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Crop Insurers Piling Up Record Profits
Last year, including net payments to farmers and profits and administrative fees for the companies, it cost the government $3.34 for each $1 it paid out in claims to farmers whose crops were damaged by storms and bad weather, federal data shows.
"I've never really looked at it from that perspective," said Scheef, who also serves as vice chairman of the American Association of Crop Insurers, an industry group. He added that the program has become more complex, driving up administrative costs.
Crop insurance administrator Ross Davidson Jr. sought to reduce company fees by $75 million last year. But in a highly unusual congressional hearing, Davidson was publicly upbraided by Sens. Pat Roberts (R-Kan.), Charles E. Grassley (R-Iowa) and Kent Conrad (D-N.D.) for not being more "producer friendly" and for losing the trust of the insurers. They called for his resignation.
Later, Davidson was transferred to the U.S. Department of Agriculture main office to work on energy issues. He has since left the agency to work in South America for the Mormon Church. Attempts to reach him through the church were unsuccessful.
The crop insurance industry was "definitely" glad to see Davidson go, said Michael R. McLeod, executive director of the American Association of Crop Insurers. "Relations had nowhere to go but up."
One Rate Fits All
Each of the 16 companies sells policies at the same rate set by the government. Farmers cannot go online and get rate quotes from different insurers.
When Crop 1 broke ranks and approached the government with its premium-savings plan, it was attempting to bring competition to a program that had never had any. Under a little-known government program called the Premium Reduction Plan, Crop 1 could pass along savings to farmers in the form of lower premiums if the company could trim its government-paid administrative costs.
The government approved Crop 1's plan, and the company, then a subsidiary of Occidental Fire and Casualty Co. of North Carolina, started offering lower premiums in selected states.
The other crop insurance companies argued that the plan was unfair. It would, they said, place companies in financial jeopardy and might result in Crop 1 agents "cherry-picking" larger, more profitable accounts while sidestepping smaller, riskier farmers. Agents complained that most of the savings would come out of their pockets because sales commissions account for about half of insurers' administrative costs.
Billy Rose, chief executive of Crop 1, dismissed the charge that his company cherry-picked policies. "That was a line they used inside the Beltway," he said. "We're a growing company. Why would we turn away anyone?"
ARMtech's Scheef testified that the crop insurance program is based on "service competition," not price competition. In a recent interview, he said the Crop 1 plan was flawed because there was no way for insurers to "trim" administrative expenses "without reducing services" to farmers.
Robert W. Parkerson, president of National Crop Insurance Services, another industry group, said that "nobody is against the discount per se." He added that the insurers favored another type of savings in which farmers with good track records and fewer claims would receive small discounts similar to those good drivers get from auto insurance companies.