Crop Insurance and the 2012 Farm Bill

Report
Crop Insurance and the
2012 Farm Bill —
an Industry Perspective
Thomas P. Zacharias
National Crop Insurance Services
AAEA Meetings, Pittsburgh, PA
July 26, 2011
© 2011 NCIS
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Industry Role
NCIS serves as the primary service
organization for the crop insurance
industry.
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NCIS Functions
• MPCI and Crop-Hail Program Development and Analysis
– Policy Analysis, Loss Adjustment Procedures, Legal
Analysis, Agronomic Research
• Economic and Actuarial Analysis
• Education and Training
– Loss Adjuster Schools – 17 (1,692 attendees)
– National Conferences – 5 (1,037 attendees)
– Annual Regional/State Meetings – 14 (531 attendees)
• Crop-Hail Advisory Organization and Statistical Agent
– Licensed by Individual State Insurance Department
• Public Relations and Industry Outreach
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Presentation Overview
• Industry Update
• 2011 Season
• Farm Bill Considerations
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Industry Update
• 1 “Consolidation” so far –
• 16 AIPs last year at this time - Now 15
• Most AIPs/SRA holders are now
subsidiaries of large insurance and / or
financial entities
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2010 MPCI Rankings by Premium as of 11/13/2010 Accounting
2010
Insurance Provider
Rural Community Insurance Services
Rain and Hail L.L.C.
NAU Country Insurance Company
Great American Insurance Company
ARMtech Insurance Services, Inc.
Producers Agriculture Insurance Company
Farmers Mutual Hail Insurance Company of Iowa
John Deere Risk Protection, Inc.
Agro National LLC
Heartland Crop Insurance, Inc.
CGB Diversified Services
ADM Crop Risk Services
American Farm Bureau Insurance Services, Inc.
Hudson Insurance Company
Country Mutual Insurance Company
AgriLogic Insurance Services
Grand Total
© 2011 NCIS
Buyup
Total
Premium
CAT Premium
Premium
1,682,970,223
52,987,245 1,735,957,468
1,632,147,113
80,755,702 1,712,902,815
791,668,897
15,971,588
807,640,485
640,431,165
17,298,634
657,729,799
499,671,959
28,525,743
528,197,702
445,674,736
28,475,641
474,150,377
313,333,867
3,004,270
316,338,137
276,299,154
13,554,012
289,853,166
281,359,416
4,054,724
285,414,140
225,881,706
4,482,794
230,364,500
147,784,653
1,355,063
149,139,716
108,189,218
3,130,520
111,319,738
97,345,429
3,412,944
100,758,373
86,199,594
2,453,266
88,652,860
72,059,355
1,049,893
73,109,248
10,130,651
256,369
10,387,020
7,311,147,136 260,768,408 7,571,915,544
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Who Are Those Guys?
(Butch Cassidy and the Sundance Kid)
• Rain & Hail Insurance Services
• "...ACE BUYS R&H Ace Ltd…December
2010..."
• ".. ACE Group - executive offices in Zurich,
Bermuda and New York, employs more than
16,000 people ...
• $83 billion in assets and $19 billion gross
written premium in 2010..."
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Who are those guys?
• ARMtech - Lubbock TX, subsidiary of Endurance
• “Endurance Specialty Holdings Ltd., global
specialty provider of insurance and reinsurance,
over 800 employees ... approx $8.4B in assets,
$2.4B in shareholders’ equity”
• ProAg – Amarillo TX, subsidiary of CUNA
Mutual
• “…positioned as a financially strong well
capitalized insurer…” (approx $1.9B in GAAP
Surplus, $15.6B in assets)
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Who are those guys?
• QBE Acquires Agro National November 18, 2010
• Acquisition Completed in March 2011
• June 2010 QBE purchased NAU Country,
Ramsey, Minnesota
QBE • Top 25 insurers / reinsurers
• 49 countries, Headquartered in Sydney Australia
• QBE $42B in assets for 2010, approx $13.6 B in
US gross premium
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Who are those guys?
• Everest Re buys Heartland (family operation out of
Topeka, Kansas) Dec. 15, 2010
• Everest Re Group Ltd, Bermuda-based Insurer and
Reinsurer ($18B Assets, $4B Gross Premium)
• Rural Community Insurance Services (RCIS)
Anoka, MN (wholly owned subsidiary of Wells
Fargo and Company)
• Great American (founded 1872, 1st crop 1925)
owned by Great American Financial Group
• Farmers Mutual Hail – Since 1893
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WHY?
• Narrower Margins ($6B savings from 2011
SRA renegotiation)
• Returns to Scope /Scale
• IT processing economies
• Increased regulatory burden, bla, bla, bla...
Oh, Don't Forget
• Payment Delays and A&O Cuts in 2008 Farm
Bill Scored as approx $6B savings
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Mild Digression
• Nationwide Actuarial Snapshots
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“…I have to admit it’s getting better…”
Paul McCartney and John Lennon
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The 2011 Standard Reinsurance
Agreement (SRA)
“…The world that we used to know
People tell me it don’t turn no more
The places we used to go
Familiar faces that ain’t smilin’ like before
The time of our time has come and gone…
Becker and Fagan – “Midnight Cruiser”
Steely Dan – Can’t Buy a Thrill
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RMA Statement 2010 Agricultural
and Applied Economics
Association (AAEA) Meeting –
Denver, Colorado
“Main purpose of SRA is to hire a
delivery system”
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• 2011 Standard Reinsurance Agreement capped
A&O payments limiting increase due to price
spikes
• $6B Estimated Reduction in A&O and Gain/Loss
• If previous SRA in effect A&O payments would
be about $2 billion
• Under 2011 SRA, A&O expected at $1.3 billion,
saving taxpayers about $700 million in 2011
• Regional Shifts in A&O Due to Caps –
(unintended consequences)
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The 2011 SRA
Last Call
“…You can’t always get what you want
But if you try sometimes you might find
You get what you need”
Keith Richards and Mick Jagger
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2011 Season
• Total Premium to be Record High
• 2010 Premium $7.6B – 2011 Estimated at $11B
(45% Increase)
• 2011 Liab > $100B
• SRA Gain / Loss Provisions Will be Tested
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• First spring crop under new Common Crop
Insurance Provisions “COMBO” policy for
producers seeking to protect against a yield
shortfall. In addition, all the prior revenue
policies have been consolidated into a
“revenue protection” policy
• New plans similar to prior APH and revenue
plans. Change has been well publicized and
agents and educators have been working with
farmers for some time to explain the changes.
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• With high base prices, revenue guarantees
close to or exceed cost of production
• 85% revenue protection close to or exceed total
production costs for major crops
• 75% coverage also exceeding total costs for
corn and soybeans and close for spring wheat
and upland cotton.
• Cotton and rice with opportunity to cover costs
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The
Farm
Bill
Challenge
• Creating a bill that can pass: need to balance benefits across
interest groups
• Maintaining a farm safety net:
– Balance between personal responsibility and privatization versus
government regulation and payments
– Balance across regions and commodities
• Improving program effectiveness: all titles
• Weighing the role of WTO concerns: production and trade
distortions
• Meeting budget constraints: with lower baseline, unfunded
programs in baseline, CUTGO, PAYGO, no payment shifting
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Q: What do you do when there are two elephants in the room?
A: Introduce them.
Direct payments
Crop Insurance
Groucho: “One morning I shot an elephant in my pajamas.
How he got into my pajamas I'll never know.”
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Why Crop Insurance is now in a Position of
Strength
1--Producers share program cost
2--Producers take personal responsibility for risk management
3--Producers get individual risk management solutions
4--Producers receive indemnities in the timeliest way
5--Program can be quickly adjusted and is self-correcting
6--Payments are not in excess of losses
7--Protection can be used as collateral for loans
8--Program enables pre-harvest marketing
9--Producers not subject to payment limits
10--Producers benefit from the efficiencies of private sector delivery
11--Crop insurance can be green box under the WTO and has flexibility
to meet WTO support limits
12--Crop insurance has contributed to deficit reduction
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CI’s Farm Safety Net Principles
Producers:
1--manage risks
2--bear risk and share in program costs
3--have effective risk management tools available
Crop Insurance:
4-- the core risk management tool
5--widely and equitably available
Private sector:
6--provides crop insurance options, shares in the risk of
loss, adjusts losses for insurable crops
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CI’s Farm Safety Net Principles (cont.)
Government:
7--provides regulatory oversight and reinsurance
8--subsidizes farm programs and crop insurance to reduce
effects of disruptions in agriculture; consistent with WTO
Farm safety net:
9--farm programs augment not substitute for crop insurance
10--primarily tailored to address an individual farmer’s
economic situation
11--payment eligibility requires losses
12--transitions to more market orientation/competition
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Some Key Safety Net Options
• Improve crop insurance
– Southern crops, specialty crop coverage, APH/coverage issues, new products
• Improve ACRE’s ability to cover uninsured production and
make more attractive
– Key need may be to redefine area to increase correlation between farm and
area losses
• Design new supplemental program (disaster) with or without
continuation of ACRE
– Key issues in design:
• A disaster program or enhanced crop insurance?
• Disaster designation required?
• Individual or area plan?
• Shallow loss coverage?
• Multiple year price protection?
• Require crop insurance for eligibility?
• Accelerate timing of payments by using CI prices?
• Apply payment and income eligibility limits?
• Apply to whole farm or other unit?
• Delivered by crop insurance companies?
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“…But you know, the darkest hour
is always just before the dawn…”
David Crosby – “Long Time Gone”
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