**Crop Insurance Industry Testimony**

**By**

**Ron Brichler**

**To**

**General Farm Commodities and Risk Management Subcommittee**

**House Committee on Agriculture**

**1300 Longworth House Office Building**

**Thursday, June 7, 2007**

**RE: To review the integrity and efficacy of the Federal Crop Insurance
Program**

Good morning Chairman Etheridge, Ranking Member Moran and Members of the
General Farm Commodities and Risk Management Subcommittee of the House
Committee on Agriculture. My name is Ron Brichler. I am a Senior Vice
President of Great American Insurance Company, and President of its Crop
Insurance Division. I also have operational reporting responsibility for
five other Great American divisions. Great American Insurance Company,
headquartered in Cincinnati, Ohio, is a subsidiary of American Financial
Insurance Group, Inc (AFG). AFG is a publicly owned company with its
stock traded on the New York Stock Exchange.

Great American's Property and Casualty Insurance Group is ranked by A.M.
Best as the thirty-third largest property and casualty operation in the
United States. Great American is engaged in marketing and servicing a
wide array of specialty property and casualty insurance products, of
which crop insurance represents about 15 percent of our gross written
premium. The Crop Division competes internally for capital with over
twenty other Great American operating divisions.

My testimony today is presented on behalf of the crop insurance industry
-- not any one organization or group. I certainly appreciate the support
of everyone in the industry who directly or indirectly contributed to
the development of this testimony.

While the crop insurance industry is pleased to have this opportunity to
appear before this Subcommittee today, we certainly regret the
circumstances that made this hearing necessary by presenting a distorted
and misleading view of the crop insurance program. We believe recent
oversight hearings by this Subcommittee, including two in May of this
year and several in the 109^th^ Congress, had completed a thorough and
current review of the crop insurance program. Furthermore, we believe
USDA's testimony in the May 3, 2007, House Oversight and Government
Reform Committee certified the program's integrity and efficacy. Thus,
as disappointed as we are about the occurrence that precipitated the
need for this hearing, the crop insurance industry is very pleased to
have the opportunity to respond and help set the record straight about
the integrity and efficacy of the modern, highly successful and
well-managed federal crop insurance program.

**This Year's Erratic Weather Demonstrates the Need for Crop Insurance**

We think the erratic weather patterns we have thus far experienced in
2007 are a grim reminder of why a good crop insurance program is so
important not only to farmers, but to consumers that they provide with a
low-cost supply of food, fiber and energy. Already we have experienced
two major freeze disasters in 2007 -- the January freeze on the West
Coast and the April freeze that caused extensive damage in several areas
from the Southeast to the High Plains. Currently, Florida, Georgia and
surrounding states are suffering from a severe drought that is
preventing planting, while other parts of the country are being hampered
by excessive moisture.

While it is too early in the year to guess the extent of this year's
losses in agriculture, these events are a reminder that farming is a
very risky business, and the business of insuring the risks of farming
is high risk insurance. While we have been fortunate to have low loss
ratios in the past few years, one catastrophic loss year could wipe out
the underwriting gains the crop insurance industry has received in those
good years.

**Crop Insurance Plays a Key Role in Energy Independence**

Moreover, the farm sector is under more pressure to produce at full
capacity than ever before. No longer are we worried about surplus
production. Now that agriculture is expected to produce not only an
ample food supply but the feedstock for bio-fuels, every available acre
is needed for production. President Bush has set a goal of 35 billion
gallons of alternative fuels in 10 years. There is a consensus among
ethanol executives that we can never produce enough corn to provide more
than 14-15 billion gallons of ethanol from corn in a year. Therefore,
additional production must come from cellulosic feedstock such as switch
grass. Farmers are never going to grow these new crops in abundance if
they can't mitigate their risks by buying a good crop insurance policy.
Crop insurance forms the foundation that supports their decisions to
grow and harvest the raw materials that ultimately will help create
energy independence.

**The State of the Crop Insurance Program is Excellent**

We, the private sector partners in the crop insurance program, are here
today to declare the federal crop insurance program's integrity and
efficacy to be in excellent shape. In support of our declaration, I
offer up the words of the Risk Management Agency Administrator Eldon
Gould from the May 3, 2007, House Oversight Committee hearing in which
he said, "The federal crop insurance program is working as it was
intended and it is performing well ..."

We believe it is significant that these are the words chosen by the
federal regulator of the crop insurance program in commenting on its
integrity and efficacy. After all, RMA employees are the people who have
the depth of experience with the program, breath of knowledge about the
program and a comprehensive understanding of the program, especially
including its history, purpose, challenge and opportunity, to render an
accurate and intelligent judgment on the program's integrity and
efficacy.

Additionally, I am very pleased to refer you to a May 23, 2007, National
Crop Insurance Services press release, which contains the following
information:

> The leadership of the Risk Management Agency (RMA) and the crop
> insurance industry met in Kansas City this week in an effort to
> strengthen their oversight of the Federal Crop Insurance Program. One
> of the most telling things they heard came from Dr. Bert Little of the
> Center for Agribusiness Excellence (CAE).
>
> **"About 0.2 percent, or less than one percent, of the policies in the
> crop insurance industry shows up as anomalies in our data mining," Dr.
> Little told the group. "That's one heck of a lot better than property
> and casualty where 10-12 percent of the claims are fraudulent."**
>
> CAE conducts the data mining of the crop insurance industry on behalf
> of the RMA.

**[House Oversight and Government Reform Committee Hearing
Statements]{.underline}**

To more fully understand and appreciate the need for today's hearing, I
want to recall for the Subcommittee several statements from the record
of the House Oversight and Government Reform Committee Hearing in
question. They are as follows:

> "This hearing examines allegations of waste, fraud, and abuse in two
> key areas of the federal crop insurance program:
>
> The first is that the program has failed at its primary purpose:
> preventing the need for annual disaster payment to farmers.
>
> A second focus of allegations of taxpayer waste and abuse in the crop
> insurance program are the large underwriting gains and commissions
> garnered by the private crop insurers, and the resulting inefficiency
> of the program.
>
> The taxpayers understand that it costs money to run the government.
> But they can't accept rampant waste, fraud, and abuse that squanders
> their money on boondoggle programs.
>
> Our committee will learn today that the federal crop insurance program
> is costing taxpayers billions of dollars in waste, fraud, and abuse.
>
> From the taxpayer perspective, it's hard to imagine a more costly and
> inefficient way of providing a safety net for farmers.
>
> The federal crop insurance program has become a textbook example of
> waste, fraud, and abuse in federal spending.
>
> Over the last six years, over \$8 billion in taxpayer funds have been
> squandered in excess payments to insurers and other middlemen.
> Somehow, about forty cents of every dollar that taxpayers have put
> into the crop insurance program has gone up in smoke.
>
> GAO has found that the private crop insurance companies are obtaining
> underwriting profits that are almost three times as high as industry
> averages.
>
> Nobody begrudges assistance to a farmer whose crop is destroyed in a
> natural disaster. But no one should tolerate insurance companies that
> skim billions from the Treasury to fatten their profits."

**[House Oversight Committee Statements Illogical, Inaccurate,
Unfair]{.underline}**

First, Mr. Chairman and Members of the Subcommittee, the crop insurance
industry wants to clearly and definitely assert that the program is
highly successful and, therefore, has not "failed at its primary
purpose." The program is a risk management tool. Any statement claiming
the program has failed because Congress and the President have approved
*ad hoc* disaster assistance laws is totally illogical. No program or
law can deny a congress and a president their constitutional rights and
privileges. No congress can bind a future congress. New *ad hoc*
disaster assistance laws have been and will continue to be approved for
any reason when there is the political will to do so. Let me repeat --
political will to do so is all that is required. Nothing else matters.
Furthermore, the word "need" is a "value" term -- meaning it has no
fixed or universally accepted definition. Therefore, the existence of
*ad hoc* disaster assistance laws is an illogical and meaningless test
of the success or failure of the federal crop insurance program.

Secondly, Mr. Chairman and Members of the Subcommittee, the crop
insurance industry wants to clearly and definitely assert that the
program is not riddled by "rampant waste, fraud and abuse." It does not
"squander money on boondoggle" programs. It is not inefficient. It is
not a "textbook example of waste, fraud and abuse." It does not make
"excess payments to insurers and other middlemen." Forty cents of every
dollar put into the program has certainly not "gone up in smoke."
Insurance companies certainly are not "obtaining underwriting profits
that are almost three times as high as industry averages." Insurance
companies do not "skim" money from the program.

Mr. Chairman, as you and Members of the Subcommittee know, all monies
paid to insurance companies are controlled by the Standard Reinsurance
Agreement (SRA), which has been written by the government, managed by
the government and enforced by the government. Interested companies are
required to sign the SRA in order to become an Approved Insurance
Provider (AIP). Companies can lose their AIP status by not complying
with the terms and conditions of the SRA.

A key question for this hearing to examine is this: If underwriting
gains are three times industry averages and there are golden
opportunities for receiving other excess payments, why are there so few
AIPs? Why have large national insurance companies left the program? The
industry's answer is clear and definite -- the statement is simply
inaccurate and unfair.

In fact, Mr. Chairman, **when comparing crop insurance returns to those
for property and casualty insurance generally and taking care to use
comparable data for the exact same years -- 2002 to 2006 -- the results
are almost identical.** In their presentation, GAO appears to have used
the 5 year time period 2001 to 2005 for the P&C analysis because data
for 2006 was not yet available. However,

for their crop insurance analysis, GAO appears to have used the 5 year
time period 2002 to 2006. Keep in mind that the P&C insurance industry
underperformed other industries in these years, especially because of
negative returns in 2001 due to the events of September 11 and 2004 and
2005 as a result of all of the hurricanes. However, just because the
total P&C industry underperformed in a particular time period, that does
not mean crop insurance will also under perform in that time period. Of
course, the P&C industry had a record profit year in 2006. **Adding
2006, a big profit year, and dropping 2001, the year of 9-11 and a big
loss year, significantly changes the data for comparison purposes.**

Equally important, **it does not appear that GAO made the necessary
effort to use comparable premium data either.** As my testimony will
show later, **the raw premium data for the two lines of insurance do not
have the same base.** P&C insurance premiums are expense loaded. Crop
insurance premiums are not expense loaded. When a percentage analysis is
conducted using two difference bases, the results will, of course, be
drastically different. Thus, when you update the GAO work to use the
exact same five year period -- 2002 to 2006 -- for both lines of
insurance and make the necessary adjustment in premiums to have a
consistent base for the percentage analysis, the P&C return is 17.4
percent. Now we are left with the opportunity to compare the differences
between 17.4 percent on the one hand to 17.8 percent on the other. Our
data source is Best Aggregates and Averages: Property Casualty and A.M.
Best Special Report: US Property/Casualty, 2006 12-Month Financial
Review.

One other important point about the GAO work is that it used crop
insurance underwriting gain as reported by RMA to measure the industry's
profitability. **As my testimony discusses later, the RMA reported
underwriting gain cannot be equated to profit since they do not reflect
all of the industry's delivery cost.**

No doubt, Mr. Chairman, the crop insurance program is complex. The level
of complexity together with highly variable but at best only average
returns may explain why there are no more companies in the business.
However, the program has grown in complexity because complexity is a
requirement for better satisfying the congressional goal of providing a
personalized risk management tool to all of the nation's farmers,
ranchers and growers regardless of their size, location or risk profile.
Complexity contributes greatly to the work load and compliance
challenges for companies and agents in selling and servicing the federal
crop insurance program. Moreover, this level of complexity requires the
investment of millions of dollars annually by the private sector in
technology. The complexity factor and other distinguishing
characteristics must be taken into proper consideration in any
comparison of the crop insurance program and related income statements
to other property and casualty lines of insurance.

**[Crop Insurance: Comparison to Property and Casualty
Profitability]{.underline}**

Crop insurance companies write a particular class of property and
casualty insurance. Because of this fact, the business of crop insurance
is frequently compared to the business of other property and casualty
(P&C) lines of insurance. This comparison is reasonable as long as the
major differences are recognized and understood. Significant differences
exist in profitability opportunities between private lines of P&C
insurance and federal crop insurance.

**Differences between P&C Insurance and Federal Crop Insurance**

+-------------+-------------------------+-----------------------------+
|             | P&C Insurance           | Federal Crop Insurance      |
+-------------+-------------------------+-----------------------------+
| Premium     | Expense loaded --       | Not expense loaded.         |
|             | meaning                 |                             |
|             |                         |                             |
|             | administrative costs    |                             |
|             | are included in         |                             |
|             |                         |                             |
|             | the premium charged.    |                             |
+-------------+-------------------------+-----------------------------+
| Premium     | Set by company,         | Set by RMA -- the same      |
| Rates       | approved by State       | rates apply to              |
|             | regulators. Rates will  |                             |
|             | differ by               | all companies.              |
|             |                         |                             |
|             | company due to risk and |                             |
|             |                         |                             |
|             | administrative loads.   |                             |
+-------------+-------------------------+-----------------------------+
| Premium     | Upfront at time of      | At harvest with companies   |
| payment     | sale.                   | turning over to             |
|             |                         |                             |
|             | Held by company to      | RMA within 30 days. No      |
|             | generate                | investment                  |
|             |                         |                             |
|             | investment income.      | income. Credit risk to      |
|             |                         | company of                  |
|             |                         |                             |
|             |                         | nonpayment by               |
|             |                         | policyholders.              |
+-------------+-------------------------+-----------------------------+
| U           | Some ability to not     | No ability to not write     |
| nderwriting | write risks via         | risks. Must take            |
|             | underwriting rules.     |                             |
|             |                         | all eligible regardless of  |
|             |                         | risk profile.               |
+-------------+-------------------------+-----------------------------+
| Reinsurance | Private                 | Mixture of private and      |
|             |                         | federal.                    |
+-------------+-------------------------+-----------------------------+
| Adm         | Set by company and      | Set by statute and RMA --   |
| inistrative | approved by             | may or may                  |
|             |                         |                             |
| Expenses    | State regulators as     | not cover actual expenses   |
|             | part of the             |                             |
|             |                         |                             |
|             | Premium                 |                             |
+-------------+-------------------------+-----------------------------+

What do these differences mean in practical business terms?

1)  Because expenses are "loaded" into premiums for private lines of P&C
    insurance, a direct comparison of "premium" between the P&C
    insurance and crop insurance is NOT POSSIBLE without adjustments to
    premium. A better comparison of the two lines of insurance is
    overall profitability.

2)  Companies that write crop insurance do not set the rates. The RMA
    does. This fact means that crop insurance companies have no ability
    to adjust rates (higher or lower) regardless of the associated risk.

3)  Farmers pay their premium at harvest and crop insurance companies
    remit the paid premium to RMA within 30 days. THIS FACT IS A
    SIGNIFICANT BUSINESS DIFFERENCE. Private P&C companies collect
    premium upfront and invest those premium dollars. Premium dollar
    investments are the major source of income for P&C companies, not
    underwriting gains. In fact many private P&C insurance companies use
    investment income to lower premium rates to customers. The opposite
    is true for crop insurance companies. Underwriting gains are the
    major source of income because there is no opportunity for
    investment income from premium dollars. In addition, there is a
    credit risk to crop insurance companies because they are required to
    pay the premium to RMA whether the amount is collected from
    policyholders or not. Annually, several million dollars in premium
    receivables are written off by crop insurance companies as a result
    of nonpayment by policyholders.

4)  Crop insurance companies must write all federal crop insurance lines
    in a State if they decide to operate in that State. Crop insurance
    companies are not allowed to turn down customers or adjust rates
    based on normal insurance underwriting rules. This fact means crop
    insurance companies take risks that they otherwise would not take.

5)  Because crop insurance companies are unable to underwrite policies,
    a key component of the crop insurance program is federal
    reinsurance. Federal reinsurance is used to cover losses on policies
    that are of "high" risk and would not otherwise be written.
    Normally, in these situations, if allowed, company rates for
    policies providing coverage in certain agriculture production
    enterprises would be raised to levels higher than the RMA
    established rates.

6)  Private P&C insurance companies can make adjustments in
    administrative charges through annual rate adjustments. Crop
    insurance companies are "reimbursed" for expenses but they are not
    allowed to adjust administrative charges to farmers to reflect
    changing business environments.

7)  For crop insurance, the underwriting gain numbers reported by the
    Risk Management Agency (RMA) are not company profits. RMA does not
    deduct all expenses before publishing the crop insurance
    underwriting gain numbers, which is a requirement to reference
    profits. All expenses have been deducted in computing underwriting
    gain numbers for other P&C lines of insurance. Thus, published
    underwriting gain data for crop insurance and other P&C lines of
    insurance are not directly comparable.

**[Profitability analysis is the correct comparison.]{.underline}**
Profitability or the rate of return on capital employed is the correct
business statistic to use when making a comparison between the federal
crop insurance line and other P&C lines of insurance. However, an
analysis of this kind is data intensive and involves accumulating
business sensitive data. To date, only three comprehensive studies have
been conducted comparing profitability between the two lines of
insurance. They are: Deloitte and Touch 2004, Price Waterhouse Coopers
1997 and updated in 1999 and Milliman and Roberts 2002, a study
commissioned by RMA.

1)  **The Deloitte and Touché study reported a 10 year profitability
    measure of 7.9 percent for the crop insurance program with a
    standard deviation of 12.9 percent while other lines of property and
    casualty insurance ran a 12.7 percent return with an 8.9 percent
    standard deviation (1992 -- 2002).**

2)  **The Price Waterhouse study concluded that the pre-tax rate of
    return on crop insurance was 11.7 percent over an 8 year period
    (1988 -- 1995) and lower than that of the P&C industry at 14.1
    percent over the same time period.**

3)  **The Milliman report concluded the estimated earned return on
    equity to crop insurers averaged 15.8 percent over a 13 year period
    (1989 -- 2001) versus an average reasonable rate of return over the
    same period of 14 percent**. **The Milliman report also said** **"we
    would caution against drawing any strong conclusions on the adequacy
    or excessiveness of the historical returns based on a sample of
    thirteen years of data, in light of the fact that only one of those
    years is a catastrophe year. Had there been a second catastrophe
    year in the sample similar in magnitude to 1993, the average return
    over the period would have been below 14 percent." Thus, if RMA had
    included the major drought year of 1988 in the base period, the crop
    insurance industry would have earned less than the target rate of
    return.**

**[Conclusion on Comparison.]{.underline}** **Comparisons between P&C
lines of insurance and crop insurance are possible based on
profitability when all sources of income and expenses are taken into
consideration.** A comparison based on underwriting performance only is
specious because it does not take into consideration significant
differences in the definition of "premium" and "underwriting gains"
between federal crop insurance and other P&C lines of insurance.
Moreover, it does not recognize a significant business distinction
between the two types of companies. **P&C companies' primary earnings
are investment income, not underwriting gains. In fact, data from the
Insurance Information Institute indicate that for the P&C insurance
industry, underwriting activity for the years 2001-2006 experienced an
average loss of almost \$10 billion annually, while investment income
over the same time period averaged more than \$42 billion annually.**

**Crop insurance companies have no opportunity to invest premium dollars
to earn income and, therefore, underwriting gains are their primary
source of income.** Although, crop insurance companies are reimbursed an
average of around 20 percent of premium for selling and servicing
expenses, the amount does not fully cover total delivery costs.
Moreover, even though the average expense reimbursement rate has been
reduced by the government from an average of slightly more than 30
percent, proposals abound today, including again by the government, to
reduce the rate further. **In comparison, the Insurance Information
Institute data for the years 2001-2006 show that for the P&C industry
the "expense-to-earned premium" ratio averaged around 40 percent. When
adjusting the P&C industry premium data for being normally expense
loaded, making the data comparable to crop insurance premium data, the
"expense-to-premium" ratio for the same time period averaged more than
60 percent.**

**[Crop Insurance: Multiple Farmer Benefit Program]{.underline}**

Recent public statements have claimed that **40 percent or more of the
crop insurance program benefits accrue to the private crop insurance
industry.** This analysis is inaccurate on its face and misleading in
the extreme. The analysis is based on "net indemnity" or "cost to the
taxpayer," which may be useful analysis for single-purpose federal
transfer programs but **grossly understates the benefits of the
multifunctional, multi-benefits federal crop insurance program.**

**Net indemnity analysis** (indemnities minus farmer paid premium) for
the crop insurance program is an incomplete measurement of the benefits
that accrue to farmers from owning these policies. **First, net
indemnity analysis ignores the fact that delivery expenses
(administrative and operating (A&O) reimbursements) are paid on behalf
of farmers by the federal government** and therefore must be
incorporated as a direct transfer of income benefit to farmers.
**Second, the benefit of an insurance program is greater than
indemnities.** No one buys an auto or homeowner's policy hoping to
collect an indemnity payment. Like farmers, they buy to insure against a
disaster that they cannot afford to be at risk for. Like other
policyholders, farmers purchase crop insurance for a multitude of
reasons. That is to say, the federal crop insurance program is
multifunctional, providing multiple benefits.

Moreover, if the rent-seeking behavior described by the economic
literature is correct, then farmers would be expected to buy crop
insurance coverage where the subsidy and, therefore, expected net
indemnities are greatest -- at the 55 percent coverage level. However,
the average program coverage level is 70 percent, which is significantly
higher than net indemnity analysis suggests is optimum. Other benefits
are necessary to explain this difference in coverage level.

In addition, net indemnity analysis does not explain why many farmers
buy revenue insurance instead of the APH yield-only plan of insurance.
Revenue insurance costs farmers on average 30 percent more
out-of-pocket, yet the loss ratio for revenue plans of insurance over
the past 5 years is no better than the yield-only plans of insurance.
Again, other benefits are necessary to explain this difference.

Thus, it is not only reasonable but also logical and sensible to
conclude there are more calculations involved in farmers' decisions
about buying crop insurance than simply the assumption of a net
indemnity. There must be additional benefits that accrue to farmers for
owning a federal crop insurance policy. A 2004 National Corn Growers
Survey elicited the following 5 factors as top reasons farmers buy crop
insurance: 1) cash flow protection 2) price of insurance 3) protection
against weather 4) lender requirements and 5) risk management. Benefits
beyond net indemnity are identified and summarized by the following
three factors:

**Credit and the Banker Factor:** Nearly every farmer borrows money on
an annual basis to operate their farm. Bankers and farmers have come to
rely on crop insurance to help mitigate the risk of their production
loans.

> **Landlord Factor:** The president of the American Sesame Growers
> Association, Steve Chapman, recently testified before Congress that
> Sesame growers needed an insurance policy not because of the risk of
> growing sesame but because landlords demanded it.
>
> **Forward Marketing Factor:** One of the primary reasons farmers buy
> revenue insurance is to use the insurance policy as security when they
> forward market a portion of their crop. Both RA and CRC allow farmers
> to forward market with less risk.

**Clearly, there are farmer benefits derived from owning federal crop
insurance policies beyond the assumption of net indemnities.**
Furthermore, it is also clear these benefits are not recognized and are
not measured by the single-dimension analysis of "net indemnity"
analysis and calculations. Until the economic literature addresses the
full spectrum of benefits that accrue to farmers as a result of owning
multifunctional federal crop insurance policies, program inefficiency
claims should be significantly, if not totally, discounted.

A far more realistic analysis of the "benefit transfer efficiency" of
the federal crop insurance program from farmers' total welfare
standpoint may be to compare total federal crop insurance outlays to
total federal crop insurance liability. This ratio calculates the level
of farmer crop insurance protection benefit received for each dollar of
federal crop insurance outlays. According to Federal Crop Insurance
Corporation (FCIC) data, for years 2001 through 2005, outlays totaled
about \$14.9 billion and liability totaled about \$205.5 billion, for a
benefit-to-cost ratio of approximately 14 to 1. While the liability
analysis aggressively assesses the program's benefit transfer value, it
certainly is far more relevant than any analysis that concludes the crop
insurance program benefit transfer ratio is less than 1 to 1.

**[Crop Insurance: Flexible, Affordable, Available,
Predictable]{.underline}**

While crop insurance isn't new, it is more important than ever to
thousands of farmers. The ability to tailor coverage to each individual
operation, obtain coverage at a meaningful level and affordable price,
secure the coverage from a local, trusted insurance professional, and
know that the coverage is in place and the fact that it can be counted
on for financial planning purposes all combine to make crop insurance
the cornerstone of many farmers' financial and risk management plans.
These benefits of crop insurance always have and will continue to
account for the success and acceptance of the program.

**Tailored Coverage:** Farmers can tailor their coverage to fit the
needs of their specific operation. They have a choice of coverage levels
ranging from 50 percent up to 85 percent. Numerous coverage plans are
available for a variety of crops, including MPCI yield guarantee
protection, revenue products providing yield loss and price protection,
and area coverage programs which provide broad based, simple yield or
revenue protection on a county basis. This variety of coverage and
product levels provides growers the opportunity to obtain the coverage
that fits their specific farming operation and risk management needs.

**Affordable Farmer Premiums:** Growers are able to purchase crop
insurance at more affordable prices because the government shares in the
risk and administrative premium costs. This cost sharing makes it
possible for many growers to secure better coverage than they could
afford without the government cost share. This results in affordable
protection for growers, while also creating manageable costs for
taxpayers.

Coverage Level 50% 55% 60% 65% 70% 75% 80% 85%

Premium Assistance 67% 64% 64% 59% 59% 55% 48% 38%

**Private Sector Delivery: Private sector delivery provides competitive,
localized service for growers because they can buy from the local agent
of their choice.** Private industry competition ensures prompt service
on claims. Choice and competition help protect and stabilize the rural
economy and small town businesses.

Furthermore, a study released in September, 1989, by **Arthur Andersen &
Company concluded that USDA experienced delivery costs twice the amount
of the private sector participants, on average. Specifically, the study
reported that for 1987 total delivery cost by private sector companies
equaled 43.17 percent of premium while for master marketers the total
was 85.30 percent.** This finding and other factors supported a move by
Congress to transition to sole delivery of the federal crop insurance
program by private sector insurance companies and agents.

**Assures a Stable and Secure Food Supply** • Unlike disaster payments,
crop insurance is predictable. Farmers and their lenders know what their
protection is before they plant their crop. Crop insurance assures a
stable and secure food supply --- an important component of homeland
security. From the taxpayers\' standpoint, crop insurance is more
economical than disaster payments because the growers pay a significant
portion of the cost of crop insurance. The public cost share of the
program is a manageable budget item for government, while disaster
payments are normally an ad hoc item subject to funding availability.

The bottom line is that the crop insurance program is successfully
meeting the needs of thousands of farmers who are relying on the
protection that their local agent helped them tailor to meet their
specific risk management needs. This protection represents a good value
for America\'s taxpayers when compared to any other alternatives for
addressing shortfalls in agriculture production.

**Resist the Call to Use the Crop Insurance Program as a Piggy Bank to
Fund Special Interests**

We realize the Committee is being subjected to extreme pressure to raid
the funding of the crop insurance program to pay for the pet projects of
one commodity group or another or for some new scheme of a farm
organization. I hope you would resist these attempts. They are extremely
shortsighted.

**These attempts would be a serious blow to a program that has taken a
quarter of a century to build.** The budget baseline for crop insurance
is growing because it is successful. More and more farmers are buying it
to lock in not only their yield, but their price. As the prices of
commodities have increased due to the demand for corn acreage for
ethanol, the budget baseline for the price support programs of these
commodities has declined.

However, the amount of risk in agriculture has also increased. While
farmers no longer receive such a large share of their income from their
government, their cost of production and, therefore, their risk has also
increased dramatically. **Without a good crop insurance program farming
will only be a viable occupation to those who are wealthy enough not to
need to borrow money.**

**[Other Crop Insurance Program Reviews and Comments by Knowledgeable
People]{.underline}**

Mr. Chairman and Members of the Subcommittee, you have heard what the
industry has to say regarding the integrity and efficacy of the program.
I thought you might like to know what has been said about the crop
insurance program by individuals outside of the industry. Below are a
few of these comments:

> Daniel Pitts Winegarden, \[former first deputy commissioner, Iowa
> Insurance Division\], Des Moines Register, May 15, 2007:
>
> "The federally subsidized private crop-insurance industry is a real
> success story in farm policy. Combining private expertise in risk
> management with incentives to manage risk is far more proactive and
> fairer than paying for disasters on an ad hoc basis."
>
> Steven Chapman, American Sesame Growers Assn., House Agriculture
> Committee, May 14^th^, 2007:
>
> "The bottom-line is this: landlords and lenders demand crop insurance.
> Since crop insurance is unavailable to sesame, land and loans are
> given only to other crops."
>
> David Gillen, National Corn Growers Association, House Agriculture
> Committee, May 14, 2007:
>
> "On behalf of NCGA, our 32,000 plus members from 48 states and more
> than 300,000 producers who contribute to corn check off programs, I
> cannot overemphasize the importance of an effective and affordable
> federal crop insurance program to our member growers' risk management
> planning. Assuming commodity markets remain above current farm price
> support levels over the next several years, crop insurance becomes
> even more critical for protecting producers' farm revenue against
> significant yield losses."
>
> Gary Iverson, Great Northern Cooperative Assn., House Ag. Committee,
> May 14^th^, 2007:
>
> "Farmers have trouble getting bankers to support loans for their crops
> without crop insurance."
>
> Keith Collins, Chief Economist, USDA, House Agriculture Committee, May
> 1, 2007:
>
> "The combined increases in A&O and underwriting gains have helped
> improve the financial performance of the companies since 2002, when
> the largest company became insolvent. The improved financial picture
> has also encouraged new entrants into the program."
>
> Eldon Gould, Risk Management Agency, House Agriculture Committee, June
> 15, 2006:
>
> "RMA is continually seeking new and creative ways to work with the
> other regulatory bodies, government agencies and the companies, agents
> and producers to ensure the integrity of the Federal crop insurance
> program. RMA compliance reviews continue to reveal that there are only
> a small number of producers who have been involved in fraud or illicit
> activity. While no level of criminal or abusive behavior is
> acceptable, RMA continues to believe the number of persons involved in
> criminal activity is relatively small.
>
> Because they share in risk, the approved insurance providers (AIPs)
> have a vested interest in working with us to prevent fraud, waste and
> abuse. We have worked closely with the AIPs to strengthen program
> integrity, protect taxpayer dollars, and better assure that those who
> deliberately break the rules are caught and punished.
>
> The vast majority of people in the Federal crop insurance
> program-farmers, insurance agents, loss adjustors, industry
> professionals and government employees-are honest, hard-working men
> and women acting with the highest integrity and competence."

**[Conclusions]{.underline}**

In conclusion, I would like to make three points:

First, the federal crop insurance program originated and has evolved
with a keen since of purpose in being of value and service to the
nation's farmers, ranchers and growers in their risk management needs.
In reaching to satisfy this public policy objective, the program has
grown more complex. However, this characteristic, that of being complex,
is the essential element for the program to be of value and service to
the maximum number of the nation's agricultural producers. **Complexity,
however, requires more resources -- time and capital -- to implement and
manage, but it is the major factor accounting for the level of success
the program enjoys among producers today.** While very successful, the
program can continue evolving and improving. In striving to enhance its
value and service to current policyholders and attracting even more
policyholders, the program must continue to enjoy the level of
congressional support, understanding and commitment that was necessary
to bring it to the performance level of today.

**Second, with the nation looking for even greater production from our
agricultural industry, including a major contribution to the new energy
independence initiative while maintaining an abundant supply of safe and
reasonably priced food, now is not the time to begin withdrawing federal
financial support for a public policy that has proven to add real value
to the agricultural industry and, therefore, to the nation's economic
welfare.** Federal dollars going to the crop insurance industry are
definitely being earned. They are buying real, tangible goods and
services for the nation. It has taken a lot of hard work and resources
to build the capability that is contained within the current crop
insurance program. Let's work to avoid giving up these gains and thereby
discounting more than a quarter of a century in time and effort building
the current program. **The crop insurance program should not be viewed
as a source of funds for other initiatives.** "Robbing Peter to pay
Paul" never works. Other worthwhile programs should be funded without
harming the successful crop insurance program.

Third, commodity prices have a long and uninterrupted history of moving
both up and down. Agricultural commodities share the same price history.
The 2007 Farm Bill should not be written on the assumption or theory
that there has been a change of some nature -- ethanol included -- that
will produce a different future for commodity prices. **The old adage --
what goes up will come down -- most definitely applies to the commodity
world, especially including agriculture.**

Thank you for the opportunity to appear before you today and offer a
testimony on the federal crop insurance program on behalf of the
private-sector crop insurance delivery industry. I will be happy to
respond to questions at the appropriate time.