Crop Insurance Today November 2017 - 24

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and use of index plans, and managing livestock
disease. All of this to say that, internationally,
there is a keen interest in managing agricultural risk through some form of insurance. To me,
and maybe this was my "listening ear bias," the
key ingredients appear to be: 1) some form of
public/private partnership; 2) cost sharing by
farmers; 3) risk bearing by the private and public sectors; and lastly, 4) the essential role of the
loss adjustment process.
Ingredients 1-3 are the core of our crop insurance system here in the United States. In the U.S.
we do have a successful public private partnership. It stands as a model of what can be accomplished when both the private and public-sector
work together to provide an infrastructure that
manages approximately $130 billion annually in
agricultural liability, if one includes both federally and state regulated lines of crop insurance.
"Keep up the good work."
My takeaway on the role of loss adjustment
was two-fold: 1) the need for a professionally
trained loss adjustment force; and, 2) the need for
an adequately sized loss adjustment force to manage large-scale claims events when they occur.
Here again, we are extremely fortunate in the U.S.
to have the capability to train adjusters, as well as
the capacity to handle large-scale claims events
such as the 2012 drought in the Cornbelt or the
multiple loss events as was the case this year with
hurricanes in Texas and Florida, drought conditions in parts of the Dakotas, prairie fires in the
Southern Plains of Kansas and Oklahoma, and
the California fires in Napa.
There are a couple of aspects regarding the
loss adjustment process that probably go unnoticed in the daily scheme of things. One, the
loss adjustment process in U.S. crop insurance is
based on sound agronomic research. Each year
NCIS supports approximately 15-20 agronomic research projects with leading agricultural
universities in the U.S., as well as Canada. The
results from these projects are then integrated
into the loss adjustment procedures used in the
field. This is done primarily for the state-regulated Crop-Hail line of business. Where applicable,
the results of NCIS agronomic research projects
are integrated into loss procedures for Federally-regulated crop insurance (MPCI). For more
than 90 years, this industry-supported research
has provided the science behind the industry loss
adjustment procedures. This ensures company
adjusters have the knowledge they need to de24

NOVEMBER2017

termine accurate losses, giving farmers peace of
mind knowing that their loss has been adjusted
accurately and fairly. "Keep up the good work."
Another aspect of crop loss adjustment that
probably goes unnoticed outside of the industry
is the importance of industry adjuster training
facilitated through NCIS. Industry loss adjustment schools and field days ensure that adjusters
are prepared and trained on industry approved
loss procedures, which provides consistency
among all companies. There is an article in this
issue highlighting the 2017 summer schools and
field days. More than 1200 adjusters were trained
during 16 schools that covered 23 different crops
and Whole-Farm Revenue Protection. Another
way that NCIS ensures adjusters are adequately
trained is through the "Crop Adjuster Proficiency Program" (CAPP®). CAPP® ensures that all
Federal crop adjusters have demonstrated an approved level of proficiency and reinforces efforts
to improve program integrity, enhance the image
of crop insurance, and protect consumers by having qualified adjusters. A main goal in the development of CAPP® was to achieve uniformity in
licensing of crop adjusters across state lines and
reduce reciprocity issues between states. "Keep
up the good work."

Some Reflections and
Observations on the
July GAO Report

The Government Accountability Office's
(GAO) July report entitled "Crop Insurance:
Opportunities Exist to Improve Program Delivery and Reduce Costs" no doubt, deserves a few
comments before closing out 2017. The report
recommended that revenue returns of the Approved Insurance Providers (AIPs) be dramatically slashed via changes to the existing Standard
Reinsurance Agreement (SRA). The GAO in its
report views AIP revenues stemming from the

A main goal in the
development of CAPP®
was to achieve uniformity
in licensing of crop
adjusters across state
lines and reduce reciprocity
issues between states.
"Keep up the good work."

SRA as a "program cost."
The report has at least two fundamental
shortcomings. First, a heavy reliance upon an
outdated 2010 Milliman study used during the
2011 SRA renegotiations, which made the apples
to oranges comparison of Return on Equity to
Return on Retained Premium. These two metrics
are not directly comparable and to compare the
two is simply misleading. Moreover, buried midway through the report, page 26 to be exact, GAO
acknowledges that realized returns have been less
than the 2011 SRA targeted return.
A second fundamental flaw is the assumption
that the Administrative & Operating (A&O) expense reimbursement is adequate to cover AIP
delivery expenses. The Grant Thornton analysis
(http://bit.ly/2iDHihW), as well as recent analysis sponsored by the National Corn Growers
Association (http://bit.ly/2hRBBQ8), clearly
demonstrate the existence of an A&O deficit. The
A&O deficit being the difference between A&O
payments made to the AIPs to cover their delivery expense and the AIPs actual expenses. This
deficit - calculated to be $700 million a year by
Grant Thornton - is real and at the same time
is totally ignored by crop insurance opponents.
Lastly, and what I feel is the primary concern
with the report, is the recommendation to apply
increases to the quota share provisions in the SRA
to obtain program savings. An increase in the quota share provision is simply bad policy. I believe
that such a proposal is ultimately distortionary
and has disproportionate effects. That is, it would
introduce perverse incentives for AIPs to intensify
efforts to compete in areas that are currently less
risky at the expense of other regions. In addition,
due to the existence of the A&O deficit, increasing
the quota share results in a disproportionate loss
of net income for the AIPs. Our estimates indicate
that raising the quota share provision by a point reduces the AIP pre-tax net income by 6.4 percent.
Policymakers need to understand that ad hoc and
arbitrary proposals to generate potential savings
can result in disastrous financial outcomes for the
private-sector delivery system and the constituents
served by our industry. (Our work is never done...)

Reflections and
Observations on Opposition
to Farm Policy (and crop
insurance in particular)

Throughout the past several years, NCIS has
conducted a series of focus groups and surveys of

http://www.bit.ly/2iDHihW http://www.bit.ly/2hRBBQ8

Table of Contents for the Digital Edition of Crop Insurance Today November 2017