Source: ASFMRA

Sixteen U.S. senators, including the Agriculture Committee's top Democrat and Republican, sent a letter to USDA scolding it for proposing $6 billion in cuts to crop insurance.

The American Society of Farm Managers and Rural Appraisers is also unhappy with the new agreement. Not only will companies be required to forgo their legal rights but USDA is requiring the companies to force all of its agents to sign an agreement foregoing the agent's right to sue USDA over the changes to commission cuts. This is unprecedented in a federal agreement. At this juncture, given the "take it-or leave it" offer, the companies will be forced to sign the agreement, ASFMRA contends.

Farm managers with crop insurance agencies are likely to be impacted by the cuts, especially those located in the Midwest. The proposed SRA establishes three new caps that will impact how much companies are able to compensate agents. ASFMRA interpreted teh cuts below.

First, the proposed SRA caps total buy-up Administrative and Operating (A&O) payments at close to $1.2 billion for reinsurance year 2011 (this total was close to $1.8 billion in 2008). A&O payments from RMA cannot exceed this cap. If they otherwise would, A&O payments are prorated.

Roughly $4 billion out of the $6 billion in savings that USDA estimates comes from the A&O buyup cap. In reality, given falling crop prices and lower volatility rates, savings are likely to be significantly less and the cap may not bite as hard as USDA assumes at least in the near term.

Second, the proposed SRA includes an 80 oercent compensation cap (80 percent of A&O payments plus CAT LAE) on "persons involved in the direct sale and service of any eligible crop insurance contract." The cap is not per policy as it was in the previous draft but binds at the State. So, total compensation cannot exceed 80 percent of A&O and CAT LAE in a state for persons involved in the direct sale and service of any eligible crop insurance contract (meaning agents).

The third and final cap — if a company accrues an underwriting gain (nationally, not by state), it may increase compensation in a state to 100 percent of the A&O payments plus its net underwriting gain (although this language is ambiguous and somewhat unclear).

For more details on the cuts

Read the senators' letter