Crop Insurance and the 2012 Farm Bill — an Industry Perspective

1. Crop Insurance and the 2012 Farm Bill —an Industry Perspective Thomas P. Zacharias National Crop Insurance Services AAEA Meetings, Pittsburgh, PA July 26, 2011

2. Industry Role NCIS serves as the primary service organization for the crop insurance industry.

3. NCIS Functions • MPCI and Crop-Hail Program Development and Analysis • Policy Analysis, Loss Adjustment Procedures, Legal Analysis, Agronomic Research • Economic and Actuarial Analysis • Education and Training • Loss Adjuster Schools – 17 (1,692 attendees) • National Conferences – 5 (1,037 attendees) • Annual Regional/State Meetings – 14 (531 attendees) • Crop-Hail Advisory Organization and Statistical Agent • Licensed by Individual State Insurance Department • Public Relations and Industry Outreach

4. Presentation Overview • Industry Update • 2011 Season • Farm Bill Considerations

5. Industry Update • 1 “Consolidation” so far – • 16 AIPs last year at this time - Now 15 • Most AIPs/SRA holders are now subsidiaries of large insurance and / or financial entities

7. Who Are Those Guys?(Butch Cassidy and the Sundance Kid) • Rain & Hail Insurance Services • "...ACE BUYS R&H Ace Ltd…December 2010..." • ".. ACE Group - executive offices in Zurich, Bermuda and New York, employs more than 16,000 people ... • $83 billion in assets and $19 billion gross written premium in 2010..."

8. Who are those guys? • ARMtech - Lubbock TX, subsidiary of Endurance • “Endurance Specialty Holdings Ltd., global specialty provider of insurance and reinsurance, over 800 employees ... approx $8.4B in assets, $2.4B in shareholders’ equity” • ProAg – Amarillo TX, subsidiary of CUNA Mutual • “…positioned as a financially strong well capitalized insurer…” (approx $1.9B in GAAP Surplus, $15.6B in assets)

9. Who are those guys? • QBE Acquires Agro National November 18, 2010 • Acquisition Completed in March 2011 • June 2010 QBE purchased NAU Country, Ramsey, Minnesota QBE - • Top 25 insurers / reinsurers • 49 countries, Headquartered in Sydney Australia • QBE $42B in assets for 2010, approx $13.6 B in US gross premium

10. Who are those guys? • Everest Re buys Heartland (family operation out of Topeka, Kansas) Dec. 15, 2010 • Everest Re Group Ltd, Bermuda-based Insurer and Reinsurer($18B Assets, $4B Gross Premium) • Rural Community Insurance Services (RCIS) Anoka, MN (wholly owned subsidiary of Wells Fargo and Company) • Great American (founded 1872, 1st crop 1925) owned by Great American Financial Group • Farmers Mutual Hail – Since 1893

11. WHY? • Narrower Margins ($6B savings from 2011 SRA renegotiation) • Returns to Scope /Scale • IT processing economies • Increased regulatory burden, bla, bla, bla... Oh, Don't Forget • Payment Delays and A&O Cuts in 2008 Farm Bill Scored as approx $6B savings

12. Mild Digression • Nationwide Actuarial Snapshots

15. “…I have to admit it’s getting better…” Paul McCartney and John Lennon

16. The 2011 Standard Reinsurance Agreement (SRA) “…The world that we used to know People tell me it don’t turn no more The places we used to go Familiar faces that ain’tsmilin’ like before The time of our time has come and gone… Becker and Fagan – “Midnight Cruiser” Steely Dan – Can’t Buy a Thrill

17. RMA Statement 2010 Agricultural and Applied Economics Association (AAEA) Meeting – Denver, Colorado “Main purpose of SRA is to hire a delivery system”

18. 2011 Standard Reinsurance Agreement capped A&O payments limiting increase due to price spikes • $6B Estimated Reduction in A&O and Gain/Loss • If previous SRA in effect A&O payments would be about $2 billion • Under 2011 SRA, A&O expected at $1.3 billion, saving taxpayers about $700 million in 2011 • Regional Shifts in A&O Due to Caps – (unintended consequences)

19. The 2011 SRA Last Call “…You can’t always get what you want But if you try sometimes you might find You get what you need” Keith Richards and Mick Jagger

20. 2011 Season • Total Premium to be Record High • 2010 Premium $7.6B – 2011 Estimated at $11B (45% Increase) • 2011 Liab > $100B • SRA Gain / Loss Provisions Will be Tested

21. First spring crop under new Common Crop Insurance Provisions “COMBO” policy for producers seeking to protect against a yield shortfall. In addition, all the prior revenue policies have been consolidated into a “revenue protection” policy • New plans similar to prior APH and revenue plans. Change has been well publicized and agents and educators have been working with farmers for some time to explain the changes.

22. With high base prices, revenue guarantees close to or exceed cost of production • 85% revenue protection close to or exceed total production costs for major crops • 75% coverage also exceeding total costs for corn and soybeans and close for spring wheat and upland cotton. • Cotton and rice with opportunity to cover costs

23. The Farm Bill Challenge • Creating a bill that can pass: need to balance benefits across interest groups • Maintaining a farm safety net: • Balance between personal responsibility and privatization versus government regulation and payments • Balance across regions and commodities • Improving program effectiveness: all titles • Weighing the role of WTO concerns: production and trade distortions • Meeting budget constraints:with lower baseline, unfunded programs in baseline, CUTGO, PAYGO, no payment shifting

24. Q: What do you do when there are two elephants in the room?A: Introduce them. Direct payments Crop Insurance Groucho: “One morning I shot an elephant in my pajamas. How he got into my pajamas I'll never know.”

25. Why Crop Insurance is now in a Position of Strength 1--Producers share program cost 2--Producers take personal responsibility for risk management 3--Producers get individual risk management solutions 4--Producers receive indemnities in the timeliest way 5--Program can be quickly adjusted and is self-correcting 6--Payments are not in excess of losses 7--Protection can be used as collateral for loans 8--Program enables pre-harvest marketing 9--Producers not subject to payment limits 10--Producers benefit from the efficiencies of private sector delivery 11--Crop insurance can be green box under the WTO and has flexibility to meet WTO support limits 12--Crop insurance has contributed to deficit reduction

26. CI’s Farm Safety Net Principles Producers: 1--manage risks 2--bear risk and share in program costs 3--have effective risk management tools available Crop Insurance: 4-- the core risk management tool 5--widely and equitably available Private sector: 6--provides crop insurance options, shares in the risk of loss, adjusts losses for insurable crops

27. CI’s Farm Safety Net Principles (cont.) Government: 7--provides regulatory oversight and reinsurance 8--subsidizes farm programs and crop insurance to reduce effects of disruptions in agriculture; consistent with WTO Farm safety net: 9--farm programs augment not substitute for crop insurance 10--primarily tailored to address an individual farmer’s economic situation 11--payment eligibility requires losses 12--transitions to more market orientation/competition

28. Some Key Safety Net Options • Improve crop insurance • Southern crops, specialty crop coverage, APH/coverage issues, new products • Improve ACRE’s ability to cover uninsured production and make more attractive • Key need may be to redefine area to increase correlation between farm and area losses • Design new supplemental program (disaster) with or without continuation of ACRE • Key issues in design: • A disaster program or enhanced crop insurance? • Disaster designation required? • Individual or area plan? • Shallow loss coverage? • Multiple year price protection? • Require crop insurance for eligibility? • Accelerate timing of payments by using CI prices? • Apply payment and income eligibility limits? • Apply to whole farm or other unit? • Delivered by crop insurance companies?

29. “…But you know, the darkest hour is always just before the dawn…” David Crosby – “Long Time Gone”