"Farmers may live 15, 20 miles away from my agency. And 3 years ago I would drive out there, sit down with them and go over policy changes," said Brian McSherry, president of McSherry Agency, Pontiac, Ill. "With the reduced compensation, I can't afford to do that anymore. I have to call them or they have to come out to the agency."

Background

Today's FCIP program has its roots in Depression-era America. Following the severe agriculture damage from the Dust Bowl and Great Depression in the 1930s, Congress shifted a major portion of the risk from farmers to the public sector and created the Federal Crop Insurance Corp. (FCIC) in 1938 to help the industry recover. The program initially addressed crop losses and focused on the major crops in the major producing regions. Farmer participation was low as program costs were high: The government had insufficient reserves to pay claims. 

Related: Read the article "GAO Says Government Should Cap Crop-Insurance-Premium Subsidies' by Arthur D. Postal.

The farm bills of the 1960s and '70s offered free disaster coverage, but it wasn't until 1980 with the passage of the Federal Crop Insurance Act that crop insurance was expanded to include more crops and other regions of the country. To encourage participation, the 1980 Act offered farmers a 30 percent premium subsidy limited to the dollar amount at 65 percent coverage. 

At this time FCIP was sold though Farm Services Agencies (FSA) and farmer participation was about 30 percent, said Todd C. Henricks, president of Chapman-Henricks Insurance Agency in Cerro Gordo, Ill., and chairman of the Board for IIA of Illinois. Congress established a dual delivery system in which farmers could choose to buy policies sold by private agents who contracted with the government for claims service, or from private companies that both sell and service claims. Because the private sector outperformed the government, all program delivery was assigned to the private sector by the end of the '80s.  

After a nationwide drought in 1988 and wet growing season in 1993, Congress passed a series of ad hoc disaster bills to provide relief to needy farmers. 

In 1994 Congress enacted the Federal Crop Insurance Reform Act as a more permanent solution. Two years later, Congress created the Risk Management Agency (RMA), operated under the U.S. Dept. of Agriculture, to administer FCIC programs. RMA carries certain regulatory functions including rate setting, coverage options and subsidizing policies. Approved Insurance Providers (AIPs) private insurance agents conduct much of the service, which includes marketing, writing, adjusting, claims works and record keeping. The federal government provides reimbursement for some of these services. Additionally, the partnership ensures that the risk is spread across the government and the AIPs, said Mike Becker, assistant vice president of federal affairs, PIA National.

Read the sidebar "Selling Opportunity: 'Farm-to-Port'".

Congress revised the farm bill in 2008 and reduced subsidies to insurance companies: $6 billion, over a period of 10 years, has been cut from the budget. The authorization for that legislation expires on Sept. 30. 

In 2012, insurance policies are sold and serviced through 15 RMA-approved carriers: ACE American, Agrinational, American Agri-Business, American Agriculture, Austin Mutual, Country Mutual, Everest Reinsurance, Farmers Mutual Hail Insurance Co. of Iowa, Great American, Hudson, John Deere, NAU Country, Occidental Fire and Casualty Co. of North Carolina, Producers Agriculture and Rural Community. A list can be found at http://www3.rma.usda.gov/%20tools/agents/companies/indexCI.cfm. 

The carriers pay agent commissions and USDA reinsurers any carrier losses. 

Related: Read the article "Crop Insurers, Agents Dismayed at New Proposed Cuts" by Arthur D. Postal.

Types of policies 

Federal crop insurance policies are revenue based or yield based. Two million crop insurance policies were sold in 2010, with revenue-based policies accounting for 56 percent of the total, and the remaining 44 percent were sold as yield-based policies. Corn, cotton, soybeans and wheat account for 75 percent of insured acres. 

Revenue-based policies were first offered in 1997. A farmer who chooses this type of insurance receives an indemnity payment when his actual farm revenue (either crop specific or the entire farm) falls below a certain percentage of the target revenue, whether the loss is caused by low prices or low production.

In a yield-based policy, farmers are assigned a typical crop yield based on production history and are given a crop price based on estimated market conditions. The farmer then selects a percentage of his normal yield to insure and a percentage of the price he wishes to receive in the event of crop loss.

Agents can offer two types of yield-based coverage: crop-hail and multiperil. Crop-hail is not offered through the government and is provided through insurers. It covers hail, fire, vandalism and some transportation.

Multiperil, purchased before planting, covers loss due to drought, moisture, freeze and disease (see "Types of Federal Crop Policies," page 36). McSherry, who insures farms as small as 20 acres to those as large as 3,000 to 4,000 acres, encourages agents to thoroughly understand the differences in the multiperil policy forms, as they are complicated. 

Related: Read the article "Industry Reps Testify Against Further Crop-Insurance Program Cuts" by Arthur D. Postal.

2012 Farm Bill Proposals

The 2012 farm bill would replace legislation enacted in 2008, which reduced subsidies to insurers for selling and serving crop insurance policies, and increased what farmers paid in administrative fees for coverage. 

The National Assn. of Farm Service Agency (FSA) County Office Employees (NASCOE) has lobbied Congress to replace the private sector insurance agents who sell and service crop insurance policies with federal government FSA employees. "It's unfathomable that anybody would want to turn the program back 30 years "to a time when FSA employees were selling the policies," said Mike Becker, assistant vice president of federal affairs for PIA National. The program then was more costly, had fewer policies and was underused. 

Independent agents are the key to the success of the crop insurance program, Becker said, and NASCOE is advocating a strategy that will lead to inefficiencies and high costs that will not serve farmers well.

In March, insurance companies and agents, in testimony on behalf of IIABA, asked the Senate Agriculture Committee to "do no harm" to the existing crop-insurance-subsidy program. Ruth Gerdes, president of Auburn Agency Crop Insurance, Auburn, Neb., testified on the crop program's shift from a public to a private delivery system and noted the efficiency of program delivery by agents and the expansion of insured acres. In 2011, 18,000 crop agents serviced 1.15 million policies. "The growth and overall success of the FCIP is due to motivated program participants, good lawmaking, quality products and a dedicated agent force," Gerdes said.

A group of six industry trade groups (American Assn. of Crop Insurers, Crop Insurance and Reinsurance Bureau, Crop Insurance Professionals Assn., IIABA, National Assn. of Professional Insurance Agents and Reinsurance Assn. of America) said in a letter to the House and Senate Agriculture Committees that crop insurance has contributed to more than $12 billion toward reducing government spending and deficit reduction since 2008. In the same time period, private crop insurance companies have given more than $27 billion to farmers and ranchers after disasters.

A few days after the testimony, House Budget Committee Chairman Paul Ryan (R-Wis.) released his budget proposal, which calls for more than $30 billion to be cut from the crop insurance program, at $5 billion a year. 

The Obama administration has proposed to reduce subsidies to the industry by $8 billion over 10 years in its 2013 budget. This includes a $300 million reduction in subsidies for administrative and operative costs, which is used to pay agent commissions. The 2013 budget proposal also reduces the ROI for crop insurers to 12 percent (down two percentage points), and also reduces producer-premium subsidies by two basis points, or two-tenths of a percent.

"If they reduce that, it will reduce delivery to farmers," Henricks said.  "It's going to harm distribution because agents aren't going to take the time. Federal crop insurance is very labor intensive to sell and service. You have to build a relationship with the farmer."

These cuts fall on top of previous ones authorized in the last Standard Reinsurance Agreement (SRA) from 2010, which acts as a financial and compliance contract between the RMA and AIPs. The last agreement reduced how much private sector companies can compensate their insurance agents. RMA is removing performance incentives, Becker said. 

McSherry said his 2011 revenue has been reduced 50 percent because of the renegotiated SRA. "My goal is to provide an efficient and effective risk management tool to all of my farm clients," he said. "As a result of the new SRA, it will be difficult for agents to continue that level of service." To compensate, the McSherry Agency laid off a part-time employee.