A recent announcement by the Risk Management Agency could have some major implications to the crop insurance industry.

RMA released Manager’s Bulletin (MGR-12-014) that will likely change the way crop insurance (multiple peril crop insurance (MPCI), crop-hail, and other related supplementals) is currently marketed and the number and variety of private insurance products that will be offered farmers in 2013.  A copy of the bulletin is available on RMA's website.

RMA defines and prohibits MPCI inducements

RMA now says that "an AIP or agent cannot require that a producer purchase an MPCI policy from the AIP or agent in order to be eligible to purchase a private crop insurance policy or endorsement offered by that AIP or agent."  Until now, crop insurers and agents have offered various insurance policies and endorsement at below loss-cost premium rates to entice farmers to buy their MPCI crop insurance from them and entice agents to roll books of business to a particular insurer.

Competition is fierce

The competition for MPCI premium has been fierce, even as the total premium and liability has grown, as companies strive to obtain a profitable book of MPCI premium that enjoys both economies of scale and spread of risk. The industry has consolidated to 16 national, regional, or single state carriers with the largest five garnering approximately two-thirds of the business.

Announcement is a Game-Changer

This is a real game changer if RMA actually does enforce it or even if the companies just believe RMA will enforce it, in my opinion. Much like the cap RMA placed on agent commissions with the 2011 Standard Reinsurance Agreement (SRA), this bulletin removes an entire class of weapons used by companies and agents to compete for farmers' business.

RMA reportedly floated a draft proposal around the crop insurance industry for several months prior to its release. The new rule will become effective for all MPCI policies with sales closing dates or cancellation dates on or after January 1, 2013.

Higher Rates and Fewer Offerings Expected

If crop insurers cannot use supplemental products and endorsements as a targeted inducement to gain MPCI business on selected crops in selected areas, then there is no incentive to continue to offer exotic coverages or offer them at less than actuarially sound and profitable rates. Farmers could see crop-hail and other MPCI-related endorsements' premium costs double in 2013. Some products or endorsements may not be offered at all.

Rule adds to changes caused by the drought

The unparalleled underwriting losses sustained in 2012 due to the widespread drought was already going to put upward pricing pressure on MPCI loss-leaders and reduce underwriting capacity. Crop insurers make known their adjustments to their filings with state insurance departments in late 2012 or early 2013 for the 2013 crop season.