The 2014 Farm Bill: A Challenge for Federal Crop Insurance AIPs

Companies participating in USDA’s Federal crop insurance program (Approved Insurance Providers or “AIPs”) have much to like about the new 2014 Farm Bill being finalized on Capitol Hill this week. Congress repealed a slew of traditional agricultural programs like Direct Payments, ACRE, and Countercyclical, but it left Crop Insurance standing as the clear leading vehicle for supporting American farm producers.

For AIPs, the positives went beyond this simple vote of confidence in the FCIC Crop Insurance program itself. AIPs will benefit, among others things, from:

  • A new “budget neutrality” rule for future negotiations of the Standard Reinsurance Agreement (SRA), intended by Congress to set a floor under current levels of AIP underwriting gain and administrative expense payments;
  • New market opportunities from a dizzying range of new broad-based and privately-delivered programs including shallow loss coverage, Margin Coverage, expanded revenue coverage, and many more specialized; and
  • The expectation of three or four years of relative political calm. The new Farm Bill stretches through crop year 2018 and, given the political hurdles in 2014, it seems unlikely that Congress will re-open this can of worms to re-tinker with key programs in the interim.

This achievement should be savored and appreciated by the crop insurance community – AIPs, agents, RMA, Congressional supporters, and customers. It caps a steady, consistent effort to improve Federal crop insurance to the point it could replace wasteful and erratic ad hoc disaster programs – a staple of the 1980s and 1990s and now virtually extinct. This effort has spanned three decades and three Administrations, including my own time as RMA Administrator from 1993 to 2001. It is a big win for taxpayers and consumers, and farmers too have voted with their feet and checkbooks to support this business-oriented approach.

Success carries a price tag, though. As the largest, most prominent, and most expensive form of Federal farm support, Federal crop insurance in the post-Farm Bill era now must expect to live under a spotlight, with critics waiting for a mistake, a breakdown, a “gotcha” moment. And nowhere will the scrutiny be more intense than on AIPs.

Don’t misunderstand. This is a good problem to have. But navigating it will require thought and planning. Beyond the many vital implementation issues AIPs and RMA must address immediately to get the new law up and running, I see four challenges for AIPs -- and RMA as their partner -- for the longer term in this new environment:

  • Deliver a clean, quality program: First, the obvious one. Having won Congress’s vote of confidence, AIPs must now demonstrate the quality and value they bring to the program. This means good customer service, prompt payment of claims, clean compliance reviews and audits, and no unforced errors. This isn’t to say there won’t be controversies, issues over particular claims or rules. But AIPs can expect to be held to a new high standard by a wider audience, not just RMA but the full range of overseers --OIG, GAO, Congress, and the media. Any abuse of taxpayer funds will be jumped on by critics as an excuse to cut funding or add rigid controls. And satisfied customers – those farmers across the country – will be AIPs’ most important allies in a crisis. Now is the time to solidify that loyalty through good service.
  • Explain it to consumers. As noted above, the emergence of FCIC crop insurance as the leading USDA program to support American farmers is a major victory for taxpayers and consumers – far better than the old approaches it has eclipsed: ad hoc disaster aid, direct payments, and the rest. Farmers pay a large part of the cost from their own pockets, ultimate risk is shared by private reinsurers as well as AIPs, the program rewards good management at the farm level, initiatives such as data mining and strong RMA compliance have sharply reduced abuse, and delivery costs have been cut. This positive story gets lost in the white noise, but needs to be shared -- not just among ourselves but with urban consumers and taxpayers who drive Congressional critics.
  • Fix the problem of underserved crops: The new Farm Bill contains a plethora of mandated new programs, many aimed at specialty and underserved crops and regions. To the extent these crops remain underserved, it is often because they are the most difficult to insure, hard to underwrite, hard to document, often with unique markets or agronomic profiles, and hard to fit within broad insurance models that work well for others. Some growers of these crops, when pressed, will admit they don’t even want insurance. Still, without strong participation by these crops seen as “underserved,” FCIC insurance itself is too easily - and unfairly - stigmatized as regional and tilted toward big Midwest row crops – an unsustainable situation in a modern Congress.

RMA and the FCIC Board deserve credit for making enormous strides on this issue. AIPs now have a strong self-interest in helping to finish the job.

  • Prepare to take initiative in proposing cost cuts: Finally, we must have that difficult talk about money. AIPs earned significant credit for absorbing cuts both in the 2008 Farm Bill and the 2010 SRA renegotiation. This helped insulate the program from further cuts in the 2014 Farm Bill, despite sharp budget pressures. But too often the Washington rule is “what have you done for me lately.”

By the time the 2019 Farm Bill comes around – and probably sooner – budget cutters will return with crop insurance high on the target list. And within crop insurance, “delivery costs” will look the most tempting. Rather than wait to fight the inevitable proposals to cut A&O, cut underwriting gain, cut subsidies, so on, perhaps this time the AIP community should consider taking the lead and control its own destiny. This means AIPs making an organized effort to develop their own plan to reduce delivery costs, not through arbitrary budget cuts but organically, through normal business forces like innovation, new technology, streamlining, efficiencies, and competition.

There is a wealth of innovative talent in the AIP community, and addressing the reality of shrinking taxpayer budgets is easily the biggest challenge to the long-term sustainability of FCIC crop insurance in its current form. AIPs and RMA have made huge strides in modernizing the program’s administrative side. The ultimate solution could take any one of a number of forms, from something structural – such as allowing some type of price competition among AIPs -- or developing industry wide cost-saving improvements that would allow an SRA-wide reduction in supports. Either way, it would be far better if AIPs came forward with an answer—planned in advance and implemented in an orderly way -- rather than waiting for one to be forced upon them by Congressional critics.

But for now, let’s not bury the lead. Congratulations to all involved in the 2014 Farm Bill. It was a long time coming and bodes well for American agriculture in the broadest sense.

Ken Ackerman was Administrator of USDA's Risk Management Agency from 1993-2001, and continues to represent clients from all parts of the crop insurance community.

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