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Crop insurance reforms were proposed
by state leaders during farm bill debate

Sept. 19, 2013 | 0 comments

Third and final in a series on crop insurance - now the method Congress has chosen to help support agriculture.

As the farm bill was working its way through Congress in May, two Wisconsin representatives led a group of lawmakers that proposed major reforms to the federally subsidized crop insurance program they called "wasteful."

The bi-partisan bill, dubbed AFFIRM, (Assisting Family Farmers through Insurance Reform Measures) would have saved taxpayers $11 billion over 10 years, say the bill's authors, by placing limits on how much crop insurance premium subsidies could go to one person.

It would have also limited crop insurance premium subsidies for individuals with an adjusted gross income of more than $250,000.

The measure would have also required more of the administrative and operating costs of the programs to be handled by the private insurance companies that offer coverage.

The way the federal government runs the program, 18 private crop insurance companies are approved to write policies to farmers. A U.S. Department of Agriculture agency helps pay for their "administrative and operating" costs.

The agreement between the USDA's Risk Management Agency and these private companies sets and provides different levels of subsidies but a typical level is 18.5 percent of the farmer-paid portion of the premium.

This agreement between the USDA agency and the companies also determines how much risk the companies will have when they have finished writing their entire portfolio of insurance policies for the cropping year.

At that time the companies determine what policies they would like to retain the premiums and liability for and which of them they will give over completely to the federal government.

The requirement is that they must retain 20 percent of the policies they consider to be high risk and at least 35 percent of their entire business portfolio for each state.

Rep. Ron Kind (D-WI) and Rep. Tom Petri (R-WI) along with six of their colleagues in the House introduced the AFFIRM Act because they said the program needed "bold reforms" and that it would save taxpayer dollars and promote transparency.

Kind and Petri said the act would have saved taxpayers $11 billion over 10 years and would still have provided a safety net for smaller and medium-sized farms.

"Unlike other subsidies, Congress does not know who receives crop insurance subsidies. Taxpayers deserve to know where their tax dollars are going," Kind said.

The measure - which ultimately didn't survive as an amendment during debate on the farm bill in the House - would have limited the total value of crop insurance subsidies to $40,000 per person each year. Kind said that under current programs there is no cap.

It would have also eliminated crop insurance premium subsidies for individuals with an adjusted gross income (AGI) of more than $250,000 and would have required the private insurance companies to bear more of those "administrative and operating" expenses.

Kind said that the measure would have promoted operating efficiencies in the crop insurance companies.

The measure would also have lowered the "target rate of return" that USDA builds into premiums through the Standard Reinsurance Agreement, which is done in order to guarantee long-term profitability for crop insurance companies.

Kind said that he introduced the measure after a Government Accounting Office (GAO) report showed that the top four percent of recipients benefit from one-third of all taxpayer premium subsidies.

"The top 10 percent receive 54 percent of the taxpayer premium subsidies. This shows how top-heavy the current system is."

He also voiced concern that as crop insurance subsidies become more important in replacing old farm safety net programs they could run afoul of international trade rules with the World Trade Organization (WTO.)

The jury is still out on whether or not federally subsidized crop insurance programs in lieu of other farm subsidies are going to get the green light under WTO agreements. They may be considered a distorting influence on crop production.



PROGRAM TRANSPARENCY

If it had passed, the AFFIRM measure would have been a step toward promoting transparency in government subsidies by requiring the reporting of all parties that receive federally subsidized crop insurance, Kind said.

That transparency in itself would have also been a step toward cutting down on waste, fraud and abuse, he added.

In May, Petri said he was delighted to be part of the bi-partisan effort to "provide a much-needed tightening up of the crop insurance program."

Petri noted that the federal government subsidizes roughly 62 percent of farmers' crop insurance premiums at a cost of $9 billion a year. America's small farmers received only 27 percent of the subsidies, he said.

The bill, he said, was intended to keep in place a safety net for farmers who need assistance, while ensuring the program is not exploited at a cost to taxpayers. It would have also prevented farmers from "farming for government insurance."

The men said that from 2001-12, crop insurance companies enjoyed $10.3 billion in underwriting gains.

According to the GAO report, over 4,200 farmers individually received more than $100,000 in premium subsidies in 2011; 26 received more than $1 million in subsidies.

In contrast, the bottom 80 percent of policyholders received only 27 percent of subsidies in 2011, with an average subsidy of around $5,000. Kind said that figure again highlights how top-heavy the program is.



DIVERSE SUPPORT

Though it ultimately didn't pass, the Kind-Petri measure had support from a wide range of stakeholders including several major environmental interest groups and a coalition of 12 conservative organizations.

Joining Reps. Kind and Petri in sponsoring the bill were Reps. Jim Sensenbrenner (R-WI), Earl Blumenauer (D-OR), Rosa DeLauro (D-CT), Jim Cooper (D-TN), Jim McGovern (D-MA), and Henry Waxman (D-CA).

Some of those supporters noted that as the crop insurance program becomes the largest subsidy to farmers - and stands in for ad hoc disaster programs that Congress passed when severe weather warranted them - the program needs reforms that will make it more targeted and accountable to taxpayers.

They said the AFFIRM proposal would have done so by establishing a modest payment limit and means test, by reducing subsidies for industry, and by promoting transparency.

One of the reasons the measure had support from some environment groups is that the crop insurance program as it stands today has a conservation impact. Kind noted that it promotes yield or revenue protections for farmers who bring highly erodible land back into production.

That is an ongoing concern for many in the farm bill debate. The high price of corn and soybeans, coupled with the end of many Conservation Reserve Program (CRP) contracts, is likely to entice farmers to return much of that formerly protected land to the production of row crops.

"A generous crop insurance program further incentivizes production on these sensitive areas absent a conservation compliance program," Kind said.

As other safety net programs disappear, the government continues to load up crop insurance and it has become a new avenue for taxpayer subsidies, he added.

With last year's drought, the government shouldered 75 percent of the $17 billion in crop insurance payouts, Kind said. "This program puts taxpayers on the hook for an inordinate amount of crop insurance subsidies."

His reform package would have eliminated the incentive to over insure, he said, and would not affect 96 percent of farmers, emphasizing the top-heavy design of the program.

As it stands today the program contributes to further consolidation in agriculture as larger entities gobble up land and can protect their investment with government subsidized crop insurance, he added.

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