Canadian Division Serves Alberta, Manitoba & Saskatchewan
Everyone Benefits from a Public\Private Crop Insurance Partnership
by Rob Goeres
Vice President and Manager, Canadian Division
Rain and Hail Insurance Service, Inc.
Farming is no longer a way of life, it is a risky cash intensive business. Financial risk associated with crop production has never been greater due to weather and price variability and increasing input costs. In this environment, broad spectrum multiple peril crop insurance is a necessary risk management tool all producers must consider.
Private insurers are interested in providing multiple peril crop insurance products, however, the catastrophe risk associated with broad spectrum crop coverage makes it impossible for the private sector to provide a comprehensive universal program for producers at affordable premium rates. The fundamental problem is that agricultural disasters, such as drought, usually effect entire geographical regions of the country. This is in sharp contrast to home-owners fire policies where losses are scattered and in any given year the insurer has the opportunity to offset a high percentage of the losses with its' current annual premiums. This fact has resulted in the current delivery and design of our crop insurance programs by government agencies with premium subsidy support to make the coverages more affordable.
Formation of a public\private partnership in the United States
In the mid 1970s, government policymakers took a renewed interest in making crop insurance work better at the farm gate. Despite significant premium subsidies, voluntary participation rates were low and growers were dissatisfied. Their own surveys indicated that the main causes of this low participation were due to:
- coverage levels not high enough
- insurance plans did not fit the farms
- service was slow
- indemnities were inadequate
- premiums were too high compared to the perceived value of the protection, and
- the government frequently provided ad-hoc disaster payments when big disasters occurred thus reducing incentive to purchase protection.
Those involved in reforming the program believed that an effective crop insurance program must include a wide variety of protection choices making it possible for individual growers to buy coverage consistent with their risk attitudes and financial needs. This approach was in sharp contrast to one-size-fits-all ad hoc disaster programs that had been previously developed in Washington, D.C.
There was interest in designing a program that coupled the financial capacity of government with the insurance expertise and risk management counseling strengths of the private sector. In 1980 a crop insurance reform law provided direction to the U.S. Department of Agriculture to utilize the private sector to the maximum extent possible.
The resulting partnership is not without its' detractors but now almost 70 percent of the eligible acres are insured on a voluntary basis with record low administrative costs, the program is more actuarially sound, has higher farmer satisfaction levels and the private companies bear a significant portion of the underwriting risk. It is a challenging venture that is still under is continual review almost 20 years later but clearly farmers have benefitted.
The Benefits of a Public\Private Partnership
The following points outline the benefits Canadian farmers could expect to gain through private sector participation. These benefits include:
- Improved products
Products can be improved in a number of ways but usually price and higher broader coverages are the main concern from the farmers standpoint. The twin spurs of profit seeking and competition provide strong, reliable incentives for companies to cover niche markets to enhance the government sponsored program. The private sector has expertise and strong incentives to continually improve products because it wants farmers to be satisfied they are protecting their financial soundness. An unhappy customer may not only cancel their crop policy but other policies he has purchased from a company.
- New products
To improve their sales private companies respond to customer demands. In a competitive business environment, new private products would be expected to outdo those currently developed by the government because competing companies aggressively invest in market research and development. The private sector has the financial capability and unmatched flexibility to provide niche supplemental or stand alone coverages to enhance government sponsored programs.
- Expanded coverage
Product delivery through professionally trained insurance brokers will produce more sales of expanded coverages because they have access to information on the total farm risk. The broker will likely be selling other lines of insurance to the same farmer giving him the ability to design full blown risk management strategies and provide market feedback to the companies. The government system does not provide strong incentives, marketing, access to companion lines of insurance, and risk management counseling expertise to the same degree as the privates sector.
- Reduced administrative expenses
It is reasonable to expect the administrative expenses as a percentage of premium will decline because competition and profit goals drive expenses down and drive income, efficiency, and productivity up. The cost for private delivery is commission driven, a variable expense based on performance, rather than the fixed cost currently incurred by government. Information technology expenses incurred by government to develop and maintain systems will be reduced as the existing management information systems of the partnering companies are integrated.
- Reduced premiums
Costs are reduced by improving loss experience and cutting administration expenses to the extent they are reflected in lower premiums. Companies have incentive to keep premiums low to attract customers and beat the competition. These competitive forces are so strong that provincial regulations must require companies to maintain sufficient premium reserves (surplus) to maintain solvency. Private sector participation on the risk reduces the need for the government to purchase reinsurance.
- Improved loss experience
When insurance companies expose their own money they have incentive to reduce program abuse and faulty design. The marketing expertise of the private company should lead to higher participation levels resulting in an improved geographical spread of business which generally improves underwriting results. Improved underwriting is passed on to farmers in lower premiums.
- Less complexity
Complexity can cause confusion, marketing problems, misunderstanding and dissatisfaction that usually reduces participation. However, complexity is not to be confused with multiple products and other choices. Private companies tend to provide products that are more balanced between meeting the customers needs and being explainable and affordable. We have extensive experience and expertise in developing insurance products that are friendly in their design and contemplate other farm insurance coverages.
- Arms Length from Government
A binding financial agreement between the companies and the government must exist as far as the insurance aspects are concerned. The government should retain all responsibility and operation of the policy, rating approval, and premium subsidy of approved programs. Government departments tend to intermingle policy and delivery functions and when this intermingling occurs, usually the delivery function suffers. A private sector model based on contract law with a clear separation of policy, rating and delivery functions will benefit farmers with improved timeliness and program stability.
- Fewer disruptive program changes
The formality of operating agreements containing notice clauses designed to keep the relationship on a sound footing will go a long way to minimize tinkering with the program. Last minute revisions or retroactive program changes cause numerous legal, financial, operational and communication problems and need to be avoided if at all possible. The farmer must be guaranteed proper notice and good communication in order for him to make his management decisions.
- Improved customer service
Customer service and high customer satisfaction is the hallmark of successful companies competing for business. Multi-line private sector companies cannot afford to provide poor service and drive away crop customers because of the leveraged effect this may have on overall company sales.
- Improved marketing
The private sector has a successful proven track record of marketing a wide variety of insurance products. Private sector flexibility combined with powerful competitive and profit seeking forces, add on products, professional selling and localized delivery all supplement our ability to outperform the public sector.
- Increased sales( add-ons and new products)
Increased sales rely on products being in demand with a solid marketing thrust by a vendor. The private sector relies solely on sales for income while public sector entities can exist on supplemental injections of cash from taxpayers when sales fall short. The public sector does not have anywhere near the same accountability to produce results.
We will become the farmer's ally advocating for the maintenance of premium subsidies at current or higher levels, and for program enhancements, because our success ultimately hinges on farmer costs and acceptance.
Canada Could Benefit Too
The public private partnership that was developed in the U.S. is a model that can help us redesign and improve our crop insurance programs. The U.S. partnership may not be exactly right for Canada but it does prove private sector participation and expertise is important in the design of affordable and meaningful risk management tools for our farmers. We should learn from the U.S. experience and fast track their successes while developing new and unique ideas of our own. Just as farmers can manage their own operations better than the government so should we expect the private insurers to do a better job of administering a crop insurance program.
Crop insurance is categorized as a "green box" neutral program under international Free Trade Agreements making it even more important to have a successful design that works for our farmers. Full utilization of private sector expertise in government sponsored multiple peril crop insurance will result in benefits to tax payers, the government, and farmers. The private insurance industry is interested in helping Canadian governments develop a public/private partnership and is willing to work with interested agricultural groups and government officials to develop ideas that will improve current programs.
This article appeared in the July / August, 1999 issue of Pro-Farm magazine, the official publication of the Western Canadian Wheat Growers Association.