Aiming to reform the federal crop insurance program, reduce the federal deficit, and maximize taxpayer dollars, the USDA has released the final draft of a new crop insurance agreement and, as a result, $6 billion in savings. Two-thirds of the savings will go toward paying down the federal deficit, and the remaining third will support high priority risk management and conservation programs. By containing program costs, these changes will also ensure the sustainability of the crop insurance program for America's farmers and ranchers for years to come.
USDA's Risk Management Agency (RMA), which administers the federal crop insurance program, released the final draft version of a new Standard Reinsurance Agreement (SRA), which details the new terms, roles, and responsibilities for both the USDA and insurance companies that participate in the federal crop insurance program.
"The federal crop insurance program is a critical component of the farm safety net, and now that our negotiations are complete, we have the framework for a stronger program that will help producers in every region of the country better manage their risk," said Agriculture Secretary Tom Vilsack. "The President has laid out an aggressive plan for reducing the deficit and we're pleased to take a leadership role in that effort … while strengthening key risk management and conservation programs that benefit America's farmers and ranchers."
The release of the final draft agreement follows two draft proposals and months of discussions with insurance companies and other stakeholders. USDA has worked aggressively through the negotiation process to preserve the crop insurance program as part of the farm safety net, support producer access to critical risk management tools, protect the interests of taxpayers, and ensure a reasonable return for the companies that deliver the program.
The final draft agreement will generally maintain the current Administrative and Operating (A and O) subsidy structure, but remove the possibility of windfall government payments based on high commodity price spikes by limiting the level of A and O payments that the industry can receive. However, an inflation factor and consideration for new business is included so that the maximum payment may reasonably increase over the length of the agreement.
Through this negotiation process, RMA has lowered the projected average long-term return for the companies to about 14.5 percent. To do this, RMA worked closely with the insurance companies to modify the terms under which RMA provides reinsurance. Meanwhile, RMA will increase the return in historically underserved states to provide additional financial incentives for companies to write business in these states. The agency also returned to individual state stop loss protection for the more risky business, thus providing greater reinsurance protection for companies.
Through USDA's work during this negotiation process, the Obama administration is also ensuring that $2 billion in savings from the new Standard Reinsurance Agreement will be used to strengthen successful, targeted risk management and conservation programs and that $4 billion will be used to reduce the national deficit. The $2 billion that will be invested in farm bill programs include releasing approved risk management products, such as the expansion of the Pasture, Rangeland, and Forage program; providing a performance discount or refund, which will reduce the cost of crop insurance for certain producers; increasing Conservation Reserve Program (CRP) acreage to the maximum authorized level; investing in new and amended Conservation Reserve Enhancement Program initiatives; and investing in CRP monitoring.
The $4 billion in budget savings USDA achieved is one of the first and most significant steps that a federal agency has achieved in reducing mandatory spending from the long term federal deficit.
The 2008 farm bill authorized RMA to renegotiate the agreement effective for the 2011 crop year. Due to significant increases in commodity prices in recent years, annual insurance industry payments more than doubled from $1.8 billion in 2006 to an estimated $3.8 billion in 2009 based on the terms of the previous SRA. Meanwhile, the number of total policies decreased from 2000 to 2009.
In preparation for these negotiations, RMA contracted with an internationally known company, Milliman Inc., to review historical rates of return and determine a reasonable rate of return for the crop insurance industry. The Milliman analysis shows that over the past 21 years, the crop insurance companies averaged a 17.0 percent return when the average reasonable rate for that period was 12.7 percent. See the full report and additional information about the new SRA online at http://www.rma.usda.gov/news/2009/12/sra.html.
Since the renegotiation process launched, USDA has focused on six primary objectives for this agreement, which have been maintained throughout the negotiation process:
• Maintain producer access to critical risk management tools.
• Align A and O subsidy paid to insurance companies closer to actual delivery costs.
• Provide a reasonable rate of return to insurance companies.
• Protect producers from higher costs while equalizing reinsurance performance across states to more effectively reach under-served producers, commodities, and areas.
• Simplify provisions to make the SRA more understandable and transparent.
• Enhance program integrity.
These objectives align with RMA's primary mission to help producers manage the significant risks associated with agriculture. By achieving these six objectives, the new SRA ensures financial stability for the program and the producers it serves, while increasing the availability and effectiveness of the program for more producers and making the program more transparent. Following today's delivery of the final draft to the companies, RMA will work with the companies to correct any technical errors or unclear language.