HARVESTING CASH: Corporate Gold in Crop Insurance
Crop Insurers Piling Up Record Profits
Monday, October 16, 2006
In 2002, a small upstart insurance company approached the federal government with an idea. The company, Crop 1, was one of 16 firms that sold federally subsidized crop insurance policies to farmers under rates set by the government.
Crop 1's plan was modest. It wanted to introduce a slight amount of competition by offering farmers discounts of up to 10 percent on their premiums.
An eruption ensued. The other companies quickly turned to Congress to quash the idea. In congressional testimony and letters to lawmakers and regulators, they complained that competing on price threatened the "unique public-private partnership" that the companies had with the government.
With the help of several powerful members of Congress, the program was eventually derailed.
"Why would you want to kill a program that saves farmers money unless you don't like to compete?" asked Steve Baccus, chairman of the company that now owns Crop 1. "This is about keeping the status quo."
The episode illuminates the power of a collection of niche insurance companies that have made billions in profits from the federal crop insurance program, even as the government has lost billions covering the riskiest claims, a Washington Post investigation has found.
Last year, the companies made $927 million in profit, a record. They received an additional $829 million from the government in administrative fees to help run the program. On top of that, taxpayers kicked in $2.3 billion to subsidize premium payments for farmers.
All of that to pay farmers $752 million for losses from bad weather.
"We would probably be better off just giving the farmers the money directly," said Bruce A. Babcock, an agricultural economist at Iowa State University who recently published his own study of the program. "That way we would save on all of the fees going to the private insurers."
The insurance companies say they cannot afford to offer farmers coverage without the government subsidies because of the risky nature of farming. As for their profits, they say they are taking on more risk than ever and need the money to protect against a potentially catastrophic loss.
"You've got to have a good year to make up for the bad," said Sam Scheef, president of ARMtech Insurance Services, which sells federal crop insurance policies in 40 states. He added that other companies aren't "exactly rushing to get into the business."
Federal crop insurance, one of the largest pieces of the nation's costly and sprawling farm subsidy system, does not resemble any other insurance. Unlike firms that sell auto or homeowners insurance, the companies do not compete on the basis of price but on service.