As corn prices rise, regulators on lookout for crop insurance scams

Bruce Rushton

Farmers aren’t the only people welcoming record-high corn prices.

Skyrocketing prices have proven a bonanza for crop-insurance sales agents, and regulators say they’re cracking down on schemes that build business for agents while reducing costs to farmers.

Caught in the middle are taxpayers, who heavily subsidize the U.S. crop insurance system.

Regulators say schemes vary, but they essentially involve insurance agents rebating part of their sales commissions to farmers. Under federal law, all policies cost the same, no matter who sells them, so rebating commissions is one way for agents to gain business.

However, rebating commissions violates state and federal law. In recent months, the U.S. Department of Agriculture and the Illinois Department of Financial and Professional Regulation have issued bulletins to agents saying government enforcers are on the look-out for rebate schemes, which are getting more popular as crop prices – and commissions – escalate.

Besides subsidizing crop insurance premiums, taxpayers help pay overhead costs for the policies, and commissions are one of the biggest administrative expenses. In 2006, public subsidies for overhead approached $1 billion.

The case of Johnson Risk Management shows how big the bucks can be.

In October, Jay R. Johnson, operator of Waverly-based Johnson Grain and Johnson Risk Management, paid a $5,500 fine and signed a consent order with the state Department of Financial and Professional Regulation. The department said Johnson Risk Management had promised to give farmers a portion of its sales commissions.

In 2006, Johnson Risk Management collected nearly $230,000 in commissions from a single insurance company, according to state records. Because of the increased price of corn, those commissions would be worth about $470,000 today, according to Bruce Babcock, an economist at Iowa State University who believes commissions are too high.

Johnson, who was named Illinois businessperson of the year in 2007 by the U.S. Small Business Administration, denies any wrongdoing. He said he signed the consent order only because it would have cost too much money and time to fight it.

“You can tell by the size of the fine that this was minor, and it came from a complaint from another agent,” Johnson said.

Phil Lackman, vice president of government relations for the Professional Independent Insurance Agents of Illinois, confirmed that Johnson’s competitors turned him in. There’s nothing wrong with that, he said.

Insurance agents benefit

Insurance agents do the same amount of work no matter what the price of corn is. But when corn prices rise, farmers pay higher premiums, and the companies that underwrite crop insurance policies – not to mention the taxpayers who subsidize them -- face considerably more risk as well.

“They (agents) are benefiting greatly,” said Bruce Trost, executive vice president of Farm Bureau Mutual Insurance Company based in Iowa. “They don’t have the risk exposure that we have as a company.”

Iowa State’s Babcock says crop insurance agents made an average of $650 per policy in 2006. This year, he said, the average is nearly $1,400.

Ultimately, Babcock said, the money comes from taxpayers who subsidize crop insurance.

“It’s a taxpayer scam, is what it is,” Babcock said. “The agents hate this when I point this out: 100 percent of the increase in commissions in the crop insurance industry comes from taxpayers.”

Lackman says agents work hard for the money.

“I’d say Mr. Babcock is not out in the field writing crop insurance today,” Lackman said.

But lots of others are, and many are fresh to the game.

“There’s been a lot of new players, if you will, in the marketplace,” Lackman said. “It’s what they feel is easy money.”

Johnson, who has sold crop insurance since 2001, estimated that fewer than 10 percent of farmers bought crop insurance when he started out. Now, more than 70 percent of farmers buy policies.

“There’s profit in it now, where there wasn’t when I first started,” Johnson said. “Anyone who has an insurance license and knows any farmers is trying to sell crop insurance because of the high commissions.”

Farmers pinched

Crop insurance is complicated, so experience is important, Lackman said. Nonetheless, the insurance-agent lobby has agreed to a 2 percent reduction in the amount the government pays to cover overhead. The proposed reduction is contained in the farm bill now before Congress.

“We acquiesced to that,” Lackman said. “The reality is, there were going to be cuts to the program. There could have been a lot greater cuts.”

Meanwhile, farmers are feeling pinched.

The price of crop insurance in Sangamon County climbed this year, from less than $50 an acre to $70 for policies typically sold to large-scale farmers, said Mark Reichert president of the Sangamon County Farm Bureau. The government paid 48 percent of premiums, down from 55 percent last year, he said.

Premiums are due at harvest, and farmers had until March 15 to decide how much coverage to buy.

“With the way the prices were with premiums this year, there were a lot of guys who struggled and struggled and struggled, all the way up to the 15th of March,” said Reichert, whose family farms about 2,400 acres. “It was a constant battle as to whether or not it was in their best interest to re-up on insurance.

“Some of them scaled back.”

Bruce Rushton can be reached at (217) 788-1542.

'Insurance' is actually guarantee for farmers

Crop insurance is somewhat a misnomer.

Taxpayer-subsidized insurance is a revenue guarantee for farmers. The government dictates what policies can be sold, and it also dictates the price.

Farmers can choose from a half-dozen policies. In general, they work like this:

Each spring, farmers decide how much, if any, insurance to buy. Taking into account the price of corn in the spring, the policies guarantee a certain amount of revenue come harvest. The size of the guarantee dictates the premium paid to insurance companies, a portion of which comes from taxpayers.

Started in 1938, crop insurance programs have ratcheted up greatly in cost and acreage covered since 1980, when Congress increased subsidies. Subsidies were dramatically increased again in 2000 in hopes of reducing disaster-assistance programs to bail out farmers hit by drought, floods or other natural disasters. Nonetheless, Congress last year approved at least $3.4 billion in aid to farmers hit by bad weather.

No farmer can be refused insurance, no matter his risk or claim history, and insurance companies are allowed to assign high-risk policies to the government.

The Washington Post in 2006 reported that taxpayers lost $1.5 billion on crop insurance in eight years while private insurance companies made $3.1 billion in profit.

The Government Accountability Office also has long criticized the crop insurance program as riddled by waste and inefficiency. Last year, the GAO reported that private insurance companies averaged a 17.8 percent annual rate of return on crop insurance between 2002 and 2006.

In 2006, the United States Department of Agriculture estimated that $62 million in claims were paid out due to waste, including payments made based on incomplete or missing paperwork.

Bruce Rushton can be reached at (217) 788-1542.

Crop-insurance industry still opposed to competition on price

The crop-insurance industry has long opposed price-based competition. Just ask Steve Baccus.

Baccus is president of the Kansas Farm Bureau and chairman of the board of Farm Bureau Mutual Insurance Company. Farm Bureau Mutual owns a company called Crop1, which tried revolutionizing the crop-insurance industry by offering discounts on premiums.

Five years ago, Crop1 pounced on a little-known clause in federal law and convinced regulators that it could reduce administrative costs. Under the law, if a company could prove that it could cut overhead, it could pass the savings along to farmers and sell insurance at a discount.

“If it doesn’t cost that much to administer the program, they ought to get some of their money back,” Baccus reasons.

Besides streamlining claims-processing and allowing farmers to do business via the Internet, Baccus said Crop1 reduced its costs by cutting commissions, which experts say is the biggest cost of selling and administering policies.

That amounted to hardball in the rarified world of crop insurance, where just 16 companies issue policies. The American Association of Crop Insurers set up a section on its Web site devoted to attacking the law that allowed Crop1 to undersell the competition, and Congress scuttled the program. This year was the last that farmers could buy the discounted insurance.

“It’s never going to be seen again,” Baccus said. “It’s a cutthroat business. The way you grow your business is by taking business away from another company.”

Crop1, which sells policies in Illinois and 21 other states, says it has saved farmers $4 million. The company collected $236 million in premiums last year, said Bruce Trost, executive vice president of Farm Bureau Mutual Insurance, which acquired Crop1 in 2006.

In convincing Congress to end the discount program, the crop insurance association argued that the U.S. Department of Agriculture doesn’t have the expertise to regulate a market based on prices. Customer service would suffer, lobbyists said.

The association also warned that companies offering discounts on premiums would cherry-pick the biggest, lowest-risk farmers, which would amount to discrimination. However, under federal law, insurance companies cannot refuse to sell crop insurance to any farmer who wants it.

Baccus said the government should give business a freer hand.

“We need to instill competition, period, into the crop insurance system,” Baccus said. “Let’s let private enterprise develop the crop insurance products that farmers need and will buy.

“It’s something really neat called capitalism.”

Bruce Rushton can be reached at (217) 788-1542.


The cost to taxpayers who subsidize crop insurance has increased dramatically since 2000, when Congress cut costs to farmers.

Acres insured Premium Subsidies Subsidies for administrative costs

2001: 211,000,000 $1,772,000 $626 million

2002: 214,000,000 $1,741,000 $743 million

2003: 217,000,000 $2,042,000 $859 million

2004: 221,000,000 $2,477,000 $869 million

2005: 246,000,000 $2,344,000 $861 million

2006: 242,000,000 $2,680,000 $903 million


Corn Belt states, including Illinois, have historically generated more premiums than claims. Conversely, states such as Texas, North Carolina, Oklahoma and North Dakota have more claims than premiums.

Acres Insured Premiums Paid Claim Losses

2001: 14.5 million $171.3 million $44.1 million

2002: 14.6 million $171.5 million $140.1 million

2003: 14.9 million $205.6 million $133.2 million

2004: 15.1 million $272.4 million $103.1 million

2005: 15.9 million $277.3 million $214.2 million

2006: 17 million $419 million $42.3 million

2007: 16.7 million $620.2 million $79.7 million