(Dow Jones) – A proposal to cut government payments to the private insurers that administer the U.S. crop insurance program could cause some insurers to drop out, said the chief of their trade group.

Insurers “are going to have to take a hard look at the financial wall that is before them,” said Bob Parkerson, president of National Crop Insurance Services, a trade group that represents the 16 private insurers that participate. Crop insurance is backed by the Department of Agriculture and covers about 80% of the land tilled in the U.S.
The Department of Agriculture pays insurers an administration fee of around 19% of premiums, and subsidizes about 40% of the premiums farmers pay. Premiums are eventually split between the government and insurers based on underwriting profits, if there are any. The business has been profitable for insurers, but the 2008 Farm Bill cut insurer payments substantially.

Now a Senate budget resolution could cut another $70 million in each of the next five years from insurer payments.

The 16 participating insurers together earned pretax net income of $1.36 billion for the 2007 crop year, the most recent figures available. Parkerson said the 2008 Farm Bill cuts will begin for the 2008 crop year.

The crop insurance program has grown substantially over the years and has become an integral part of the farming business, Parkerson said. Lenders frequently require crop insurance when lending to farmers.

In the 2008 crop year, farmers paid total premiums of $9.9 billion, and so far a total of $8.2 billion has been paid out in claims.

Insurers “are being punished for doing a good job,” Parkerson said. He attributed some of the negative sentiment towards insurers to the financial services bailout, despite the fact that property/casualty insurers have for the most part rejected government bailouts.

Evan Greenberg, chief executive of Ace Ltd. (ACE), one of the largest crop insurers, has publicly argued against government bailout money steered to insurers, but Wells Fargo & Co. (WFC) another large provider, has been the recipient of TARP funds. Neither breaks out earnings for their crop insurance partnerships, which is a small line of business for both. Ace also offers its own, unsubsidized rain and hail coverage for farmers and said that the 2007 crop year resulted in a net pre-tax benefit to income of $61 million.

The Obama administration’s proposed budget called for $5.2 billion in cuts to the program over the next decade, but did not specify whether the cuts would be to farmer subsidies or insurance company payments.

Congress rejected the proposed budget, and a current Senate budget resolution calls for a $70 million annual cut to the program, which Parkerson said is intended to come entirely from fees paid to insurers. The House budget process currently calls for no cuts to the crop insurance program, but Parkerson said it is too early in the process to draw any conclusions about what the final budget will look like.