Crop Insurance Competition – Is it Real?
- By: Paul Neiffer
- November 6th, 2009
- 2 Comments
Bruce Babcock, an economist at Iowa State University, recently prepared an extensive report on competition in the crop insurance industry. With all of this year’s crop delays in getting corn and beans harvested this fall, you may get to know your crop insurance agent better in the next couple of months. You are probably hoping that the crop insurance company can pay any claim that you may have for harvest losses.
It appears that competition is disappearing in this industry with the continuing purchases of insurance companies by other crop insurance companies. Bruce wanted to find out if they were making money. Since 2000, the Risk Management Agency of the USDA calculated that these companies earned an average return on equity of 19%. The RMA concluded that a more reasonable number should have been about 11%. Of course the industry does not agree with these conclusions.
Based upon the RMA analysis, their conclusion is that the US taxpayers have paid excessive compensation to the industry totaling at least $1.165 billion for 2008. This indicates that the premiums paid by farmers could be reduced by at least a billion dollars and the industry would still be in good shape. Congress could reduce these premiums by an average of about $400 per year and save the taxpayers about $500 annually. However, these agents also pay taxes and vote, so the chance of this happening may be very low per Bruce.
What might be more helpful to review is the average amount of compensation that an agent receives for selling a crop policy. This amount has increased from about $400 in 2000 to almost $1,500 last year which almost a four fold increase. A profitable crop insurance company has found a good way to increase business is to compete for a crop insurance agent’s book of business by offering higher premiums. You can see the result in average premium paid during this period.
In summary, although crop insurance agents and companies will be doing a lot more work this fall, they will get paid for it.