NU Online News Service, Sept. 26, 1:29 p.m. EDT

Obama-administration plans to further reduce crop-insurance subsidies could accelerate a consolidation process in the agricultural insurance sector that is already long underway, according to Moody's.

In its Weekly Credit Outlook, Moody's says the administration's plan is credit-negative since it would lower the expected rate of return to crop insurers, cap certain administrative expenses and set premiums for catastrophic coverages more along commercially available terms.

Crop insurance underwriters and producers have voiced opposition to the proposal, part of the administration's deficit-reduction plan, to  reduce crop-insurance subsidies by an estimated $8.3 billion over 10 years. Tom Zacharias, president of National Crop Insurance Services, Overland Park, Kan., says,  "Congress needs to evaluate the economic impact of weakening the primary safety net on which farmers and our rural economy can rely." 

Moody's says, "In our view, the proposed regulation, while significant, would be a continuation of a more than decade-long pattern of tightening constraints on crop insurers' permitted margins and expense reimbursements, which has contributed steadily over time to substantial consolidation in the sector."

The rating agency adds that the greatest impact of the administration's plan will be on the smallest competitors in the sector, which will provide further consolidation opportunities for the "more scale-efficient market leaders." Moody's adds that numerous adjustments to the program over the years have been "generally transferring somewhat more risk to the insurance sector, but also enabling the most efficient and expert insurers to continue operating profitably." As a result, the sector has steadily declined from over 30 to a market structure where the five largest insurers account for approximately two-thirds of industry-wide direct premiums, Moody's says.

Moody's adds that it expects consolidation in this sector with or without the proposed legislation, but notes that the legislation would accelerate the process.