USDA’s Federal crop insurance program has benefited from a unique public-private partnership that is one of the most successful in government. USDA’s Risk Management Agency (RMA) and Federal Crop Insurance Corporation (FCIC) set the insurance policies, subsidize them and regulate them, but they rely on private agents and insurance companies (called Approved Insurance Providers or AIPs) to actually interact with farmer-customers, selling, and servicing the policies across the country.
This merging of entrepreneurial energy and government controls has resulted in enormous growth. In the single decade from 2003 to 2013, the Federal crop insurance program more than tripled its portfolio, from just $40 billion to over $123 billion in guarantees. During this time, it also succeeded in making inefficient, annual ad hoc Congressional disaster bills, the major form of Federal farm relief through the 1990s, virtually obsolete.
The growth did not come without controversy. Critics often complained that participating insurance companies and agents made too much money, companies and agents complained that the program was too complex and unwieldy, and RMA often was caught in the middle. Every so often, Congress or USDA intervened to adjust levels of Federal support, either through changes to the Standard Reinsurance Agreement (SRA) that governs FCIC’s relationship with participating AIPs, or though Congressional legislation reducing the administrative and operating subsidies or underwriting gains companies earn.
Beyond this normal give and take, however, 2015 saw developments in the crop insurance business that appeared to signal a fundamental change in the equation. A striking number of prominent players chose to leave the program, divesting themselves of their crop insurance businesses amid concerns of diminished profitability. The headlines tell at least half the story:
What lies behind this trend? Each transaction, of course, is unique and reflects the circumstances of the particular firms involved. But it’s hard to look at this picture of churning apart from the growing consensus that the basic economic equation for crop insurers has changed, creating the most challenging business environment in many years.
A June 2015 analysis by the accounting firm Grant Thornton LLP, prepared for the industry group National Crop Insurance Services (NCIS), laid out the problem clearly. Program-related pre-tax income for crop insurance AIPs as a group fell sharply in 2012 and 2013 from prior levels. These companies had posted nine straight years of gains up to that point, including $1.363 billion in 2008, $944 million in 2009, $1.750 billion in 2010, and $1.131 billion in 2011. But then the picture changed. Instead, 2012 and 2013 showed large net losses, $1,746 billion and negative $62 million respectively. (See full report here.)
Much of this drop resulted from unusually bad weather and falling crop prices, cyclical forces likely to rebound in the future. But most observers also point to larger, more lasting, systemic factors behind the decline:
Despite these trends, there is still plenty of reason for optimism for the crop insurance business, and the challenge is ripe with opportunity. For the short term, 2015 is looking to be a far better underwriting year than 2014, 2013, or 2012. According to RMA data, the program’s national loss ratio for 2015 stood at 0.55 as of February 1, 2016, representing some $5.3 million in indemnities paid, far below 2014’s final level of $9.1 billion in indemnities and its 2014 year-to-date level of $7.2 billion in indemnities. 2015 indemnities will doubtlessly creep higher as claims are finalized, but are not expected to reach levels seen in recent years, signaling a healthier year for participating companies.
For the longer term, tightening profit margins will continue to challenge AIPs. But here too lies opportunity. Those AIPs and agents able to economize, maximize efficiencies, use cutting-edge technologies, build niche markets, and reduce costs while maintaining a critical mass of stable, high-quality business, are poised to benefit. AIPs should not look to Congress or USDA to relieve the crunch, especially in the highly-charged environment of an Election Year. Instead, the answer must come from AIPs themselves. This is a time when smart management can make a difference. Innovation has long been the “secret sauce” behind the success of American agriculture and agribusiness and AIPs that can weather the storm by trimming their sails and best navigate the winds will emerge stronger, more competitive, and with a larger, more sustainable share of a more stable market.