USDA's Risk Management Agency (RMA), which administers the Federal crop insurance program, has released a second draft of a proposed new Standard Reinsurance Agreement (SRA), which establishes the terms, roles, and responsibilities for both the USDA and insurance companies that participate in the Federal crop insurance program.

The first draft was released Dec. 4, 2009. The new draft includes a series of significant changes, including many discussed during negotiations between the RMA and the participating crop insurance companies.

"The Federal crop insurance program has served farmers well for many years and is an important part of the farm safety net," said Agriculture Secretary Tom Vilsack. "We must maintain producer access to critical risk management tools and provide reliable protection from losses, while ensuring that we're taking appropriate steps to protect the interests of taxpayers. This second draft demonstrates USDA's commitment to responding to the concerns of the insurance companies in a way that meets USDA's original objectives. Today's announcement represents a significant step toward an agreement that will give us a stronger Federal crop insurance program that helps producers manage risk, reduces volatility for crop insurance companies, serves farmers in every region of the country, and responds to taxpayer concerns."

RMA Administrator, William Murphy, discussed the changes Feb. 17 with a group of crop insurance industry professionals at a meeting in San Diego, Calif.

The 2008 farm bill authorized USDA's Risk Management Agency, which manages the Federal Crop Insurance Corporation (FCIC), to renegotiate the agreement effective for the 2011 crop year. Due to significant increases in commodity prices in recent years, annual insurance industry payments more than doubled from $1.8 billion in 2006 to an estimated $3.8 billion in 2009. At the same time, the number of policies decreased. USDA has worked aggressively through the negotiation process to preserve the crop insurance program as part of the farm safety net, support producer access to critical risk management tools, protect the interests of taxpayers, and ensure a reasonable return for the companies that deliver the program.

As with the first draft of the SRA, the second draft provides companies with relatively stable A&O subsidies per policy for seven major commodities and will facilitate insurance company planning. RMA has responded to some of the companies' concerns by adopting several modifications. For example, the second draft includes a transition period for companies to adjust to the new A&O subsidy structure, an inflation factor for A&O after the transition period, and an additional 5 percent for A&O for operations in lower served states.

Through its risk sharing terms, the second draft continues RMA's efforts to rebalance expected returns across the country and to more effectively reach under-served producers, commodities, and areas. In response to company concerns, RMA has reduced the number of state groups from four to three and has modified the risk sharing terms for all States from the first draft.

This second draft of the SRA is in line with USDA's six primary objectives for this agreement:

1) Maintain producer access to critical risk management tools;

2) Align Administrative and Operating (A&O) subsidy to insurance companies closer to actual delivery costs;

3) Provide a reasonable rate of return to insurance companies;

4) Protect producers from higher costs while equalizing re-insurance performance across states to more effectively reach under-served producers, commodities and areas;

5) Simplify provisions to make the SRA more understandable and transparent; and

6) Enhance program integrity.

These objectives align with RMA's primary mission to help producers manage the significant risks associated with agriculture. By achieving these six objectives, the new SRA will ensure financial stability for the program and the producers it serves, while increasing the availability and effectiveness of the program for more producers and making the program more transparent. The new agreement will also provide insurance companies with greater flexibility for their operations and financial incentives to increase service to underserved producers and areas, while ensuring that taxpayers are well-served by the program.

RMA data shows that annual insurance industry payments have doubled from $1.8 billion in 2006 to an estimated $3.8 billion in 2009 based on the terms of the existing SRA. Meanwhile, the number of total policies dropped slightly from 1.3 million in 2000 to 1.1 million in 2008. In preparation for these negotiations, RMA contracted with an internationally known company, Milliman Inc., to review historical rates of return and determine a reasonable rate of return for the crop insurance industry.

See the full report online at http://www.rma.usda.gov/news/2009/09/milliman.html. See additional information about RMA's proposals for the new SRA at http://www.rma.usda.gov/news/2009/12/sra.html.