Cutting the Fat

It Won’t Kill Crop Insurance

December 3, 2015

Cutting the Fat: Delivering Crop Insurance Through Companies is Costly

The recent budget agreement calls for a reduction in the target rate of return to crop insurance companies. Rate of return is defined by the industry as profit as a percentage of premium. Profit is defined as revenue received in excess of costs. 

Data on costs up through the 2013 crop insurance year are available in a publication prepared by the accounting firm Grant Thornton LLP.8 Exhibit 5.1 of the report measures costs from 1992 to 2013 as a percentage of gross premium. Costs for adjusting claims, agent commissions and all other expenses are reported separately. The “other” category of expenses presumably includes salaries, IT expenses, and other office expenses. Total cost for each category can be obtained by multiplying the percentages by gross premium for each year, data that is available from USDA’s Risk Management Agency. Table 1 shows the results.

From 2001 to 2013, crop insurance companies’ total costs increased by 156 percent, or about 8.2 percent per year. This rate of increase is more than three times the average inflation rate of 2.5 percent a year over this time period.

Table 1. Company Costs of Delivering Crop Insurance

  Agent Commission Loss Adjustment Other Total
 
$ millions
2001 465 110 240 815
2002 461 122 245 828
2003 546 113 237 895
2004 653 117 251 1,021
2005 600 130 261 991
2006 714 133 284 1,131
2007 1,116 151 302 1,568
2008 1,655 177 296 2,128
2009 1,504 224 367 2,094
2010 1,268 213 395 1,875
2011 1,281 263 407 1,951
2012 1,090 278 445 1,812
2013 1,251 319 519 2,089

One possible explanation for why costs increased faster than inflation is that the amount of work increased dramatically. One measure of workload is the number of policies issued, reflecting the amount of work involved in selling and administering them. The amount of work devoted to adjusting losses varies with the number of claims made. Thus a better measure of the workload is the number of farms that generate claims. Table 2 shows the total number of policies and the number of farms on which claims were made (units indemnified). Table 2 uses these measures of workload to calculate the costs per policy for agent commissions and other costs, as well as the costs per unit indemnified.

Table 2. Cost of Delivering Crop Insurance Adjusted for Workload

Year Units Indemnified Number of Policies Agent Commission Loss Adjustment Other
 
millions
$ per policy $ per unit $ per policy
2001 674 1,298 358 163 185
2002 958 1,259 366 128 195
2003 778 1,241 440 146 191
2004 663 1,229 531 177 204
2005 523 1,191 504 249 219
2006 669 1,148 622 198 247
2007 567 1,138 980 266 265
2008 1,048 1,149 1441 169 257
2009 593 1,172 1283 377 313
2010 463 1,140 1112 459 346
2011 954 1,136 1127 276 358
2012 1,202 1,174 928 231 379
2013 1,166 1,224 1,022 273 424

The number of policies sold has been roughly stable over this time period. The number of farms indemnified varies dramatically from year to year because of variations in growing season weather.

Agent commissions per policy increased by an average annual rate of 9.1 percent, increasing from $358 per policy to more than $1,022.9 The costs of adjusting claims per unit indemnified increased by 4.4 percent per year. Other expenses increased by 7.2 percent per year. To put these cost increases into perspective, the US Bureau of Labor Statistics reports that total compensation to civilian workers increased by an average annual rate of 3.7 percent over this time period, which is somewhat higher than the 2.5 percent average increase in consumer prices. Wages and salaries in the insurance industry grew by an average of 2.65 percent per year from 2002 to 2013.

These data clearly show that costs in the crop insurance industry increased at a much faster rate than in other industries and much faster than in the rest of the insurance industry. The reason costs increased so much faster is the peculiar nature of the industry and its relationship with the federal government.


8 “Federal Crop Insurance Program Profitability and Effectiveness Analysis 2013 Update.” Prepared on behalf of National Crop Insurance Services, Inc  by Grant Thornton LLP.  June 2014.

9 This large increase in commission per policy is not reflected in the commission rate, expressed as a percentage of premium. The commission rate has declined from 15.7 percent in 2001 to 10.6 percent in 2013. If the commission rate had stayed constant at 15.7 percent then commissions in 2013 would have been more than $1,500 per policy. If commissions had been this high in 2013 then the crop insurance program would truly have been a jobs program for agents in rural America, a role many of its supporters tout.