OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has released a briefing reviewing recent legislation that would cap crop insurance premium subsidies payable to farmers. The Best’s Briefing, titled, “Multi-Peril Crop Insurance Programs: Pressure Builds for Program Cuts,” states that while the legislators anticipate that the direct impact of this change would be relatively limited, there is the potential for larger, more far reaching indirect effects. The indirect effects may include higher rates and a reduction in the amount of coverage purchased by a farmer.
The federal crop insurance program (FCIP) is intended to provide access to capital needed by farmers to increase crop yields, increase efficiencies and effectively compete in world markets. In 1994, the Risk Management Agency (RMA), which is part of the U.S. Department of Agriculture (USDA), was created to administer subsidies as part of the FCIP.
The coverage provided under the FCIP is termed Multi-Peril Crop Insurance (MPCI), and is overseen by the RMA. The government provides significant reinsurance for MPCI business through its Federal Crop Insurance Corp. (FCIC) as participating insurers select one or more risk funds (as part of the underwriting process) to place their businesses into through cessions to the FCIC. Insurers can then cede additional MPCI business to third party commercial reinsurers to further minimize their risk. The subsidy rate is established through Congress.
Government subsidies fall into two categories: premium subsidies to farmers and administrative and operating (A&O) subsidies paid to participating insurers. The A&O reimbursement is designed to reimburse insurers for their costs, i.e. the expense of acquiring and administering the program on behalf of the RMA. Of the nearly $10.2 billion estimated MPCI premiums written in 2014, approximately 62% were in the form of subsidies. Although other items are included in the premium subsidy, subsidies comprise nearly all of the outcomes. The Congressional Budget Office (CBO) indicated that the FCIC paid approximately $1.3 billion in A&O expenses. According to the RMA, over the fiscal period 2002 through 2012 subsidies for crop insurance premiums were $42.1 billion, approximately 72% of the program’s $58.7 billion total cost.
If the current bill fails to pass, and there is no indication that it will be slated for a vote at this time, A.M. Best believes the MPCI program may continue to be a target for cuts.
For the full copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=234794.
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