Des Moines Business Record
05-21-06
Farm Bureau Mutual blocked on expansion of premium discount program
By Joe Gardyasz
joegardyasz@bpcdm.com
Efforts by Farm Bureau Mutual Insurance Co. to use premium discounts to
increase its share of the crop insurance market are being plowed under by
lobbyists for insurance industry groups that oppose the program.
Farm Bureau, which completed its acquisition of Urbandale-based Crop1
Insurance in January, had planned to build on Crop1’s niche as the only crop
insurer in the country offering premium discounts to farmers through the U.S.
Department of Agriculture’s Premium Reduction Program. Using the program,
Crop1 has saved policyholders more than $4 million in premiums since it began
offering the discounts in 2003. Farm Bureau expects to pay out $4.9 million to
farmers for the 2006 crop insurance year, which ends in June.
However, those discounts have been taking commissions out of the pockets of
agents who sell the policies. The Independent Insurance Agents & Brokers of
America Inc., a lobbying group representing 15,000 agents, together with the
American Association of Crop Insurers and the Crop Insurance Research
Bureau, have so far persuaded Congress to put a hard freeze on the program.
The House Appropriations Committee earlier this month approved an $18.4
billion discretionary spending bill that would continue a one-year ban on the
discount program that was enacted by Congress a year ago. The measure,
which is scheduled to be taken up the Senate next month, would prohibit the
discounts from being used in both fiscal years 2007 and 2008.
The opposition is unfortunate, said Bruce Trost, executive vice president of West
Des Moines-based FBL Financial Group Inc., a publicly traded company that
manages Farm Bureau Mutual.
In making the decision to buy Crop1, “our board members felt it was important
we got more involved in crop insurance,” he said. “There’s not been a lot of
innovation in that area. We just feel that introducing some innovation into that
area is good for the producer, it’s good for everybody.”
A moratorium on funding for the program was already in place when Farm
Bureau began the process to acquire Crop1, so the opposition comes as no
surprise.
“We felt like (ending the program) was not good for our policyholders and we felt
that it was important for us to acquire Crop1,” Trost said. “Very definitely, we
knew it full well and that was one of the considerations. … We think free
enterprise should be encouraged.”
Though the Premium Reduction Program has been around since 1993, no
insurers had participated in it until Crop1 began offering the discounts in 2003.
To be eligible to issue the discounts, companies must prove that they have
reduced their costs below the government’s administrative subsidiary rate, which
is currently about 21 percent.
“It’s as simple as this,” Trost said. “If a company is able to operate at less than
(that rate), they’re allowed to give (up to a 4 percent discount) back to
policyholders.”
Currently, Farm Bureau’s share of the market for crop insurance, which is sold by
just 16 companies, is about 4 percent, he said. If the nine companies that have
applied to offer discounts were able to do so, they could generate $120 million in
additional funds back to farmers, Trost said.
“It encourages insurers to not just count on operating gains, but also on
increasing efficiency,” he said.
The only outcome from such a system would be a reduction in service to farmers,
said Paul Horel, president of the Crop Insurance Research Bureau. Based in
Overland Park, Kan.., the trade association’s Iowa-based members include West
Des Moines-based Farmers Mutual Hail Insurance Co. as well as Farm Bureau
Mutual.
To offer the discounts, “companies are going to have to find ways to cut costs as
much as possible,” Horel said. “Generally, that doesn’t mean better customer
service. It is our firm belief that virtually no one in the industry is able to operate
at that (21 percent administrative cost) level currently. Therefore, if you’re not
able to operate at that level, you’re not going to be able to operate below that.”
Agents’ commissions on crop insurance, which average about 13 to 14 percent
of premium paid, are lower than those for other lines, and reducing them further
would be unfair to agents, Horel said.
“And it’s a much more complicated and labor-intensive program than other
insurance out there,” he said. “It’s constantly evolving, and the agents have to
keep up with that. It’s easier to make mistakes because there are so many rules
and regulations.”
Commission reductions would also tend to spur agents to seek out larger
producers over smaller farmers, Horel said. “We just think that will be
exacerbated if you continue to whack away at those commissions,” he said.
Bruce Babcock, director of the Center for Agricultural and Rural
Development at Iowa State University, was among four industry experts asked
by the USDA’s Risk Management Agency to review the discount program in early
2005, after nine of the 16 companies that write crop insurance policies applied to
offer PRP discounts.
“At that point the RMA kind of threw up its hands,” Babcock said. “I think the
RMA didn’t really know how to evaluate the cost savings the companies were
documenting. So they froze things and asked for help in evaluating the program.”
Does Farm Bureau have a valid argument that the program would keep costs
down and spur price competition?
“The No. 1 cost to these insurers is agent commission,” Babcock said. “So when
(Trost) talks about keeping costs down, he’s really talking about keeping agents’
commissions down. (PRP) would really create price competition between agents
and companies. So he’s right; the companies that would be able to deliver the
insurance at the lowest cost would be the most successful. However, the agents’
commissions are the only source of costs out there that are significant that could
be cut.”
As for the conjecture that the program would create a disincentive to serve
smaller producers, Babcock said that bias is already built into the present
system.
“My conclusions were that if Congress wanted to get competition into the crop
insurance business, then the PRP was a good idea,” he said. “Right now, the
only thing they can compete on is service; they can’t compete on price right now.
So if they wanted the companies to be able to compete on price, this was the
way to do it. The RMA should be as flexible as possible in approving PRPs. If
price competition isn’t an objective, then they probably don’t want PRP.”
As a farm organization, Trost said, Farm Bureau would like to see each of the
nine companies that applied for discounts be able to offer them.
Horel, on the other hand, said he would like to see the RMA work with insurers to
develop a performance-based system that recognizes the risks inherent from
producers’ actions, similar to how automobile insurance policies work.