MANKATO, Minn. (DTN) -- Crop insurance companies may have to pay out large claims this year, but that may help keep support for the federal crop insurance program on Capitol Hill, the administrator of the Agriculture Department's Risk Management Agency said here this week.

"It wouldn't be a bad thing at all" if claims are high this year, RMA Administrator Bill Murphy told a crop insurance conference sponsored by the University of Minnesota Center for Farm Financial Management on Wednesday.

The current high farm prices have created an image that "farmers are making all this money," he said, and higher losses would show that crop insurance "isn't just a money-making machine."

"We've got to make sure these programs are around when there are bad times," Murphy said.

Murphy praised agents for their role in convincing farmers to take out crop insurance, and also said that the agency is receiving praise from Capitol Hill for the quick service farmers are getting as they deal with the many weather problems around the country this year.

"This program wouldn't be where it is today without the private agent system," he said.

Crop insurance is "going to be the linchpin of the next farm bill," Murphy said, warning that the success of the program and its current size "catches the eye on the Hill."

Murphy noted that the number of acres insured has risen from 256 million in crop year 2010 to 263.8 million in crop year 2011, while total premiums have risen from $7.6 billion in 2010 to $11.7 billion in 2011.

Crop insurance companies' liabilities -- or values insured -- have risen from $78 billion in 2010 to $111.1 billion this year. Insurers paid out $4.2 billion in indemnities in 2010. So far this year, indemnities have reached $700 million, but that is an early figure with fall harvest just beginning for most of the Midwest.

The federal government pays an average of 65% of the premium cost as well as paying the companies' administrative and operating expenses. Between the crop premium subsidy and the administrative and operating expenses, the federal government pays 75% of the cost of the program.

In an interview after his presentation, Murphy said the program is likely to cost the government $9 billion this year, with $6 billion to $7 billion in premium subsidies. A spokeswoman for the Risk Management Agency told DTN this week USDA will pay at least $8.5 billion, but higher losses in Texas and other drought states could push the subsidy total above $10 billion.

That makes it the largest farm program, higher than direct payments at about $5 billion, and traditional programs that pay farmers when prices are low. Prices are so high that those programs amount to almost nothing at the present time.

The increasing importance of crop insurance pushed proposals to require farmers who get federally subsidized crop insurance to comply with sodbuster and swampbuster rules. Of such plans, Murphy said, "The last time we tried this it was a nightmare." But, he added, "if done right, it could work."

Between drought and flooding, cotton and wheat "got off to a pretty bad start," Murphy said, but the full picture for this year's farm losses depends on what happens with the corn and soybean harvests. Of the major U.S. crops covered under crop insurance, corn has the greatest liability at $31.6 million, followed by soybeans at $18 million, wheat at $6.4 million and cotton at $2.9 million, he said.

Murphy also told the agents that RMA is going through a regular review of crop insurance rates to determine whether modern farming methods have reduced risk and whether the rates can be lowered.

Midwestern farmers have complained that their rates are too high and believe that they are subsidizing growers in Texas, where losses occur more frequently. But Murphy said the loss ratios in the two states are the same. Iowa does have losses less frequently than Texas, he said, but when they occur in Iowa, they are bigger. Most of the increase in crop insurance rates in recent years, he said, has come from the higher value of the crop.

Murphy said RMA is also examining how years should be rated and the length of period that is considered when determining risk levels. The trend in the insurance industry, he said, is to give more weight to recent years, on the theory that more recent years are more likely to predict future risk. "How applicable is the yield 10 years ago to the present?" he asked.

Murphy told the agents that he understands that the standard reinsurance agreement the Obama administration negotiated to restrict agent commissions is considered "a thorn in your side," but he said he thought it was better that the negotiation took place before the current budget concerns in Washington.

He said he realizes that California agents have complained about the impact of the agreement on them, but said if RMA would change it, all the companies would have to agree.

Although both company executives and agents complained bitterly when the companies accepted the administration's final offer on the reinsurance agreement, Tom Zacharias, the president of National Crop Insurance Services, said in another session Wednesday that "the agreement at present is workable."

(CC/AG)

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