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The Honorable Richard G. Lugar
Dear Mr. Chairman: We compliment you on your efforts to address the needs of American agriculture and hope that it signals imminent action to markup risk management legislation. We would like to share the crop insurance industry's perspective on how best to achieve our mutual goals. Your September 30 letter to Senate colleagues seeking their co-sponsorship of S. 1666 reflects your strong desire to address farmers' need for improved risk management. Since you are conducting a risk management hearing on October 14, we are submitting our views for your consideration. We are naturally strong supporters of the program because we administer, underwrite, deliver, and provide risk capital for it. And even though nearly 70% of the eligible acreage is insured, the program can be improved. Farmers need better coverage at more affordable rates. We believe this policy goal was the prime motivation behind the inclusion of $6 billion in new funding for risk management and income assistance in this year's Congressional budget resolution. Last year over 90 percent of farmers who purchased crop insurance carried a deductible of 35 percent or greater. Lower deductibles cause premiums to rise rapidly. Unfortunately, this means that most farmers must suffer a loss of 35% below normal output levels before collecting any indemnity. Many farmers desire higher coverage, especially when prices are low and margins thin. Experience with the 30% premium discount in 1999 demonstrates this. That is why we think legislation that provides additional premium subsidy at higher coverage levels is on the right track. By the same token, we fear that the lack of such basic structural changes to the crop insurance program in S. 1666 is a serious shortcoming. In your September 30 letter you wrote: "Last year farmers received no more than two-thirds of the federal money set aside for the area of crop insurance. The remaining funds went to insurance companies and other intermediaries." While technically true in a narrow sense of budget outlays, this approach greatly understates the value of the insurance program and the benefits to farmers from federal involvement. Also, resources that go to the private industry for program delivery are at record low ratios and they are below industry standards for similar property and casualty programs. You may not have intended it, but your statement implies that farmers benefit only from direct payments. That is not an appropriate way to measure the value of insurance. The nature of insurance is that we all buy it in the hope we will not collect on it. The real benefit of insurance is the protection it provides. Last year crop insurance protected $28 billion of farm income for a relatively modest federal resource commitment. In reality, of course, the benefits of crop insurance are legion, and include added security for lenders, confidence in making land purchases or other capital investments because of the added certainty of cash flow for debt repayment, the ability to forward contract knowing that replacement is guaranteed in case of loss, and higher long-term income levels as the risk of catastrophic loss is shifted to the insurer. In one sense, every year that we hold a life insurance policy and do not die is a year in which we spent money unnecessarily. We could have taken the premium and invested it in the stock market instead. The same is true of health insurance as long as we do not get sick - and of crop insurance as long as we do not suffer a flood or drought. But when the insurable event actually happens, we realize the true value of insurance. That value was not just the premium farmers paid, or the premium the government helped pay, or the sums paid by the government to insurance companies on behalf of farmers to deliver the program. Instead, the value was the ability to manage our lives or our businesses in a manner that guards against the catastrophic effects of unexpected events - the death of a spouse, or the illness of a child, or the failure of a crop. Crop insurance has become part of the rural financial infrastructure. Many farmers would not be able to farm without it. Many banks will not lend without it. In testimony before your Committee, farmers and lenders have testified to this effect. The primary difference between crop insurance and traditional types of private insurance coverage is that the private sector has not developed a widely-available, affordable multiple peril crop insurance policy for farmers. Market capacity and a high correlation of losses have traditionally precluded a private market. It is for this reason that Congress, disgusted with the old system of disaster bailouts, enacted legislation in 1981 to make multiple peril crop insurance available to farmers on a nationwide basis. Over the previous decades, the lack of private sector multi-peril insurance led to federal disaster assistance programs. Unfortunately, these programs were subject to widespread abuse and mismanagement. The programs, usually administered by the agency that is now the Farm Services Agency, were frequently audited by the General Accounting Office and the USDA's Office of the Inspector General. Their reports tended to discredit both the programs and the agency's administration of them. We believe your own efforts to compel this particular agency to downsize and close its offices have probably led you to similar conclusions. We submit that while a purely private multi-peril insurance system is not feasible, a purely governmental disaster payment program is undesirable. We conclude that crop insurance is a solid product that needs improvement so that growers can afford to purchase more protection. There is no evidence that the private sector alone will find it viable to deliver crop insurance without the federal partnership in the near future. Therefore, we also believe a federal role will remain important. We sincerely believe that it is better public policy to redesign, improve and augment the current crop insurance system than to institute a new system of cash payments. In this regard, we believe S. 1666 raises a number of serious questions to which we do not yet know the answers. These questions involve such issues as -
Sincerely, Mike Miller
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