Farms.com, Canada
09-11-07
Do-It-Yourself Crop Insurance Faces Ban
INDIANOLA, Iowa (DTN) -- The headlines are hard to ignore: Crop insurers have
posted record profits; insurance premiums are expected to jump with higher
commodity prices. As a result, some farmers have looked into becoming their
own crop insurance agent to lower their insurance costs.
"I can take a test as well as the next guy," said Wallonia, Ky., farmer Joe Nichols,
who recently became a certified crop insurance agent in Kentucky to handle his
crop insurance needs.
Nichols isn't alone. Growers in Illinois and Indiana tell DTN their sons or spouses
are becoming licensed agents to keep the premiums in the family. In other cases,
growers are forming their own insurance agencies and hoping to share the
proceeds much like the old cooperative buying models.
Interest in do-it-yourself insurance is so high that the industry is attempting to bar
some types of farmer-agents in the new farm bill. In his farm bill proposal, Senate
Ag Committee Chairman Tom Harkin, D-Iowa, has plans to disqualify farmers
from being their own crop insurance agents if 20 percent or more of their full
book of business is for themselves.
Crop insurance leaders point out that state insurance commissioners also are
investigating for possible violation of state rebating rules, as is the General
Accountability Office. "It isn't really a good idea to do your own insurance," the
president of a major crop insurance company told DTN. He believes the practice
"distorts" the purpose of licensing, "which is meant to protect consumers and
have standards for the sale of insurance."
Generally, insurance is regulated at the state level and some states outlaw
farmer-agents already. In Nebraska, a person who is his own main insurance
client cannot be licensed to sell insurance. However, many states now have no
restrictions on who can sell insurance or how many insurance clients you have.
"Personally, I think every farmer should be able to be their own crop insurance
agent," said Iowa State University Bruce Babcock, director of the Center for
Agricultural and Rural Development. "It would increase the competition."
An agent's commission is generally 20 percent of the total premium, including
government subsidy. For the most expensive coverage, agent-growers could
have saved about $10 per acre in commission, said Babcock.
"On corn ground in 2006, the average Iowa producer paid $4 in commission for
Revenue Assurance (RA) policies, $5 per acre for Crop Revenue Coverage
(CRC) coverage and $7.72 per acre commission for the average Group Risk
Income Protection (GRIP) policy. On Iowa corn ground in 2007, GRIP with a
guaranteed corn price of $4.06 per bushel, the average total premium price was
$61.50 an acre (from which the government pays about a 20 percent
commission). Subtracting the subsidy, the producer paid $27.35 per acre on
average. If he had pocketed the $12.30 in commission, his total out of pocket
cost would have been $15.05 an acre.
"I think the provision in the Harkin bill is there because the crop insurance
industry sees farmers being their own agents as a threat," Babcock said.
In Kansas, the average CRC wheat premium for 70 percent coverage was $7.99
per acre in 2006-07. This year, at the same rate and coverage, the wheat
premium will be $9.80 per acre (a 23-percent increase), said Art Barnaby,
agricultural economist at Kansas State University. For RA contracts, last year the
average wheat premium was $8.81 per acre in Kansas. The same coverage and
rate will cost $10.80 per acre this year. "The higher average rate for RA contracts
likely reflects the fact that more RA contracts are sold in higher-risk areas,"
Barnaby said.
Though it's not impossible for farmers in most states to be their own crop
insurance agent, the Risk Management Agency (RMA), a division of USDA that
oversees crop insurance, has several requirements. (1) You must not violate
state law; (2) You cannot violate federal rebating regulations that bars an agent
from reducing his commission and sharing that reduction with the client; (3) If
conflict of interest is suspected (as it would be in this case), a mandatory review
by the insurance company would be required to check the loss and underwriting
procedure; (4) You need to have a sponsoring insurance agency or company; (5)
You need to have 12 hours of training before you take the state test and three
hours annually of continuing education.
It might be difficult to find a sponsoring insurance agency for a farmer who simply
wants to be his own agent, said William Murphy, deputy administrator for
Insurance Services at RMA.
"The mandatory review for possible conflict of interest situations would be an
added cost, and under the regulations of the federal crop insurance program, a
company can't charge service fees," he said.
Also, it may not be in a farmer's best interest to be his own agent, Murphy said.
The RMA official, who regularly sees the problems that can occur in insurance
claims, noted that if an agent misinformed you or didn't do due diligence and did
not properly complete your paperwork, you could sue the agent who likely carries
"Errors and Omissions" coverage.
"It is not uncommon for us to deny coverage for acreage in an area that does not
have that coverage or for a farming practice, such as dryland farming, in an area
we only provide irrigation coverage," Murphy said. Misinformed farmers have
been able to get compensation from an agency by suing the agent. "However, if
the farmer was his own agent, he would be out of luck," Murphy said.
Kansas State's Barnaby said he thinks the time commitment to comply with
conflict of interest rules will be the main obstacle for farmers, or their spouses, to
being their own insurance agent.
Babcock supports the notion of farmer-agents. "I don't foresee a problem with
fraud unless the farmer was in cahoots with the claims adjuster. The farmer
keeps the production records but these can be easily cross-referenced with Farm
Service Agency records."
RMA's Murphy doesn't discourage the practice, as long as farmers are in
compliance with all regulations. "We do have a firewall between the insurance
sales agent and the claims adjuster to protect against fraud," Murphy said. The
insurance agent cannot go with the adjuster to the field with the claim.
"I suppose if the agent and farmer are the same, the farmer would have to send
someone else, such as a neighbor, to show the field to the adjuster," he said.
"Farmers looking into being their own crop insurance agent should spend some
time checking out the state and federal rules and find a sponsoring agency or
company," Murphy said. If your state allows, you can become your own crop
insurance agent -- unless the Senate's ban in the farm bill becomes law.
Elizabeth Williams can be reached at elizabeth.williams@dtn.com.
Marcia Zarley Taylor can be reached at marcia.taylor@dtn.com.