The proposed Federal Budget could negatively impact the crop insurance industry, with about $26 billion of the proposed savings affecting crop insurers through capped underwriting profits along with reduced eligibility and lower subsidies, according to Keefe, Bruyette & Woods.
The revised budget hopes to make about $47 billion of Farm Bill-related savings between 2019 and 2028.
It would impact the insurance industry with reduced subsidies, lowering the average subsidy to 48% of premiums from 62% and cut the maximum underwriting profit margin to 12% from its current 14.5%.
KBW estimates this “would absorb over 17% of profits during good years, without necessarily lowering losses during tougher years.”
During the 20 years between 1997 and 2016, the industry reported about $4.5 billion of crop underwriting profits, KBW said that if the profit cap had been in place during this period, it would have lowered cumulative profits by over 46%.
However, KWB said that since not all of the industry’s Multiple Peril Crop premium stems from government-subsidized products this analysis overstates the impact of a potential margin cap.
Whether or not the budget will pass as proposed remains to be seen, however, it posts a pending risk to crop insurers’ premium volumes and expected underwriting profits.
The preliminary Federal Budget proposal would further eliminate premium subsidies, commodity payments, and conservation programme eligibility for farmers with Adjusted Gross Incomes of over $500,000, and although these larger farmers only make up an estimated 2.1% of the total, they likely account for a significant percentage of crop insurance premiums.
Further changes would include: “tightening payment limits for farmers and eliminating payment limit loopholes”, with proposed commodity support payment limits of $125,000 per producer (or $250,000 per married couple), along with eliminating “special treatment” for peanut farmers, who can qualify for twice when they also grow other crops.
“Eliminating funding for those programs with limited outcomes,” focusing on ensuring that participants are eligible for Conservation Stewardship Program contracts, and that payments are not excessive reviewed as part of an audit.
And “Eliminating funding for the Regional Conservation Partnership Program”, and “Eliminating programs for which there is no Federal purpose”, such as commodity-specific support programs and mandatory livestock feed assistance,” KBW explained.
While it’s still not clear whether these changes will be approved, KBW advised insurers to watch the proposal, pointing to last December’s tax reform which included previously unsuccessful modifications to internal offshore cessions, as an example of the plausible extent of legislation change within the current U.S. regime.