Agriculture Secretary Tom Vilsac announced that as of July 12, 2010, USDA’s Risk Management Agency (RMA) received signed 2011 Standard Reinsurance Agreements (SRA) from all 16 private insurance companies who participated in the federal crop insurance program during the 2010 crop year, formally ending the negotiation process which has been underway since December 2009. The new SRA negotiated by USDA is projected to achieve $6 billion in savings over the next 10 years, two-thirds of which will go toward paying down the federal deficit while the remaining third will support high-priority risk management and conservation programs.
“The new agreement that we have now finalized lays the foundation for a more sustainable federal crop insurance program, reduces the federal deficit, and improves the farm safety net for producers by providing incentives for companies to sell policies in all areas so that farmers and ranchers across the country can access these critical risk management tools,” Vilsack said. “USDA appreciates the efforts of the companies to negotiate a new agreement in good faith, with straightforward and constructive dialogue to develop an agreement that works for the companies, producers and taxpayers.”
Throughout the negotiation process, USDA worked aggressively 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 16 companies who have signed the SRA are:
Ace Property and Casualty Insurance Company
Agrinational Insurance Company
American Agri-Business Insurance Company
American Agricultural Insurance Company
Austin Mutual Insurance Company
Country Mutual Insurance Company
Farmers Mutual Hail Insurance Company of Iowa
Great American Insurance Company
Hudson Insurance Company
NAU Country Insurance Company
Occidental Fire and Casualty Company of North Carolina
Producers Agriculture Insurance Company
Rural Community Insurance Company
Stonington Insurance Company
John Deere Insurance Company
XL Reinsurance America, Inc.
RMA grants conditional approval to these companies to participate in the program, including the renewals and writing of new fall crop business, contingent upon receipt and final approval of each company’s plan of operations. The plan of operations from each company is due no later than July 26, 2010.
The new agreement will generally maintain the current Administrative and Operating (A&O) subsidy structure, but remove the possibility of windfall government payments based on high commodity price spikes by limiting the level of A&O payments that the industry can receive. Through the negotiation process, RMA lowered the projected average long-term return for the companies to about 14.5%.
With the savings achieved with the new agreement, $2 billion will be used to strengthen successful, targeted risk management and conservation programs and $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 2006 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.