Private industry crop insurance officials are "dismayed" at a recent USDA report on crop insurance reform, saying the inspector general used "faulty cost analyses, inaccurate budget numbers, misinformation about the structure of the program and nonsensical comparisons" in a harsh report that weighed heavily against private industry performance.

Included in the report was the implication that government, not private industry, could delivery the crop insurance program more effectively, most likely through the Farm Service Agency, an agency already shouldering an overburdened workload.

"Not once do you show how FSA, which cannot now deliver disaster relief in a timely manner and has recently asked for large infusions of appropriations, could do this job at all," said American Association of Crop Insurers Chairman Mike Miller in an April 6 letter to USDA Inspector General Roger C. Viadero.

Among the IG's finding was that private companies "incur minimal risks from reinsured losses" and have "little reason to effectively monitor risky policyholders, little reason to deny claims of questionable losses and no cause to find fault with their own practices."  The report claimed that more federal money now goes to the reinsured companies than to producers
recovering from insurable losses.

"This is an insurance program, not an income transfer program," Miller told Viadero.  "When losses exceed premiums, as happened in 1993, the companies will experience an underwriting loss...In most years, the insurance industry will receive more in revenue than the policyholders."  He pointed out that this is true in all insurance programs such as home, auto,
and life.

Miller pointed out that the OIG had picked an unrepresentative base period on which to base its conclusions.   “It makes a comparison between ‘Company Revenue’ and ‘Producer Indemnities’ over a four-year time span that represents the lowest consecutive four years of losses ever experienced in the program,” Miller noted.

He then rebutted several of the IG's claims in the report.  The report "grossly overestimates the federal costs of the catastrophic program," Miller said.  He said that the report also overstated the 1998 costs of the program by $500 million.

The 1998 crop year expenses were the sum of the indemnities paid ($1.6 billion), plus delivery payments ($427 million), minus farmer-paid premium net of underwriting gains ($610 million) plus Risk Management Agency administrative expenses ($64 million) for a total of $1.5 billion, said Miller.

Another claim in the report was that "immaterial risk" is assigned to the reinsured companies, giving the company managers "little incentive to administer the insurance policies in accordance with the government's best interest."

To that, Miller said companies' interest is aligned with government's interest "to administer the policies in such a way as to pay what is appropriate and no more."  He pointed out that the OIG report failed to mention that the government negotiated a new agreement with the private companies in 1998 in which companies bear more risk, as much as 90% of the underwriting results.   In addition, Miller said that the administrative expenses paid to companies have been reduced over the last few years, 21% in the last year alone.

Links:
Entire text of Miller's letter
OIG report
    Summary
    Full Report - from index choose cropins.pdf.  Will download in .pdf format, which can be read in Acrobat Reader