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Crop Insurers Piling Up Record Profits

Government officials maintain that the crop insurance program pays for itself. But they count the billions of taxpayer dollars for premium subsidies as revenue to the program. Take away the subsidies, and the program would have lost $12 billion in the past decade.

Less Risk, More Gain for Firms

The 16 companies that work with the government's Risk Management Agency are not exactly household names. The market is dominated by three firms -- Rain and Hail LLC; Great American Insurance Co.; and Rural Community Insurance Co. -- which together account for the bulk of the business, according to industry and government officials.

The companies make their money in two ways: on administrative fees that the government pays them to sell and service policies and on profits when gains from premiums exceed losses from claims.

Federal officials negotiate how the government and insurers split their gains and losses through a document known as the Standard Reinsurance Agreement, the most recent version of which dates to 2005. The highly detailed document allows insurers to decide which level of risk they assign to each policy, from low to high.

The agreement allows the companies to assign the bulk of their high-risk policies to the government, leaving taxpayers liable for those losses. Meanwhile, the companies keep most of the low-risk policies likely to generate a profit.

The USDA's Collins said the agreement is "highly asymmetric. Companies get a larger share of the gain than of the loss."

Policies in states such as Iowa, Illinois and Minnesota, with stable climates and good soil, generate large profits for the companies -- $268 million in 2005 alone, an analysis of underwriting data found. But firms and the government often lose money on states plagued by droughts and floods, such as Texas and North Dakota.

One result is that insurance companies and agents are concentrated in profitable states. For example, there are 2,900 agents registered to sell federal crop insurance in Iowa, compared with 750 in Texas.

The companies are required to sell policies to any farmer who wants one, regardless of the risk, Collins said, and would be unwilling go into high-risk states unless they could shift those losses to the government. He added that the companies have agreed to take on greater risk in recent years.

"Greater risk-sharing does allow the companies to do better when times are good," he told The Post in an e-mail. Nevertheless, "they face much greater exposure to losses should weather go bad."

The government also negotiates the fees that it pays the companies to run the program, known as administrative and operating expenses. The companies currently receive about 21 cents for every premium dollar, down from as high as 36 cents in the 1980s. Insurers complain that they lose money servicing each policy because of the cut.

But while the fees have declined as a percentage of premiums, the higher subsidies have encouraged farmers to buy more insurance, boosting the fees to $891 million in 2004 from $550 million in 2000.

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