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Reduce Premium Subsidies on Buy-Up Coverage by 5 (Against a Loss of Revenue Caused by Low Prices, Low Yields Percentage Points

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Reduce Premium Subsidies on Buy-Up Coverage by 5 (Against a Loss of Revenue Caused by Low Prices, Low Yields Percentage Points 58 ANALYTICAL PERSPECTIVES • Reduce premium subsidies on buy-up coverage by 5 (against a loss of revenue caused by low prices, low yields percentage points. or a combination of both) or yield protection (for produc- tion losses only), all within the same policy. RMA also • Increase the government’s share on underwriting continues to pursue a number of avenues to increase pro- gains to 20 percent from 5 percent. gram participation among underserved States and com- • Reduce the face value premium on Catastrophic modities by working on declining yield issues and looking Crop Insurance (CAT) by 25 percent and charge an at discount programs for good producers who pose less administrative fee on CAT equal to the greater of risk. $300 or 25 percent of the (restated) CAT premium, subject to a maximum fee of $5,000. Insurance against Security-Related Risks In addition to these changes, the Farm Bill authorized Terrorism Risk Insurance the Federal Crop Insurance Corporation (FCIC) to have the option of renegotiating the financial terms and condi- The Terrorism Risk Insurance Program (TRIP), autho- tions of the Standard Reinsurance Agreement with the rized under P.L. 107-297, helped stabilize the insurance crop insurance companies during FY 2010. If the FCIC industry during a time of significant transition follow- exercises this authority, it could result in more efficiency ing the terrorist attacks of September 11, 2001. Initially, for risk sharing between the government and the crop in- TRIP was a three-year Federal program that provided surance companies. a system of shared public and private compensation for There are various types of insurance programs. The insured commercial property and casualty losses arising most basic type of coverage is CAT, which compensates from certified acts of foreign terrorism. In 2005, Congress the farmer for losses in excess of 50 percent of the indi- passed a two-year extension (P.L.109-144), that narrowed vidual’s average yield at 55 percent of the expected mar- the Government’s role by increasing the private sector’s ket price. The CAT premium is entirely subsidized, and share of losses, reducing lines of insurance covered by the farmers pay only an administrative fee. Higher levels of program, and adding an event trigger amount for Federal coverage, called buy-up coverage, are also available. A payments. premium is charged for buy-up coverage. The premium In December 2007, Congress passed a seven-year ex- is determined by the level of coverage selected and varies tension (P.L.110-318) that broadened the program to in- from crop to crop and county to county. For the ten prin- clude losses from domestic as well as foreign acts of ter- cipal crops, which accounted for about 80 percent of total rorism. For all seven extension years, it maintains an liability in 2008, the most recent data show that over 79 insurer deductible of 20 percent of the prior year’s direct percent of eligible acres participated in the crop insur- earned premiums, an insurer co-payment of 15 percent of ance program. insured losses above the deductible, and a $100 million RMA offers both yield and revenue-based insurance event trigger amount for Federal payments. It changed products. Revenue insurance programs protect against mandatory recoupment provisions, requiring Treasury to loss of revenue stemming from low prices, poor yields, or collect 133 percent of the Federal payments made under a combination of both. These programs extend traditional the program, and accelerated time horizons for recoup- multi-peril or yield crop insurance by adding price vari- ment of any Federal payments made before September ability to production history. 30, 2017. RMA is continuously trying to develop new products The Budget baseline includes the estimated Federal or expand existing products in order to cover more types cost of providing terrorism risk insurance, reflecting the of crops. One of the innovative products being refined for 2007 extension of the TRIP. Using market driven data, 2009 is the Biotech Endorsement (BE) for non-irrigated the Budget projects annual outlays and recoupment for corn intended to be harvested for grain, including an ex- TRIP. These estimates represent the weighted average tension of the endorsement to irrigated corn. This prod- of TRIP payments over a full range of scenarios, most of uct allows producers that plant with qualifying biotech which include no terrorist attacks (and therefore no TRIP seed corn to receive discounts on their crop insurance pre- payments), and some of which include terrorist attacks of miums. The BE was originally tested in the 2008 crop varying magnitudes. On this basis, the Budget projects year in four states and is being expanded to eleven states net spending of $2.160 billion over the 2010-2014 period for the 2009 crop year. The premium rate reduction was and $3.069 billion over the 2010-2019 period. determined to be actuarially sound based on data dem- The Administration proposes to lessen Federal inter- onstrating that non-irrigated corn with specific bioengi- vention in this insurance market and reduce the subsidy neered traits having a significantly lower risk of yield loss to private insurers (i.e., increase the private sector’s share in comparison to non-traited corn. During 2009 RMA in- of losses). Beginning in 2011, when the economy is expect- tends to publish a final regulation, effective for the 2011 ed to have stabilized, and then again in 2013, the proposal crop year, implementing the “Combo” policy. The Combo would increase the insurer deductible and co-payment, policy combines 5 existing policies into a single plan of in- and the event trigger amount for Federal payments. The surance that would streamline the insurance process for proposal would also remove coverage for domestic ter- RMA, the approved insurance providers, and producers. rorism. Prior to the 2007 reauthorization, coverage of It would offer producers a choice of revenue protection domestic terrorism was widely available even in the ab- 7. CREDIT AND INSURANCE 59 sence of Government support. The proposal would sunset loss liability to passengers or crew, the limit being the TRIP in 2014 consistent with current law. By reducing same as that of the air carrier’s commercial coverage be- an insurance market subsidy, the proposal would encour- fore September 11, 2001; and (iii) third party liability, the age the private sector to mitigate terrorism risk through limit generally being twice that of such coverage. The other means, such as developing alternative reinsur- Secretary is also authorized to limit an air carrier’s third ance options prior to the 2014 program termination date party liability to $100 million, when the Secretary certi- and by building safer buildings. Beginning in 2010, the fies that the loss is from an act of terrorism. Budget proposal amends TRIP to allow insurers addition- This program provides airlines with financial protec- al time to remit policyholder surcharges to Treasury and tion from war risk occurrences, and thus allows airlines to require commercial property and casualty insurance to meet the basic requirement for adequate hull loss and policyholders to collectively pay back only 100 percent liability coverage found in most aircraft mortgage cove- rather than 133 percent of the Federal payments made nants, leases, and government regulation. Without such under the program. In so doing, the proposal would al- coverage, many airlines might be grounded. Currently, low Treasury to assess a surcharge (recoup Federal pay- aviation war risk insurance coverage is generally avail- ments) only after the economy begins to recover following able from private insurers, but premiums are significant- a terrorist attack. ly higher in the private market. Also, private insurance The Budget projects savings from this proposal of $263 coverage for occurrences involving weapons of mass de- million over the 2010-2014 period and $644 million over struction is more limited. the 2010-2019 period. Currently 62 air carriers are insured by Department of Transportation. Coverage for individual carriers ranges Airline War Risk Insurance from $80 million to $4 billion per carrier, with the me- After the September 11, 2001 attacks, private insur- dian insurance coverage at approximately $1.8 billion per ers cancelled third-party liability war risk coverage for occurrence. Premiums collected by the Government for airlines and dramatically increased the cost of other war these policies are deposited into the Aviation Insurance risk insurance. In addition to a number of short term re- Revolving Fund. In 2008, the Fund earned approximately sponses, the Congress also passed the Homeland Security $166 million in premiums for insurance provided by DOT. Act of 2002 (P.L. 107-296). Among other provisions, this At the end of 2008, the balance in the Aviation Insurance Act required the Secretary to provide additional war risk Revolving Fund available for payment of future claims insurance coverage for hull losses and passenger liability was $1,146 million. Although no claims have been paid to air carriers insured for third-party war risk liability by the Fund since 2001, the balance in the Fund would be as of June 19, 2002. The Federal Aviation Administration inadequate to meet either the coverage limits of the larg- Extension Act of 2009 (P.L. 111-12) further extended est policies in force ($4 billion) or to meet a series of large the requirement to provide insurance coverage through claims in succession. The Federal Government would pay September 30, 2009. Acting on behalf of the Secretary, any claims by the airlines that exceed the balance in the the FAA has made available insurance coverage for (i) Aviation Insurance Revolving Fund. hull losses at agreed value; (ii) death, injury, or property IV. FINANCIAL CRISIS AND GOVERNMENT RESPONSE Technological advances and the removal of regulato- than their incomes could absorb.
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