A study by Milliman Inc., released by the USDA last Friday April 2, determined that the return on equity for crop insurers in the Federal Crop Insurance Program was 26.4 percent in 2009, well above the reasonable rate of return for 2009, 10.7 percent.

National Crop Insurance Services responded to the study on Monday, criticizing the focus on high 2009 earnings and warning that such a short time-frame should not be used as an indicator of the financial health of the industry; however, in addition to releasing numbers for 2009, the Milliman Inc. study included a long-term profitability assessment which showed that  crop insurance companies averaged a 17 percent return from 1989 to 2009, when the reasonable rate for that period was 12.7 percent.

Access the full study here: http://www.rma.usda.gov/news/2010/03/marchhistorical-reasonable.pdf.

The study results will form the backdrop to a renegotiation of the Standard Reinsurance Agreement (SRA), which is the contract between the Federal Crop Insurance Program and participating insurance companies.  RMA plans to have an SRA signed by all parties by June 2010.

The savings expected from the SRA renegotiation were included in the USDA’s proposed budget for 2011.  According to the budget, “Crop insurance companies currently benefit from huge windfall profits due to the structure and terms of the Government’s contract with the companies.”  Through the SRA renegotiation process, the USDA expects to offer the same program benefits to farmers and ranchers, while saving the taxpayer significant sums.  Originally slated for a $8 billion savings over the next 10 years, the savings amount is now expected to be significantly lower.

The renegotiation of the SRA is an administrative action.  As such, very real and substantial reductions in federal spending that result from the new agreement cannot be used by Congress as savings they can make use of to offset proposed increases in funding for child nutrition, food safety, farm conservation, commodity programs, or any other purposes.  This budget rule reality is part of the backdrop to congressional letters objecting to the size of the negotiated settlement.