tag.

The Bush administration's 2007 budget proposes to link purchase of crop insurance to participation in farm programs. Farmers would have to buy crop insurance protection for 50 percent or higher of their expected market value or lose their farm program benefits.

Gould calls it premature to say if the change will go through. But concern grows about finding a way to provide risk management in a way that satisfies the World Trade Organization. "Some kind of different safety net comes on the radar screen," says Gould.

"It didn't hold up before. I'd be surprised if it held up this time," says Barnaby. Babcock also doubts Congress has the political will.

WHAT'S NEW

The system is ever-evolving. The Federal Crop Insurance Corporation in February approved a pasture, rangeland and forage pilot program using an indexing system to determine crop condition. "That has a potential of being a huge product that could affect a lot of people in the Western states," Gould says, noting that the United States includes about 588 million acres of pasture and rangeland and 61.5 million of hay land. The program will divide the country into four regions due to different weather patterns. Pilots will be available in select counties in Oregon, Idaho, Colorado, North Dakota, South Dakota, Oklahoma, Texas, South Carolina and Pennsylvania for the 2007 crop year.

Twenty-six other active pilot programs are in various stages of development, covering everything from avocadoes to winter squash.

Helping farmers stricken by disaster over multiple years is also on RMA's agenda. They get pinched because their yield guarantee--approved actual production history--is calculated on a simple average of four to 10 years of actual yields. Gould says the agency should come out with a system for the 2007 crop year to calculate average yield when recurring natural losses occur in a region.

The market is showing lively interest in livestock. Pilot programs covering swine and live and fed cattle are gaining popularity, Gould reports. "The policies become important when livestock margins become thin." Cattle policies generate more interest than swine because most swine production in the United States is under contract, relieving farmers of some risk.

"I think the jury is probably still out" on the success of these products, says Barnaby. They don't carry the premium subsidies that crop products do. Still, small producers can use them more easily than other hedging tools. "That is their major advantage."

From the insurers' standpoint, Barnaby adds, "the biggest problem is that these don't have a lot of volume at this point. . . . Reinsurance companies want to write big contracts, not little ones." He notes a $13 million limit on premium volume, which has not sold out.

Insurance companies will have to pay a $65 fee on each livestock risk protection policy and $200 per livestock gross margin policy to pay for program maintenance, Barnaby points out. "They can't pass it on to the producers, but they may try to pass it on to the agent."

One type of policy getting more attention is the group risk income protection, or GRIP, contract. Barnaby says Corn Belt farmers think actual production history products are overrated.

In the Great Plains, with the exception of Nebraska, companies penciled underwriting losses over the last 15 or 20 years. Multiple-year droughts in Kansas dragged down APH and effectively raised premium rates. "You get to some point where it no longer makes sense to buy crop insurance."

That has more farmers looking at GRIP contracts, which are essentially a put option on expected county revenue, Barnaby explains. These pay indemnities when average county revenue for an insured crop falls below the revenue level chosen by a farmer. "You can transfer risk with that contract." But, he adds, "I think it's adverse selection between two products."

With 40,000 GRIP policies in effect, Babcock also sees that as a growth area. "I personally think it's quite an effective risk management tool for many farmers." Besides working in areas with multiple-year losses, it's a good choice in areas of "systemic risk," that is, where if one farmer suffers losses, the whole county likely suffers losses.

Discount coverage, however, appears to be in limbo. Gould says Congress put premium reduction plans, which allowed discounts, on hold for 2007. RMA must evaluate how the concept worked and gather industry comments.

He doesn't know what will come of the plan, steeped in controversy over whether it offered the best way to deliver premium discounts. Only one company, Crop 1, offered the discounts via Internet sales, though nine insurance providers were eligible to offer a premium discount for the 2006 reinsurance year.

"I'm not sure if it's a good thing or a bad thing," says NCIS's Parkerson of the PRP snag. Many farmers need someone to walk them through the complex programs. "That became very difficult, I think, on the Internet. I'm not against selling it on the Internet per se. . . . I'm sure somebody will bring it back or bring something like it back."

Insurance agents dislike the Premium Reduction Plans, explains Barnaby. "The concern was that the lower commissions paid to insurance agents was part of the reason that they were able to give the 3.5 percent discount" off the base premium set by RMA.

Other types of discounts may be offered in the future, Parkerson adds. "Our board of directors here at NCIS has asked us to start exploring a performance discount for farmers . . . who have not had claims for several years."

RMA is also stepping up emphasis on compliance, with more money, people and technology, such as satellite imagery and data mining. For example, Parkerson explains, if a farmer reports different acreage or yields to RMA, insurance companies and the Farm Service Agency, those discrepancies are flagged for follow-through. "RMA continues to use data mining to identify anomalous producer, adjuster and agent program results and, with the assistance of Farm Service Agency offices, conducts growing season spot checks to ensure that new claims for losses are legitimate," Gould told a House Agriculture Subcommittee in March. "Specifically, reduced indemnities on spot-checked policies were approximately $112 million in 2002, $81 million for 2003, and $71 million in 2004."

KIM BOWER-SPENCE lives in Pennsylvania. She specializes in covering the agricultural sector.

June 1, 2006

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