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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 <approved insurance provider> 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.
Regulate Private Products-No, But Marketing Practices-Yes
RMA does not regulate private crop insurance products, per se, a duty left to the jurisdiction of state regulators. However, the SRA requires AIPs to file their non-reinsurance supplemental products (NSPs) with RMA to seek approval that they do not create greater risk for MPCI policies. In addition, under the Federal Crop Insurance Act (Section 508(a) (9)), RMA does have the authority to prohibit “any practice which would provide a rebate or, more broadly, an inducement for any producer to purchase Federal crop insurance from a particular crop insurance company or agent.”
Alleged illegal rebates and inducements in the past have not been actively pursued by RMA, but handed off to state insurance departments to investigate. The states have been increasingly uninterested in federal crop insurance, compared to bigger problems affecting more consumers in life, health, accident, personal, and commercial lines. Plus, they receive no premium tax revenue from federal crop insurance due to federal preemption.
RMA sees the obvious.
After thirty years of oversight, RMA has finally observed that “private crop insurance policies and endorsements are a valuable consideration or inducement." From the very beginning of private company delivery of the federal crop insurance program in 1981, private insurance companies, many of whom were already crop-hail insurance providers, tied the two insurance products together. One company went as far as marketing the relatively unknown and untested privatized MPCI as HailPlus™.
A “companion” crop-hail plan was quickly adapted by the crop-hail industry to cover the part of the crop not covered by MPCI due to its high deductible and lagging yield histories on which guarantees were calculated. In 1998, "Production Plan" crop-hail was introduced which was even further integrated with MPCI policy data and adopted MPCI's coverage units as its unit of insurance. (Traditional crop-hail is on a spot or acre basis.)
Price Competition Enters the Crop Insurance Market
As private reinsurance capacity grew, crop-hail companies abandoned their gentlemanly practice of sharing in the liability of single farm risks (in order to reduce catastrophic losses) and cooperative loss adjustment (i.e., one loss adjuster's findings served all of the companies on a given risk). With federal reinsurance, MPCI was pretty much a whole farm, an all-or-nothing risk, and whole farm crop-hail underwriting followed.
However, MPCI was different from other insurance in that there was no price competition--all companies had the same RMA-set premium rates. Low-balling the competition was an easy, though perilous, way to increase writings. So, as the states allowed increased price competition among companies, companies learned to price and agents quickly learned to market crop-hail and then other supplemental coverages competitively as loss-leaders to entice farmers and their agent to place their profitable MPCI policies with them.
Loss leaders can be costly
In 2011, a relatively average hail loss season, crop insurers suffered crop-hail underwriting losses in excess of $350 million, primarily due to inadequate rates (i.e., rates with expected loss ratios above 100). The 2011 losses, which severely ate into MPCI underwriting profits, caused some companies to raise crop-hail rates in 2012 and they lost market share to others who did not.
The new rule will fall most heavily on independent agents
The new rule hampers the ability of some purely retail insurance agents and crop insurers to compete, particularly now that commissions are capped. Containing competition is like squeezing a large balloon. If you squeeze in one area, the balloon just pops out somewhere else less contained. More than just providing colorful maps of insured crops, new areas of competitive advantage are emerging with data gathering and precision farming technology that integrates farm data gathering systems with crop insurance reporting requirements.
The competitive advantage may shift toward non-insurance delivery partners
In prohibiting one form of inducement, the competitive door is still left open for other forms of inducement, i.e., extra value or improved service. Synergistic agribusinesses are displacing traditional pure retail insurance agents. Farm lenders have "encouraged" farmers to secure their insurance from them and earn "participation” discounts on farm loans. Agents affiliated with seed providers somehow allow greater access to the latest seed technology. Agents affiliated with grain marketers provide "free" marketing services, exotic marketing contracts and improved grain basis bids. However, traditional retail insurance agents are both competitive and innovative. They will find a way to compete. When it comes to a race between insurance agents and bureaucrats, it's not a race.
Steve Griffin is a West Des Moines, Iowa-based crop insurance consultant. He was instrumental in developing many supplemental policies and numerous crop-hail plans, including the popular, Crop-Hail Production Plan. Today's popular revenue products, before they became federal reinsured policies, were first developed for such competitive purposes as well.