The U.S crop insurance program could benefit from the private market playing a bigger role — including reinsurance support — but the habitually loss-making program needs to be overhauled first, according to a recently release government report.
A report issued by the Congressional Budget Office last month reveals four options for lawmakers to consider when overhauling the program over the next decade, including:
- Restrictions on how losses are quantified in order to reduce claim payments.
- Reductions in premium subsidies for crop insurance.
- Reductions in reimbursements to private insurance companies for A&O costs.
- Changes to the terms of risk sharing between the government and private insurers.
Taken together, the CBO estimates the U.S. government could save $19 billion over the next 10 years if the options are enacted.
“It cost the federal government $5 billion in 2016 and an average of nearly $9 billion annually over the past five years,” the CBO report states. “Policymakers have faced questions about how to reduce those costs while maintaining appropriate support for agricultural producers.”
Risk Sharing and the Private Market
When calculating the possible options to reduce government crop insurance costs, the congressional agency suggests cutting margins for existing private market carriers as well as raising the claims bar on producers.
The CBO recommends reworking the current reinsurance agreement between the U.S. government and carriers, lowering the expected rate of return for crop insurance companies by an average of 2 percentage points. The report added that while the U.S. government realized realized a net loss of $1.4 billion underwiring crop insurance between 2010 and 2016, crop insurance carriers rate of return has been “as least as great” as the broader property casualty market private market.
For private market insurance already running crop insurance programs, the CBO also recommends limiting the administration and operating (A&O) reimbursement to 9.25 percent of premiums or eliminating the subsidy altogether and let carriers charge policyholders directly.
“Two analyses conducted by government agencies have found that reimbursements exceeded actual A&O costs,” the report stated, adding that although insurance industry studies said that A&O costs exceeded government reimbursements “reported A&O costs are not audited and therefore may not reliably reflect actual costs.”
In its options for calculating losses, the report first suggests disallowing the use of harvest prices to measure losses for revenue policies and shifting to “production price” in order to prevent artificially supporting a higher losses when crop production decreases. The report also suggests restricting producers’ ability to adjust their Actual Production History (ACH) in order to represent “fundamental changes in production capacity rather than temporary setbacks.”
The report finally call sfor reducing crop premium subsidies by 15% and limiting the premium subsidy for each producer to $50,000 annually, saying “most empirical studies have found a weak link between producers’ demand for crop insurance and the costs of the policies.”
Increasing the Role of Private Market Reinsurers
In the long-term, the CBO report says that the U.S. government should reduce its role as reinsurance provider for crop policies and shift the risk sharing to the private market.
“[Crop] insurers could arrange to share risk more widely by purchasing reinsurance—that is, insurance coverage for insurers—through the private market, rather than relying on the government to assume responsibility for a portion of losses,” the CBO says. “Estimates of reinsurance companies’ resources suggest that those companies would be capable of managing the risks of significant and widespread agricultural losses in the United States.”
However, the role of the government needs to be addressed first, the report concludes.
“Even if producers could manage their risks privately, however, the expectation that they would receive supplemental assistance for significant losses might discourage them from doing so.”