By Gilbert M. Gaul, Dan Morgan and Sarah Cohen
Washington Post Staff Writers
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.
And unlike other insurers, which try to weed out bad customers and limit risk, the federal program agrees to take on any and all comers. In fact, to attract customers, the government charges farmers only about one-third of what it actually costs to cover the claims. Since 1981, subsidies to farmers for their premiums have totaled nearly $19 billion.
Finally, under an agreement with federal officials, crop insurance companies are allowed to shift their riskiest policies to the government. In the past eight years, the companies have made a total of $3.1 billion in profit as the government has lost $1.5 billion, an analysis of records shows.
"Crop insurance reform has become a good idea gone awry," said Jerry R. Skees, an agricultural economist at the University of Kentucky. "It's expensive, complex and inefficient."Flocking to Cheap Insurance
In 1980, Congress turned to private insurance companies and their extensive networks of agents in an effort to expand crop insurance and save money on the billions that were being paid to farmers in emergency disaster legislation. Companies get into the program by applying to the government.
That year, lawmakers also introduced a subsidy to help farmers buy insurance, picking up about 30 percent of the premium.
Farmers flocked to the cheap insurance. Insured acres went from 45 million in 1981 to 101 million in 1990 to 240 million today. The number of crops covered has also increased.
Since Congress boosted subsidies for premiums again in 2000 -- the average is now 60 percent -- the crop insurance industry has collected record underwriting gains, or the profits left from premiums after claims have been paid. The $927 million insurance companies made last year surpassed the previous record of $690 million, set the year before. Overall, they have had record profits in four out of the past five years.
Keith Collins, the U.S. Department of Agriculture's chief economist and chairman of the federal board that oversees the crop insurance program, said the companies' performance has been "atypically good" in recent years.
Company spokesmen added that it is important to look at the history of the program, not just the recent results. "I think you have to look at 2002 and this year and 1993," said Scheef, referring to years in which the insurers lost money. Recently, he added, "I just think we had some good weather."
Since the insurance companies began administering the program in 1981, records show, they have suffered $139 million in losses in a few bad years while collecting more than $4 billion in profit during the good ones.
In many years, they have made large profits even when the government loses huge sums on crop insurance, a Post analysis found. For example, in 2001, the companies made $346 million, while the government lost $335 million.
Even in bad years, when everybody loses money, the government bears the brunt. In the drought year of 2002, the companies lost $47.4 million, while the government lost $1.1 billion.
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.
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.
Baccus, president of the Kansas Farm Bureau and chairman of the Farm Bureau Mutual Insurance Co., the Iowa firm that now owns Crop 1, said its plan saved farmers "over $4 million and has a 94 percent retention rate."
In February 2005, federal regulators received about 800 letters in response to a request for comments on the Crop 1 plan. The majority were from crop agents and insurance officials denouncing it. In some instances, the letters were identical except for the name. Four arrived from farmers in Kansas, one of whom was Landon Koehn of Marienthal.
When a reporter contacted Koehn, he said he didn't remember the letter. But after a reporter read him its contents, he responded, "I can tell you this honestly: I didn't write this letter," adding, "I would know if I did."
Later in 2005, Rep. Jack Kingston, a Georgia Republican and former insurance agent, successfully introduced language in a House appropriations bill to derail Crop 1's discount plan by essentially prohibiting government funds from being used in the Premium Reduction Plan.
In May, the Independent Insurance Agents and Brokers of America, known in the industry as "Big I," awarded Kingston its Gerald Solomon Legislator of the Year Award. "Congressman Kingston has been a true friend to independent insurance agents," Big I chief executive Robert A. Rusbuldt said at the time.
In an interview, Kingston said he offered the provision because "small farmers weren't being served" by the discount plan.
During final House-Senate negotiations last fall, Sen. Conrad Burns (R-Mont.) offered language similar to Kingston's that was approved by the conferees and passed by Congress, Burns spokesman James Pendleton said.
"Senator Burns was supportive of the concept," Pendleton said. "But his rationale was that the premium reduction program wasn't working. It was a bait and switch. There was no guarantee that farmers would get a reduction in their premium in the end."
In February, the American Association of Crop Insurers hosted Burns as its main speaker and sponsored a fundraiser for him at the Grande Resort Hotel in Naples, Fla. The event raised $15,000, according to McLeod, the association's director and a former chief counsel of the Senate Agriculture Committee.
The association's political action committee has contributed $9,315 to Burns during the current campaign cycle, the largest donation to Burns from any agriculture group, according to the campaign watchdog group PoliticalMoneyLine.
Research editor Alice Crites contributed to this report.