Today, farmers manage their business risks in ever-more sophisticated ways.  For a growing number of producers, federal crop insurance is an important part of their business plan.
 About 63% of insurable acres in the United States are now covered by crop insurance.  Of these insured acres, about a third have “catastrophic” coverage, while two-thirds are insured at higher levels of protection.  The crop insurance delivery system has effectively been privatized, with 17 companies selling policies through insurance agents.  However, the government still subsidizes both the premiums farmers pay for insurance and the costs companies incur in selling it.

 These subsidies may be necessary, but they are not cheap.  According to USDA, the government will spend $1.8 billion on crop insurance in 1998 even after taking farmers’ premiums into account.  Of that amount, about 33% will go to companies in 1998 and 62% to farmers, with the remainder being administrative costs.  Last year, however, 73% of the government’s costs were payments to insurance companies, and only 21% were payments to farmers.  The difference, according to USDA, is that indemnities will be higher in 1998, while companies’ delivery expenses and underwriting gains will be lower.

 USDA publishes the crop insurance program’s “loss ratio,” which equals indemnities divided by premiums.  Anything below 1.0 indicates a good program performance but does not mean the program is cost-free.  From 1985 through 1993, the loss ratio was never below 1.0 and was well above 2.0 in each of the disaster years 1988 and 1993.  Since then, however, it has been 1.0 or less, and well below that in the last two years: 0.81 in 1996 and 0.55 in 1997.

 Under legislation passed in 1994, agents’ sales commissions were supposed to be paid out of discretionary budget accounts — that is, annual appropriations.  The government’s overall discretionary spending caps, however, are tight.  Congressional appropriators will find it difficult to accommodate the approximately $200 million that would be needed to pay these costs out of discretionary accounts.

 Therefore, the crop insurance industry and the Administration seek to have these costs shifted back into the mandatory budget accounts under the control of our committee.  Of course, this would not be easy either.  Under the Budget Act, we would need to offset the $200 million annual cost by reducing other crop insurance costs or by cutting other spending under our jurisdiction.

 Everyone would like a long-term solution to this problem.  We should not need to legislate on crop insurance every year, and neither should the appropriators.  So I am prepared to help find money to make sure our farmers have access to crop insurance.

 However, there should be no money without reform.  I ask all my colleagues on this committee to join me in saying: We should not simply throw money at this problem.  We should insist on market-oriented reforms that will lead to more competition while preserving farmers’ access to affordable insurance.

 Most of the savings necessary to fund the $200 million in annual sales agents’ commission costs should be generated internally, through reforms in crop insurance itself.  It is not likely all the funds can be generated in this way, so the committee will need to examine other agricultural programs under its jurisdiction.

 I have prepared a concept paper that illustrates how crop insurance can be reformed.  I will introduce it as a bill in the near future, but would like to receive comments first from my colleagues and the public.  It was provided last week to all members of the committee and to potential witnesses at this hearing.  It is available to the public today.

 Under this proposal, companies’ administrative expense subsidies would be reduced by two percentage points beginning in 1999, while the fees farmers pay for catastrophic coverage would increase.  Companies would begin to pay premiums for government reinsurance of their risks.

 In exchange for lower subsidies, companies should be given more freedom to compete for farmers’ business and design innovative products.  Beginning in 2000, my proposal would begin to change the role of USDA’s Risk Management Agency from control and product design, to regulation and oversight.  The RMA would still approve prices but would no longer set them.  It will surprise many Americans to learn that insurance companies cannot now compete on price to earn farmers’ business.  Under my proposal, they will be able to do so.

 Eventually, we should phase out government-designed policies except in areas where there is not sufficient private-sector interest.  However, all policies would continue to be subsidized.  Ideally, I would like to see a crop insurance industry without federal subsidies, but it is doubtful this will happen in the near future.

 We must make sure that farmers have the same access to affordable crop insurance as under the present system.  The alternative would probably be a return to ad hoc disaster payments at some point — an outcome which would, itself, be a disaster.

 I am certain that some insurance companies would prefer not to see their subsidies reduced.  I am open to realistic alternatives.  I repeat, however, that simply spending money without reform will not solve our problems.  That should not be good enough for this committee or this Congress.
 I thank all our witnesses for the effort they have put into preparing their testimony and look forward to hearing their thoughts.