USDA wants cap on crop insurance agent commissions

Feb 19, 2010
USDA wants cap on crop insurance agent commissions

Potential cuts to the crop insurance industry would be about 20 percent less than originally proposed, but agent commissions would be capped under a new draft of the standard reinsurance agreement between USDA and the crop insurance industry, USDA officials said last Wednesday.

Though USDA had originally declined to detail the savings in the first proposal, the White House’s proposed budget detailed $8 billion in crop insurance savings over 10 years. Officials said last Thursday the actual projection was closer to $8.4 billion. The proposed changes would still cut costs for crop insurance by about $6.7 billion over 10 years, based on percentages and numbers offered by USDA officials.

“I think the companies overall would be satisfied with the direction of the movement,” said Bill Murphy, administrator of USDA’s Risk Management Agency.

Michael Scuse, USDA’s deputy undersecretary for Farm and Foreign Agricultural Services, said the second draft has several significant changes following conversations with the industry. Still, this draft would accomplish USDA’s goals of being fair and providing quality crop insurance to producers but still offering considerable savings, he said.

“I think this second draft will show we took our conversations and meetings with the companies and trade associations and with our producers to heart,” Scuse said.

Murphy, Scuse and other USDA officials briefed reporters last Wednesday just before Murphy prepared to offer the second draft to a crop insurance industry meeting being held this week in San Diego, CA. Snow days in Washington last week slowed work on the proposal, but Murphy said he is still able to detail the changes to crop insurance executives and agents who are attending the convention.

USDA officials have already met with most insurance companies to explain some of the proposals, Murphy said. The responses were a mix of positive and negative, depending on the specific issue, he said.

“We spent a good deal of time listening and working with them, and I think they are going to be fairly happy with the direction they see us moving in with the second draft,” Murphy said.

The crop insurance industry’s administrative and operating expenses, combined with underwriting gains, rose from $1.8 billion in 2006 to $3.8 billion in 2009, which Murphy said is “certainly not a sustainable cost for the delivery of the program.”

Besides saving money, USDA wants to “rebalance” insurance offerings nationally. Right now, the industry aggressively courts corn and soybean producers, but there are fewer companies marketing crop insurance outside the Corn Belt.

Administrative and operating (A&O) expenses, and thus agent commissions, are tied to commodity prices now, causing fluctuations from year to year.

USDA has been trying in the new contract to move those A&O expenses more toward the actual cost of delivering services.

One key proposal by US- DA would cap agent commissions. One of the problems with some companies or lucrative policies in corn and soybean country is companies are actually paying more in agent commissions than the companies receive in A&O reimbursement for those policies. So USDA proposes a “soft cap” on agent commissions at 80 percent of the A&O reimbursement.

To offset the cap in commissions, USDA would allow companies to offer profit-sharing incentives to agents as well.

In the profitable states for insurers, companies have competed and expanded by offering higher commissions for agents. This creates the risk of companies actually offering agents more in commissions than the companies receive from USDA in A&O expenses. That practice helped push an Iowa crop insurer into bankruptcy in the early 2000s.

“We have had a lot of concerns with this,” Murphy said. “It could easily put a company in financial strains.”

Under the original contract offered, USDA proposed to take an average crop price over the past decade for major commodities and proposed to reduce A&O expenditures to about 15 percent above 2006 levels, or about $1.26 billion. That figure doesn’t add underwriting gains.

“This is going to cause a drastic change in the way they work with agents because up until now, the commission schedules were a simple percentage,” Murphy said.

The companies suggested a phase-in period, so USDA provided a two-year period to phase in those changes through 2012, and then the original contract provisions would kick in.

“I think we moved very well in their direction on this,” Murphy said.

Ideally, this second proposal will provide all of the various structural changes in the contract, Murphy said. USDA will give 30 days for companies to comment, then move to final agreement. — Chris Clayton, DTN