Crop reinsurance agreement caps agent commissions

Crop insurance agent commissions will be capped if the Federal Risk Management Agency has its way. The second draft of the standard reinsurance agreement says crop insurance agent commissions are to be no more than 80 percent of what the RMA provides to the company in administrative expenses for the policy.

Some reinsurers are currently paying as much as 27 percent in commissions to agents, says Bill Murphy, administrator of the Agency.

“How they’re making this work is that they’re betting that they’re going to have an underwriting gain in order to offset that cost,” Murphy told Brownfield Tuesday. “Well, what happens if we have another [year as bad as] ’93, say in Iowa?”

 AUDIO: Bill Murphy (8 min. MP3)

With that level of commission, Murphy says a bad year would put a financial strain on a company. As a concession, the RMA is proposing that agents be compensated with profit sharing, but he says agents aren’t buying it and Murphy says he’s surprised by their attitude.

“I have to question the logic,” says Murphy. “Would [agents] prefer that a company go out of business? You can just imagine in today’s environment, with the amount of insurance we’re now carrying, what kind of market disruption would occur if one of these major carriers went out of business.”

Murphy says the agreement is being renegotiated to control underwriting gains along with administrative and overhead costs. Combined, he says they went from $1.8 billion in 2006 to $4 billion in 2009.

“This is taxpayer money,” says Murphy. “There are better ways to spend this money.”

Murphy says the purpose of renegotiating the reinsurance agreement is to get control of costs.

“We’d like to make sure the companies get a reasonable rate of return [and] that the agents get a good amount of money to deliver the program,” says Murphy. “They are key to the success of this program.”