Economists call for changes in crop insurance gain/loss reporting
February 13, 2013 | 12:29 AM
INDIAN WELLS, Calif. — The former chief economist of the House Agriculture Committee this week endorsed a call to make note of the government’s participation in the underwriting gains and losses of the federal crop insurance program.
Craig Jagger
In a speech to the Crop Insurance and Reinsurance Bureau meeting here on Friday, Craig Jagger said he agreed with an article written by former USDA chief economist Keith Collins that noted government charts on the cost of crop insurance do not reflect the fact that the government shares in the underwriting gains in the crop insurance program in good years, as well as the losses in bad years.
Collins, who chaired the Federal Crop Insurance Corporation when he was at USDA and is now an economics adviser to National Crop Insurance Services, an industry research group, noted in a little-noticed article published last year that the government’s share of the underwriting gains in most years reduce the government cost of the program.
Underwriting gains are the excess of premiums over indemnities in good years, and are a rough version of profits on crop insurance policies. In the article, Collins said that crop insurance companies have been criticized for high underwriting gains in good years, with little attention paid to the fact that the government shares in those gains.
The arrangement is part of the standard reinsurance agreement that the Agriculture Department’s Risk Management Agency negotiates with the companies.
The article, published in February 2012 by National Crop Insurance Services, concluded that from 2001 to 2010, the cumulative underwriting gains for the government was $4 billion, which offset subsidies for the program by that amount.
Keith Collins
Since the article was published, data for the disaster year of 2011 has shown that the government lost about $0.5 billion on reinsurance operations and that in 2012 losses will be “a large, as yet undetermined, number,” Collins said, speaking in an interview on the sidelines of the crop insurance industry convention organized by the American Association of Crop Insurers and National Crop Insurance Services.
The government pays 62 percent of the cost of the crop insurance program. Costs have risen in recent years to about $8 billion to $9 billion per year as commodity prices have risen and the cost of insuring the crops has followed.
Collins, as a consultant to National Crop Insurance Services, has a motivation for the program to be seen in the best light, but Jagger, who now operates his own firm, Legis Consulting, said he believes the underwriting gains and losses should be reflected in government charts because the accounting procedures should be accurate.
“I agree with Keith,” Jagger said in the question and answer portion of his speech. "With FCIC receiving a significant share [of the underwriting gains or losses], government budget analysts should analyze the current accounting treatment and change it as appropriate.”
The Risk Management Agency, the Congressional Budget Office and the Office of Management and Budget all publish data on the crop insurance program.
Collins explained the calculation method in a follow-up email.
“The typical way to calculate government (taxpayer) costs of crop insurance is: Add (1) net indemnities (indemnities minus farmer paid premiums) plus (2) [administrative and operating] payments to companies (which are a government subsidy for delivery costs paid on behalf of farmers, who would otherwise pay a delivery load) plus (3) company underwriting gains.
“But this is algebraically equal to the sum of (1) government premium subsidies plus (2) A&O payments to companies minus (3) government underwriting gains on their reinsurance operations.”
“Government underwriting gains, when they occur, reduce the subsidy costs of the program,” Collins said.
Although 2011 and 2012 will show losses, “even with a large negative number, reflecting the 1-in-25 year drought in the Midwest in 2012, the cumulative underwriting gains or losses of the government since 2001 will still be fairly small,” he said.
“This indicates that the criticism that the government pays out excessive amounts by reinsuring companies has not been true over time and is not likely to be true in the future,” Collins said.
“In fact, one would expect a return to underwriting gains for the government, rather than losses, in coming years. This simply reflects the historical pattern in the Midwest of many successive years of little to no production losses and infrequent years of very large losses.”
In the interview, Collins noted that CBO and OMB charts do not really have a place to include the underwriting gains or losses since they are focused on budget authority and outlays, but he said a way should be found to include the information in government reports.
In a speech to the Crop Insurance and Reinsurance Bureau meeting here on Friday, Craig Jagger said he agreed with an article written by former USDA chief economist Keith Collins that noted government charts on the cost of crop insurance do not reflect the fact that the government shares in the underwriting gains in the crop insurance program in good years, as well as the losses in bad years.
Collins, who chaired the Federal Crop Insurance Corporation when he was at USDA and is now an economics adviser to National Crop Insurance Services, an industry research group, noted in a little-noticed article published last year that the government’s share of the underwriting gains in most years reduce the government cost of the program.
Underwriting gains are the excess of premiums over indemnities in good years, and are a rough version of profits on crop insurance policies. In the article, Collins said that crop insurance companies have been criticized for high underwriting gains in good years, with little attention paid to the fact that the government shares in those gains.
The arrangement is part of the standard reinsurance agreement that the Agriculture Department’s Risk Management Agency negotiates with the companies.
The article, published in February 2012 by National Crop Insurance Services, concluded that from 2001 to 2010, the cumulative underwriting gains for the government was $4 billion, which offset subsidies for the program by that amount.
Since the article was published, data for the disaster year of 2011 has shown that the government lost about $0.5 billion on reinsurance operations and that in 2012 losses will be “a large, as yet undetermined, number,” Collins said, speaking in an interview on the sidelines of the crop insurance industry convention organized by the American Association of Crop Insurers and National Crop Insurance Services.
The government pays 62 percent of the cost of the crop insurance program. Costs have risen in recent years to about $8 billion to $9 billion per year as commodity prices have risen and the cost of insuring the crops has followed.
Collins, as a consultant to National Crop Insurance Services, has a motivation for the program to be seen in the best light, but Jagger, who now operates his own firm, Legis Consulting, said he believes the underwriting gains and losses should be reflected in government charts because the accounting procedures should be accurate.
“I agree with Keith,” Jagger said in the question and answer portion of his speech. "With FCIC receiving a significant share [of the underwriting gains or losses], government budget analysts should analyze the current accounting treatment and change it as appropriate.”
The Risk Management Agency, the Congressional Budget Office and the Office of Management and Budget all publish data on the crop insurance program.
Collins explained the calculation method in a follow-up email.
“The typical way to calculate government (taxpayer) costs of crop insurance is: Add (1) net indemnities (indemnities minus farmer paid premiums) plus (2) [administrative and operating] payments to companies (which are a government subsidy for delivery costs paid on behalf of farmers, who would otherwise pay a delivery load) plus (3) company underwriting gains.
“But this is algebraically equal to the sum of (1) government premium subsidies plus (2) A&O payments to companies minus (3) government underwriting gains on their reinsurance operations.”
“Government underwriting gains, when they occur, reduce the subsidy costs of the program,” Collins said.
Although 2011 and 2012 will show losses, “even with a large negative number, reflecting the 1-in-25 year drought in the Midwest in 2012, the cumulative underwriting gains or losses of the government since 2001 will still be fairly small,” he said.
“This indicates that the criticism that the government pays out excessive amounts by reinsuring companies has not been true over time and is not likely to be true in the future,” Collins said.
“In fact, one would expect a return to underwriting gains for the government, rather than losses, in coming years. This simply reflects the historical pattern in the Midwest of many successive years of little to no production losses and infrequent years of very large losses.”
In the interview, Collins noted that CBO and OMB charts do not really have a place to include the underwriting gains or losses since they are focused on budget authority and outlays, but he said a way should be found to include the information in government reports.
