Crop insurers’ $14 billion: Is it money laundering?

WASHINGTON: Former American International Group chief Maurice “Hank” Greenberg has a new business partner: the US taxpayer. Greenberg’s Starr Indemnity & Liability Co. is one of 18 companies approved to get federal cash for insuring farmers against loss of crops or income.

Wells Fargo, the nation’s fourthlargest bank by assets, Zurichbased Ace and units of American Financial Group Deere and Archer-Daniels-Midland all enjoy similar public backing. The government subsidies show how a program created to safeguard the nation’s farmers has evolved into a system that in most years all but guarantees profits for insurers.

In 2012, taxpayers spent $14 billion paying more than 60% of farmers’ insurance premiums, the companies’ operating costs and the lion’s share of claims triggered by a historic drought, according to the Congressional Research Service.

“What we’ve got is a moneylaundering operation,” says Harwood Schaffer of the University of Tennessee’s Agricultural Policy Analysis Center. “It looks like we’re doing a free market thing and it’s not free market at all.” Amid congressional efforts to curb federal spending, government aid for a profitable industry is drawing bipartisan criticism.

Yet even as House Republicans threaten to shut the government this fall unless the White House agrees to more cuts in nutrition, health and environmental programs, aid for corporations remains inviolate. Crop insurance, administered by the US Department of Agriculture’s Risk Management Agency, was established in 1938 to help farmers ride out droughts and disease.

Today an expanded program directly subsidizes government-approved insurers and indirectly benefits several other financial institutions – many based in tax-advantaged venues such as Bermuda or Switzerland – that reinsure those risks.

The government program is designed to provide companies a 14.5% return on equity – a mark higher than that earned last year by companies such as JPMorgan Chase and General Electric.

“If they stay in over the long term, they’re going to have a profit,” says Gretchen Roetzer, a director at Fitch Ratings’ North American insurance group.