The renegotiation of the Standard Reinsurance Agreement (SRA) for the federal crop insurance program is causing quite a stir and could induce challenging market conditions for reinsurers participating in the Federal insurance program.
In aletter to Risk Management Agency Administrator William Murphy, Lincoln, D-Ark., and Chambliss, R-Ga., along with 28 U.S. senators expressed appreciation for RMA's willingness to reconsider its previous proposals as the SRA renegotiation proceeds.
However, despite a modest reduction in the size of the proposed cuts between the first and second drafts, the senators expressed their concerns with RMA’s proposals that may undermine the crop insurance program, reduce the quality of service and availability of the program, and harm rural America through job loss.
The second draft calls for nearly $7 billion in proposed cuts over the next 10 years. By comparison, the 2005 SRA was estimated to save $410 million over 10 years and the 2008 Farm Bill included savings of $5.6 billion over ten years.
"While we believe there may be some efficiencies to be identified through the SRA renegotiation process, we are concerned that the level of program cuts in the second draft will seriously—and negatively—affect several insurance companies’ ability to continue to offer much-needed risk management products in many areas of the country," the senators wrote.
The senators also noted concern with RMA’s approach of proposing significant cuts to the program prior to the completion of a study of program delivery costs.
It is important that the SRA provide fair and adequate compensation for program delivery so that farmers and ranchers continue to have access to the program. "This objective brings into question the new proposal in the second draft to cap commissions paid to crop insurance agents, who are a crucial component of the delivery system. We remain concerned about proposals that may undermine the program, reduce the quality of service and availability of the program, and harm rural America through job loss," the letter stated.
Farm bill starting point
National Farmers Union (NFU) President Roger Johnson sent a letter to U.S. Department of Agriculture (USDA) Secretary Tom Vilsack on the renegotiation. NFU supports an SRA that will not negatively impact the delivery of crop insurance or decrease the current baseline, but instead strengthens risk management protection while ensuring farmers of all crops, in all rural areas, have access to essential crop insurance products.
“It is a very troubling possibility that responsible financial adjustments in the federal crop insurance program may result in unintended consequences,” said Johnson. “The next farm bill will be even more difficult to write if the starting point from which to reduce spending on crop insurance is even lower.”
Costs of change
Aon Benfield, a reinsurance intermediary and capital advisor, today releases its analysis of the U.S. crop reinsurance market, which reveals that proposed changes to the Standard Reinsurance Agreement by the USDA could induce challenging market conditions for reinsurers participating in the Federal insurance program.
The report reveals that the proposed cuts would likely reduce reinsurers' expected profit by 20 to 30%, which could lead to some companies withdrawing from the program or scaling back their capacity.
The Multi-Peril Crop Insurance (MPCI) program is a Federal initiative that provides American farmers with a range of insurance policies designed and delivered through 16 private crop insurance companies.
Participating insurers are subject to the Standard Reinsurance Agreement (SRA) - a contract that defines reinsurance purchases, gain sharing and expense reimbursement. With the SRA set to expire after the 2010 crop insurance year, terms are currently being negotiated for 2011 and beyond.
Early proposals drafted by the RMA, indicate significant structural and economic changes which would result in a meaningful reduction in the expected future profits for crop insurers.
Joseph Monaghan, head of Aon Benfield's Agriculture practice group, said: "Our study reveals that over a 10 year period, reinsurers participating in the MPCI program have experienced favorable returns due to relatively low loss experience resulting from few adverse weather events."However, the proposed changes to the program would have the likely effect of reducing participants' margins, which could see potential reductions in capacity," he said. "Those reinsurers providing cover for the program on a quota share basis may reduce their participation as well, which could in turn reduce the ability of cedents to provide MPCI."
The crop study highlights that if the latest RMA proposals had been in place from 1998 to 2008, participating insurers' underwriting gains would have been reduced by nearly $560 million.
Reinsurers state that while the period witnessed relatively few crop losses, the potential for significant losses still remains. Additionally, the RMA has proposed significant changes to the expense reimbursements. If these changes had been in place in 2009, crop insurer profits would have been reduced by more than $300 million.
Monaghan added: "In recent years, an increased number of reinsurers have started to write crop reinsurance, primarily attracted by the low volatility and diversification of this line of business. As a result, terms and conditions for crop reinsurance have become more competitive and insurers have benefited from lower pricing.
"Currently, quota share reinsurance is generally priced at low single digit expected margins by reinsurers. Reinsurers may be unwilling to support their renewal treaties at the expiring terms given the erosion in expected economics under the proposed SRA. Reinsurers may either discontinue their support for crop insurance or demand lower ceding commissions and profit commissions for continued support, which will in turn put pressure on participating insurers."