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Insurance payouts still lag 2011

When 2012 ended, the nation's crop insurance companies, with the backing of USDA, had made just over $10 billion in indemnity payments to cover losses from one of the nation's worst droughts.

While it's a big number and not the final one, it's smaller at this point than $10.8 billion paid for southern Plains drought, North Dakota floods and other calamities in 2011. It also seems to be lagging behind the estimates for 2012 loss payments made in the heat of summer last year, when several agricultural economists from the Midwest were projecting $30 billion in loss claims.

It's possible that the final tally for total 2012 payments could be $12 billion to $13 billion, Kansas State University agricultural economist and insurance expert Art Barnaby told Thursday.

"It could be that low," Barnaby said. "I think $15 billion is better guestimate right now."

Payments are still being made. And it will be early summer before the likely total of indemnity payments will be known. That's because payouts for GRIP (Group Risk Income Protection) policies can't be made until the National Agricultural Statistics Service releases its tally of county yields in April. Indiana, one of the states hardest hit by the drought, had a lot of farms covered by GRIP policies, Barnaby said.

When the GRIP payments are added to the total, "I don't think we're talking about more than a billion" dollars, he said.

At this point, Barnaby isn't certain the grand total in payments will hit $15 billion. But he's not expecting the more breath-taking number of $30 billion.


"I knew from the beginning that those $30 billion and $40 billion estimates were nonsense," Barnaby said.

One reason the earlier estimates were high is that economists were expecting a loss ratio for the crop insurance program similar to losses following the drought of 1988, the most recent drought with a similar nationwide impact.

After the drought of 1988, the loss ratio was 2.7. That means that insurance companies and the federal government, which shares the risk, paid out 2.7 times more than companies received in premiums for crop insurance policies.

In August, one estimate of 2012 losses, made by University of Illinois economists Gary Schnitkey and Bruce Sherrick, used a loss ratio of 2.5 for 2012. Multiplying that ratio by an estimated $12 billion in premiums for crop insurance policies last year gave them the $30 billion number.

Barnaby's own numbers were higher at one time, too. Last fall he was expecting more than $20 billion in losses and was using a loss ratio of 2.35.

On Monday, December 31, when the USDA's Risk Management Agency reported payouts for 2012, the loss ratio was 0.91--identical to the loss ratio for all of 2011. In 2011, the crop insurance program came in slightly ahead, with what's called an underwriting gain by the industry.

Congress has set a goal for the crop insurance program of a loss ratio of 1, which means the program is neither losing nor gaining. Over the past 25 years that include the drought of 1988, the excessively wet year of 1993 and 2011 losses that set a record, the program has been on the mark, Barnaby said. And if payouts are as low as $12 - $13 billion, the loss ratio for last year would still be close to 1. USDA's Risk Management Agency had reported total premiums of just over $11 billion for 2012 crops.

Although the program seems to be working the way Congress intended, it's still expensive in the eyes of critics who include the Environmental Working Group on the left and the American Enterprise Institute on the right. The federal government subsidizes more than 62% of the premiums paid by farmers for insurance, at an annual cost of about $9 billion.

For that reason, Barnaby expects the program's cost to be a target of budget cutters now that the 2012 farm bill has failed and Congress will have to write a farm bill again in 2013.  

"I'm guessing that there will be a fight over spending on farm programs again and crop insurance is the only one that has any money left," Barnaby said.

Technically, crop insurance has its own authorizing legislation that is separate from the farm bill. But it's part of USDA's total budget and has  been targeted in recent years for cuts by both the Obama White House and the House Budget Committee under it chairman, Representative Paul Ryan (R-WI).

Some economists are proposing doing away with the harvest price guarantee for crop insurance or reducing the amount premium subsidy for the harvest price coverage , said Barnaby (who helped design crop revenue coverage while working as an independent contractor for a crop insurance company).

Barnaby has proposed asking farmers to pay part of the premium if they sign up for catastrophic crop insurance coverage (50% coverage at 55% of the price). Right now they pay just an administrative fee.

But he's found little interest in that approach to saving on crop insurance costs. Some of the biggest users and beneficiaries of CAT coverage are fruit and vegetable growers, he said.

"Where that would hit would be in California and Florida," he said. Those are populous states with a lot of votes in Congress.

Another big fruit and vegetable state is Michigan, the home of Senate Agriculture Committee Chairwoman Debbie Stabenow.

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