USDA Unveils Draft Of New Federal Crop-Insurance Program

The U.S. Department of Agriculture unveiled its first draft of a retooled Federal Crop Insurance Program designed to push private insurers to spread coverage for farmers more evenly across the country as well as cut government spending on the program.

The USDA distributed copies of the draft to the 15 government-subsidized crop insurance companies, which will be able to dispute the document and negotiate changes until mid-January.

Crop-insurance companies are making too much money, mostly at the cost of taxpayer subsidies, USDA officials said Friday while explaining the changes they are proposing. A study commissioned by USDA concluded that a reasonable rate of return on equity for private crop-insurance companies is 12.8%, but the average now is 16.8%.

“We want to bring that rate of return down,” a USDA official told reporters.

Reporters were asked by the USDA not to name officials who conducted the briefing.

USDA data show government payments to crop insurers have more than doubled in recent years, jumping from $1.8 billion in 2006 to $3.8 billion in 2009 while the total number of policies held by farmers has declined.

“We’re paying quite a bit,” the USDA official said. “It’s unsustainable.”

Much of that increase is made up of government reimbursements for companies’ administrative and operating, or A&O, expenses. The USDA’s new Federal Crop Insurance Program proposal aims to cut those payments by uncoupling government

A&O payments for premium costs on loans to producers of seven major crops - corn, sorghum, wheat, soybeans, rice, upland cotton and barley.

Premium costs “are directly influenced by underlying commodity prices,” the USDA said in summary of proposal, and that leads to “volatility in the value of the A&O subsidy,” pushing the subsidies to too high while the cost of servicing policies remained low.

Cutting costs is a secondary goal, though, USDA official said. The primary goal is to get private insurers to offer more coverage to areas of the U.S. that are underserved because they are seen as less profitable.

To do that, the USDA is proposing to “reduce the potential for underwriting gains” for insurance companies in regions that are the most profitable while increasing that potential in regions deemed less profitable.

“We want to make all of the states somewhat similarly profitable to the companies - to drive the competition out of the Midwest and into the rest of the country,” a USDA official said.

CME Group