[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
HEARING TO REVIEW THE INTEGRITY
AND EFFICACY OF THE FEDERAL
CROP INSURANCE PROGRAM
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND RISK MANAGEMENT
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
THURSDAY, JUNE 7, 2007
__________
Serial No. 110-25
Printed for the use of the Committee on Agriculture
www.agriculture.house.gov
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COMMITTEE ON AGRICULTURE
COLLIN C. PETERSON, Minnesota, Chairman
TIM HOLDEN, Pennsylvania BOB GOODLATTE, Virginia
Vice Chairman Ranking Minority Member
MIKE McINTYRE, North Carolina TERRY EVERETT, Alabama
BOB ETHERIDGE, North Carolina FRANK D. LUCAS, Oklahoma
LEONARD L. BOSWELL, Iowa JERRY MORAN, Kansas
JOE BACA, California ROBIN HAYES, North Carolina
DENNIS A. CARDOZA, California TIMOTHY V. JOHNSON, Illinois
DAVID SCOTT, Georgia SAM GRAVES, Missouri
JIM MARSHALL, Georgia JO BONNER, Alabama
STEPHANIE HERSETH SANDLIN, South MIKE ROGERS, Alabama
Dakota STEVE KING, Iowa
HENRY CUELLAR, Texas MARILYN N. MUSGRAVE, Colorado
JIM COSTA, California RANDY NEUGEBAUER, Texas
JOHN T. SALAZAR, Colorado CHARLES W. BOUSTANY, Jr.,
BRAD ELLSWORTH, Indiana Louisiana
NANCY E. BOYDA, Kansas JOHN R. ``Randy'' KUHL, Jr., New
ZACHARY T. SPACE, Ohio York
TIMOTHY J. WALZ, Minnesota VIRGINIA FOXX, North Carolina
KIRSTEN E. GILLIBRAND, New York K. MICHAEL CONAWAY, Texas
STEVE KAGEN, Wisconsin JEFF FORTENBERRY, Nebraska
EARL POMEROY, North Dakota JEAN SCHMIDT, Ohio
LINCOLN DAVIS, Tennessee ADRIAN SMITH, Nebraska
JOHN BARROW, Georgia KEVIN McCARTHY, California
NICK LAMPSON, Texas TIM WALBERG, Michigan
JOE DONNELLY, Indiana
TIM MAHONEY, Florida
Professional Staff
Robert L. Larew, Chief of Staff
Andrew W. Baker, Chief Counsel
William E. O'Conner, Jr., Minority Staff Director
.........................................................
__________
Subcommittee on General Farm Commodities and Risk Management
BOB ETHERIDGE, North Carolina, Chairman
DAVID SCOTT, Georgia JERRY MORAN, Kansas
JIM MARSHALL, Georgia Ranking Minority Member
JOHN T. SALAZAR, Colorado TIMOTHY V. JOHNSON, Illinois
NANCY E. BOYDA, Kansas SAM GRAVES, Missouri
STEPHANIE HERSETH SANDLIN, South CHARLES W. BOUSTANY, Jr.,
Dakota Louisiana
BRAD ELLSWORTH, Indiana K. MICHAEL CONAWAY, Texas
ZACHARY T. SPACE, Ohio FRANK D. LUCAS, Oklahoma
TIMOTHY J. WALZ, Minnesota RANDY NEUGEBAUER, Texas
EARL POMEROY, North Dakota KEVIN McCARTHY, California
Clark Ogilvie, Subcommittee Staff Director
.........................................................
(ii)
C O N T E N T S
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Page
Etheridge, Hon. Bob, a Representative in Congress from the State
of North Carolina.............................................. 1
Moran, Hon. Jerry, a Representative in Congress from the State of
Kansas......................................................... 2
Walz, Hon. Timothy J., a Representative in Congress from the
State of Minnesota, prepared statement......................... 38
Peterson, Hon. Collin C., a Representative in Congress from the
State of Minnesota, prepared statement......................... 39
Goodlatte, Hon. Bob, a Representative in Congress from the
Commonwealth of Virginia, prepared statement................... 41
Witnesses
Brichler, Mr. Ron, President, Crop Insurance Division, Great
American Insurance Company, Cincinnati, Ohio................... 4
Prepared statement........................................... 43
Barnaby, Dr. G.A. (Art), Jr., Ph.D., Professor, Department of
Agircultural Economics, Kansas State University Research and
Extension, Manhattan, Kansas................................... 5
Prepared statement........................................... 56
Herring, Mr. David C., Jr., Branch Manager, East Carolina Farm
Credit, Kinston, North Carolina................................ 7
Prepared statement........................................... 67
Mock, Mr. Mike, Senior Risk Manager, The Andersons, Inc., Maumee,
Ohio........................................................... 8
Prepared statement........................................... 71
Little, Dr. Bert, Ph.D., Associate Vice President for Academic
Research, Professor of Computer Science and Mathematics,
Executive Director, Center for Agribusiness Excellence,
Tarleton State University, Stephenville, Texas................. 10
Prepared statement........................................... 77
Ferens, Mr. Nick, Manager, U.S. Civil Market, DeticaDFI,
Washington, D.C................................................ 12
Prepared statement........................................... 82
Submitted material........................................... 166
Gould, Mr. Eldon, Administrator, Risk Management Agency, U.S.
Department of Agriculture, Washington, D.C..................... 27
Prepared statement........................................... 97
Tighe, Ms. Gene, President, Farm Sanctuary, Watkins Glen, New
York........................................................... 28
Prepared statement........................................... 111
Robinson, Mr. Robert A., Managing Director Natural Resources and
Environment, Government Accountability Office, Washington, D.C. 30
Prepared statement........................................... 130
Submitted material........................................... 153
Supplemental Material Submitted for the Record
Independent Insurance Agents and Brokers of America, Inc.,
Washington, D.C................................................ 157
HEARING TO REVIEW THE INTEGRITY
AND EFFICACY OF THE FEDERAL
CROP INSURANCE PROGRAM
----------
THURSDAY, JUNE 7, 2007
House of Representatives,
Subcommittee on General Farm Commodities
and Risk Management
Committee on Agriculture
Washington, DC.
The Subcommittee met, pursuant to call, at 10:05 a.m., in
Room 1300 of the Longworth House Office Building, Hon. Bob
Etheridge [Chairman of the Subcommittee] presiding.
Members present: Representatives Etheridge, Marshall,
Boyda, Herseth-Sandlin, Ellsworth, Space, Walz, Peterson (ex
officio), Moran, Graves, Boustany, Conaway, Lucas, Neugebauer,
and Goodlatte (ex officio).
Staff present: Tyler Jameson, Clark Ogilvie, John Riley,
Sharon Rusnak, Bryan Dierlam, and Jamie Weyer.
STATEMENT OF HON. BOB ETHERIDGE, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NORTH CAROLINA.
Mr. Etheridge. This hearing of the subcommittee on General
Farm Commodity and Risk Management to Review the Integrity and
Efficiency of the Federal Crop Insurance will come to order.
Let me say to our panelists and the ranking member, and I will
be brief in my opening remarks, we have a pretty tight schedule
today.
And for that reason, we are going to ask you, when we do
ask you to open with comments, stick to the 5-minute summation
as much as possible and try to keep your answers fairly concise
because we have another committee on our heels coming in for
mark-up. And we are time limited in this committee today in our
time, as important to this committee is.
And I want to thank my colleagues for being here today, and
you will see some move in and out because there is a lot going
on. And I also want to welcome all of our witnesses, and in
particular I will have more to say about Mr. Herring a little
later on, one of our North Carolinians. It is good to have you
with us today as well. We have several witnesses today, so I am
going to keep my remarks short and to the point.
A little more than a month ago, another committee of the
House of Representatives held a hearing to examine the Federal
crop insurance. Certainly we on the ag committee do not have a
monopoly on oversight capability over crop insurance and their
benefits, having fresh eyes take a look at what is happening in
crop insurance in the industry.
With that being said, any oversight of crop insurance must
recognize that this line of insurance operates very differently
from other lines of property and casualty insurance. I have no
doubt that those differences were made clearly evident in the
May 3 hearing by the oversight committee. The purpose of this
hearing is twofold. One, it is to extend the tradition of
oversight over the crop insurance industry.
Since enactment of the Agricultural Risk Protection Act of
2000, this subcommittee, under the leadership of subcommittee
chairman then Saxby Chambliss and his successor, my good friend
to my left here, Jerry Moran, there have been 13 oversight
hearings held on crop insurance. We have held hearings directly
examining waste, fraud and abuse in the crop insurance program.
We even held a hearing where a farmer from my district
testified about problems with the pilot insurance program. His
testimony led to changes which improved the programs integrity.
Our second purpose is education. Although part of property
and casualty insurance, crop insurance is a very different
animal. Terms that apply to one do not necessarily apply to
another. They operate differently, and they are regulated
differently. Before anyone makes broad generalizations or
comparisons of the Federal crop insurance program and before
someone accuses the program of being wasteful, they not only
need to have the facts right, they need to make sure that they
are accounting for the uniqueness of the crop insurance system.
And while some representations made of the crop insurance
program remain questionable and hopefully will be correct at
this hearing, one fact is undisputable. Premiums for crop
insurance are increasing, and with them are projected
administrative and operating costs for reimbursements. And as
we are looking out for our farmers' interests, members are
asking tough questions about these increases, questions I hope
our witnesses today will be able to answer.
I look forward to hearing today's testimony from our
witnesses, and I know turn to the gentleman from Kansas, Mr.
Moran, for his opening statement.
STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF KANSAS
Mr. Moran. Mr. Chairman, thank you very much. I thank you
for conducting this hearing. Thank you for your what I think is
an insightful opening statement. Again with your request to be
brief, I would only say that I worry that the crop insurance
industry has become a target, simply because there is a
perception that there is some money available within the crop
insurance programs and therefore as we debate a farm bill and
finalize a farm bill legislation, that crop insurance may
become a target for those dollars. And I want to work to make
certain that the crop insurance industry and the beneficiaries,
the farmers in Kansas and across the country, do not suffer
because of that mentality.
I also recognize that crop insurance must be profitable in
order for us to have the benefits that accrue to farmers across
the country, farmers and producers. We do have an opportunity,
because tax dollars are involved, to make certain that the tax
payers are protected in all of our crop insurance programs. And
we need to make certain we find the right balance between
profitability and the crop insurance industry and protecting
those who pay their taxes on an annual basis.
Mr. Chairman, we just had a hearing, and I appreciate you
coming to Kansas on Tuesday this week. We had a field hearing
in Salina, Kansas. Interesting to me that the ag economist who
testified from Kansas State University, based upon his survey
of Kansas farmers, indicated that the number one priority for
benefits that a farmer receives from Washington, D.C. is
derived from crop insurance. That the highest priority of where
money is most valuable comes from the crop insurance program.
That is a reminder to me that the products that we have are
valuable. They have increased in value over time. We need to
make sure that continues into the future.
I look forward to hearing our witnesses as they answer the
questions that you have described.
Mr. Etheridge. Thank you, and I now yield to the gentleman
from Virginia for an opening statement, Mr. Goodlatte, the
ranking member of the full committee and former chairman.
Mr. Goodlatte. Thank you, Mr. Chairman. I appreciate your
holding this hearing on this very important subject, and I am
anxious to hear the witnesses' testimony, so I will yield back.
Mr. Etheridge. Thank you, sir. You almost caught me off
guard here.
Mr. Goodlatte. I do have a statement to submit for the
record.
Mr. Etheridge. Without objection.
Mr. Etheridge. And the chair would respect this and request
again that each of our members who are testifying stick as
closely to 5 minutes as possible because of our timeframe. Your
full statement will be included in the record. And for any
member seated who would like to submit their statement for the
record, we would do the same. We would like to welcome our
first panelist to the table, Mr. Ron Brichler, president of
Crop Insurance Division, Great American Insurance of
Cincinnati, Ohio; Dr. Barnaby Jr., PhD professor, Department of
Agro Economics at Kansas State University Research and
Extension in Manhattan, Kansas; Mr. David Herring, branch
manager of East Carolina Farm Credit in Kinston, North
Carolina; Mr. Mike Mock, senior risk manager of the Anderson
Incorporated in Maumee, Ohio; and Dr. Bert Little, associate
vice-president for academic research, professor of computer
science and mathematics, and executive director of the Center
for Agribusiness Excellence at Tarleton State University in
Stephenville, Texas; and finally Mr. Nick Ferens. Is that
pronounced Ferens? Manager of U.S. Civil Market in Washington,
D.C. Mr. Brichler, please begin when you are ready.
STATEMENT OF RON BRICHLER, PRESIDENT, CROP INSURANCE DIVISION,
GREAT AMERICAN INSURANCE COMPANY
Mr. Brichler. Good morning, Chairman Etheridge and Ranking
Member Moran. My name is Ron Brichler. I am a Senior Vice
President of Great American Insurance Company and President of
its crop division. I am also responsible for five other Great
American divisions. Great American's property and casualty
insurance group is ranked by AM Best as the 33rd largest
property and casualty operation in the United States.
Great American is engaged in marketing and servicing a wide
array of specialty property and casualty insurance products
with crop insurance representing about 15 percent of our gross
written premium. The crop division competes internally for
capital with over 20 other Great American operating divisions.
My testimony today is presented on behalf of the crop
insurance industry, not any one organization or group. We, the
private sector partners in the crop insurance program,
appreciate this opportunity to testify.
First, Mr. Chairman and members of the subcommittee, the
crop insurance industry wants to clearly assert that the
program is highly successful and has not failed at its primary
purpose. The program is a risk management tool. Any statement
claiming that the program has failed because Congress and the
president have approved ad hoc disaster assistance laws in
illogical. No program or law can deny a Congress and a
president their constitutional rights and privileges.
Mr. Chairman, I started my career as a CPA, and that is why
it hurts me to see this latest GAO report. Anyone understanding
insurance industry accounting would know that they cannot
compare crop insurance pure loss premium with fully expense
loaded premium for other property casualty lines of coverage.
This has lead the GAO to state crop insurance companies have
earned an average annual rate of return of 17.8 percent from
2002 through 2006, versus a property and casualty industry 6.4
percent. This improper comparison was further compounded by
using different years in the analysis. These errors have caused
inaccurate comparisons on both a premium basis and an analysis
period basis.
Mr. Chairman, we have adjusted for these mistakes. After
doing so, the appropriate property and casualty industry return
is actually 17.4 percent versus the crop industry 17.8 percent.
A mere rounding error, considering the inherent volatility of
the crop insurance line of business. A difference of this
magnitude is definitely not something worth a policy change.
Additionally, the GAO work used crop insurance underwriting
gain as reported to RMA to measure the industry's
profitability. The RMA reported underwriting gain cannot be
equated to profit since it does not reflect all the industry's
delivery cost.
Three separate profitability studies of crop insurance have
been conducted over the last 10 years. One study concluded the
return for crop insurance was reasonable. The other two
concluded that the return for the crop insurance industry was
actually below comparable property and casualty industry lines.
Next, I would like to address the issue of the
administrative and operating expense payments to crop insurance
companies on behalf of the farmer. Although crop insurance
companies are paid on average around 20 percent of the premium
for selling and servicing expenses, the amount does not fully
cover total delivery cost. The expense rate has been reduced by
the government over time, and the proposals abound today
including another by USDA to reduce this rate further.
In comparison, the Insurance Information Institute data for
the years 2001 to 2006 showed that for the PNC industry, the
expense-to-earn-premium ratio averaged around 40 percent. When
adjusting the PNC industry premium data to make it comparable
to crop insurance premium data, the expense-to-premium ratio
for the same period averaged more than 60 percent. A 1997 GAO
report that examined this issue recognized that delivery and
servicing expenses were in excess of the A&O, concluding at
that time that the true percentage was closer to 26.5 percent.
While the program is significantly larger today, the
percentages may be different, companies still expend more today
than the average 20 percent rate.
In conclusion, I would like to make three points. First,
the congressional vision of the crop insurance program was to
provide an affordable risk management tool for agricultural
producers. The public and private partnership we have today has
made this a reality. To have the program become more inclusive,
it has become more complex and expensive, but it is working.
Now that we have built this risk management tool and over 1.1
million policyholders are using it, it is not the time to
tamper with its funding.
Second, with the new energy initiative, more and more will
be expected from production agriculture. Crop insurance will be
required to support the growers, lenders, and production system
if farm products are to help us become less energy dependent.
Third, commodity prices today are high; however, basing the
2007 Farm Bill on the assumption that this is a permanent
change would not be wise. Commodity prices are variable, and
they will fall. It has taken 25 years to bring the crop
insurance program to where it is today. Please don't jeopardize
it by looking to it for funding for other programs.
Thank you, and I will be happy to respond to questions at
the appropriate time.
Mr. Etheridge. Thank you. Dr. Barnaby.
STATEMENT OF DR. G.A. (ART) BARNABY, JR., PH.D., PROFESSOR,
DEPARTMENT OF AGRICULTURAL ECONOMICS, KANSAS STATE UNIVERSITY
RESEARCH AND EXTENSION
Dr. Barnaby. Thank you, Mr. Chairman. Good morning,
Congressman Moran. Nice to see you again. Congressman Boyda
from my state too, actually my district.
I started this quest, when I was asked about this, with the
question are insurance companies paid too much? So that was my
starting point with this question, and I was trying to think
about how to approach and do the comparison so it is side-by-
side and not subject to creative accounting that Enron and some
other folks taught us how to do. And the way I looked at it if
this were a private insurance contract. You would have a dollar
coming in the front door, and out the back door, you would pay
a certain percentage of that dollar in claims. And that number
is a very hard number, and I didn't think any way you could
really vary it.
So in order to get it on the same level, you will see in
Table 1, that is exactly what I was up to. I took the A&O. I
also included the company underwriting gain and loss, and I
treated it as a cost. The insurance industry has taken a little
issue with me doing that because it is sort of double
accounting. But the way I was looking at it is if the
government were to offer crop insurance through government
employees and if they could operate at the same efficiency at
the private sector, pretty big assumptions being made there,
but if they could, then in theory, they would get to retain;
although those underwriting gains would go back to the agency.
So that is why I treated it as a cost rather than as embedded
into the premium as paid itself.
And then I broke out the premium subsidy and the farmer
paid premium, so those are all the dollars that come in the
front door of the insurance company. And I end up with a total
premium dollars there, in '06 for example, those wouldn't be
final in '06 because those are still being updated, but about
6.2 billion in total dollars going in.
And then I looked at the number of indemnity payments that
are paid, and again these are straight off of the RMA website.
And then I looked at it by year, and what I am showing there,
for example, in '93, for every dollar they took in, they paid
out $1.80. You really don't make any money with that year. But
you can look at other years when they did very well. 1997, for
example, every dollar went in. That year, they paid out 38.7
cents. And obviously profits would have been good that year.
Anyway, over that whole period of time, roughly they took
in a dollar, and if I equally weight these, the other thing is
you have got increasing sales volume, which means the 2000
Arper program worked as proposed. We increased participation.
We increased coverages so it did what it was supposed to do,
but in any case if you treat each year as equally probable, in
other words, a 1993 could occur again, it roughly works out to
where for every dollar that comes in, they pay out about 75
cents. That means there is roughly 25 cents left to cover the
other operating expenses.
So how does that compare with property casualty? Table 2, I
went through the same process. This is for premiums on auto
insurance. Unfortunately, when they report their numbers, they
include the lost adjustment expense in with the claims, so I
had to separate that out, and that is why I gave a range of
numbers. But roughly, they pay out about 65 cents for every
dollar that comes in. 35 cents goes to pay commissions,
operating expenses of the company, loss adjustment expense,
turning on the power and lights at the company, et cetera.
Homeowners' policies on Table 3. Very similar numbers,
about 35 cents left over. Private hail insurance is on Table 4.
They retain about 30 cents out of every dollar. They pay out 70
cents. So a dollar is paid, and, of course, in the case of hail
insurance, farmers pay the full dollar. So they don't expect to
get back more than they pay in, or at least they shouldn't if
they have looked at the actuarial numbers.
The other possibility is perhaps the expenses are greater
in the other lines of insurance. To do a proxy for that, what I
looked at was the percent of policy with claims. In the case of
Federal crop insurance, I should say the risk management
program--they paid out on average about 24 percent of all their
policies had claims. Now, those were paid claims. What is not
well understood there are also claims that are filed, but after
the loss adjuster does the loss adjusting, they discover they
do not exceed the deductible and therefore there is no claim
due so the company has incurred the expense of working the
claim but there is no actual payment made. And if there is no
payment made, then that claim is not reported to RMA so it does
not show up in the RMA numbers.
So when you look at the total ones, I come up with a number
of about 30 to 40 percent of the policies actually have claims
worked. The industry would argue that it is even higher than
that. It is certainly higher than the 30 percent that is paid
and we can document with an absolute hard number. Comparing
that to other lines, you are looking at a percent of auto
policies with claims about 4 percent, homeowners not quite 7
percent, and private hail is about 13 percent of their policies
have claims.
So in closing, one final comment. I have done a lot of
educational work of combining crop insurance with marketing
tools. And the point is that come harvest time, farmers will
either have dollars to replace loss inventories at current
market values. By the way, those values have doubled over a
year ago. Premiums in Chicago put options at doubled, so the
market is telling me the risk on price especially is doubled
from what it was a year ago, and so if you do have claims, if
we do have a disaster, they will not be paying those corn
claims at $2 like we have in the past. It could be as much as
$6 and $7 because of the tight supply. In fact, I have
recommended people buy RA harvest price option for that very
reason because there is no limit on the coverage.
So the point is a lot of farmers have made plans based on
it being there for '08 and '09 sales----
Mr. Etheridge. Thank you, sir.
Dr. Barnaby. --that is going to be in place. Thank you.
Mr. Etheridge. Thank you. Mr. Herring.
STATEMENT OF DAVID C. HERRING JR., BRANCH MANAGER, EAST
CAROLINA FARM CREDIT
Mr. Herring. Good morning, Chairman Etheridge and members
of the subcommittee. My name is David Herring, and I work for
East Carolina Farm Credit. I am a branch manager based in
Kinston, North Carolina. East Carolina Farm Credit is a farmer-
owned cooperative and a member of the farm credit system. In
addition to my branch manager duties, I am a licensed property,
casualty, life, and health insurance agent. I am here today to
talk about the importance of crop insurance to our customer
owners and to the safety and soundness of our financial
institutions.
Farm Credit plays a unique role in the crop insurance
industry. As a provider of crop insurance, we work to improve
access to crop insurance products for our customers. As a
financial institution, we rely on crop insurance as a backstop
for many of the loans we make to farmers. As a farmer-owned
cooperative, we work to provide the most efficient crop
insurance delivery system for our farmer owners.
Farm Credit's net worth of nearly 100 customer-owned
financial institutions provides crop insurance services to
farmers throughout the nation. With approximately 10 percent
market sharing crop insurance, Farm Credit institutions combine
to sell more crop insurance to customers than any other single
industry provider.
I would like to take this opportunity to give my personal
testimony as to the Federal crop insurance program and its
importance to the financing of the farmers of eastern North
Carolina. In reflecting back to the summers of 1977 and 1985,
both years were disastrous due to drought. At the time, crop
insurance was carried only by a small percentage of farmers. As
crop losses accumulated, many family farms were forced into
bankruptcy or foreclosure. Without crop insurance as safety
net, many farmers couldn't pay their debt.
For many of our formal borrowers, we require insurance
coverage to be in place as a condition of providing a loan. The
guarantees offered through crop insurance gives stability to an
individual farmer's income and with assignments in place, a
guaranteed source repayment to the lender. For many farmers and
especially for young and beginning farmers, this is essential.
Serving the financial needs of the agricultural community
involves taking risks. Prudent management of a loan portfolio
is necessary to manage this risk. For our financial
institutions, a requirement that some farmers carry crop
insurance is an important tool that helps us manage that risk.
For some farmers, credit would not be available without
protection that crop insurance gives the lender. Changes to the
crop insurance program that increases costs or reduces coverage
to the farmers would significantly weaken the safety net of our
farmers.
We encourage the subcommittee members, as you write this
farm bill, to preserve the strength of the crop insurance
program and ensure that farmers can continue to rely on it in
years to come.
Thank you for inviting me to testify today. I would be
happy to answer any questions.
Mr. Etheridge. Thank you, Mr. Herring. Mr. Mock.
STATEMENT OF MIKE MOCK, SENIOR RISK MANAGER, THE ANDERSONS,
INC.
Mr. Mock. Thank you, Mr. Chairman, members. My name is
Michael Mock. I am Senior Risk Manager at The Andersons,
Incorporated. For more than 25 years, I have worked with
producers assisting them with commodity-risk management. The
majority of my clients are located in the eastern belt in our
facilities, but we work with customers from Elgin, Nebraska to
Lyle, Minnesota to Coldwater, Mississippi.
The firm I represent, The Andersons, is diversified with
interests in the grain, ethanol, and plant nutrients sectors of
U.S. agriculture. In addition, we are involved in rail car
leasing and repair, turf products production, and general
merchandise retailing. The company is currently celebrating its
60th year in operation, having been founded in Maumee, Ohio in
1947.
Last year, the company handled 170 million bushels of
grain. We currently operate two ethanol plants with a third to
come on board first quarter '08. When completed, they will
produce a total of 275 millions gallons of ethanol annually.
That equates to roughly 100 million bushels of corn consumption
per year.
We are recognized as leaders in the ag industry as risk
managers and grain originators. An integral part of our risk
management strategy includes leveraging crop insurance. Our
business structure includes a crop insurance agency, which will
have premium sales approaching $10 million for the '07 sale
season. The Andersons actively promotes the use of crop
insurance. We are unable to replicate the combination of price
yield coverage it offers producers via other hedging vehicles
such as exchange traded options. Echoing Mr. Moran's opening
comments, the company believes strongly that a high quality,
revenue-based crop insurance policy is the single most
important step a producer can take to effectively minimize risk
for his grain production.
The Andersons has demonstrated this stance to producers,
bankers, insurance providers and others through our crop
revenue profilers software program. Examples of the profiler
are contained in our written statement, and they show the power
of blending a crop insurance policy in combination with a good
marketing plan. Producers who implement this risk mitigation
approach have demonstrated consistent profitability. The
financial strength of their businesses reflects the value of
this methodology.
As a result, these producers rely less on government
marketing loans. They have less need for counter cyclical
payments or disaster payments. What they do need is access to
quality insurance providers who can deliver high quality crop
insurance alternatives at affordable prices.
With several grain and ethanol operations, The Andersons
believe the use of revenue-based crop insurance provides a win-
win both for our customers and for the company. Obviously crop
insurance mitigates the client's risk of lack of production.
But it also instills confidence for producers to forward
contract early in the cycle at profitable prices. I can state
very emphatically alleviating the fear of lack of production
leads to more forward contracting by our customers,
particularly over multiple-year periods. For The Andersons,
this works to ensure a source of inputs for our ethanol plants
as well as fulfill the needs of food and animal feed customers.
Another key point to consider in order to manage our own
risk in doing business, The Andersons is a commodity input
hedger. The cost of financing forward contracts is a
significant expense and not without risk, especially in
volatile market conditions. Our bankers know the company's
ability to maintain contract integrity is directly correlated
with the producer's ability to deliver on the contracts
established with us.
Knowing this, The Andersons and others in the industry seek
to contract with producers who have quality protection in the
event lack of production becomes an issue. Crop insurance
provides such protection for both parties. As a result, this
contributes to the financial health and stability of both
farmers and the grain industry alike.
This winter, producers were influenced by high commodity
prices when making their crop mix decisions. The Andersons is
convinced the unexpectedly large year-on-year increase in corn
acres for '07 was due in large part to the crop insurance
program. The ability to lock in excellent profitability
provided both the farmer and his banker with the courage to
invest significant dollars in additional high-cost corn acres.
As the U.S. moves forward in providing a stable food, feed,
and fuel supply for its citizens, both The Andersons and its
customers will become more reliant on affordable high quality
crop insurance tools to manage ever-growing risk. We expect
crop reduction costs to increase significantly in future crop
cycles, especially for corn.
In addition, competition for crop land has resulted in
sharply higher land rent cost. This will likely serve to
pressure producer profit margins despite the relatively high
value of grain prices. The ever-increasing costs of planting
corn, especially corn after corn, may serve to encourage the
farmer to explore other avenues with crops with less costly
inputs.
Ensuring a steady supply of grain to consumers, especially
corn for ethanol facilities, require producers to establish
financial stability without necessary financial risk. To
accomplish this, productions must continue to have access to
affordable crop insurance.
In summary, our customers have embraced these products as
their primary risk management tool. We strongly encourage
clients to use these policies to assist us in managing our risk
when writing forward contracts. The future promises high price
opportunities but with an associated risk of a much higher cost
structure. As we move forward, the need for an affordable,
high-quality insurance program is greatly heightened both the
producer as well as the grain and ethanol industries. Thank
you.
Mr. Etheridge. Thank you, Mr. Mock. Dr. Little.
STATEMENT OF DR. BERT LITTLE, PH.D., ASSOCIATE VICE PRESIDENT
FOR ACADEMIC RESEARCH, PROFESSOR OF COMPUTER SCIENCE AND
MATHEMATICS, EXECUTIVE DIRECTOR, CENTER FOR AGRIBUSINESS
EXCELLENCE, TARLETON STATE UNIVERSITY
Dr. Little. Chairman Etheridge, Ranking Member Moran, and
members of the subcommittee, thank you for the opportunity to
appear this morning before the subcommittee. I am Bert Little,
associate vice-president for academic research and professor of
computer science and mathematics at Tarleton State University,
a member of the Texas A&M University system.
In this role, I also direct Tarleton's Center for
Agribusiness Excellence, CAE, with implements USDA's mandate to
use data mining and data warehousing to improve integrity in
the Federal crop insurance program. Personally my own roots in
agriculture run deep. My family obtained its first land grant
in 1790 in southeastern North Carolina, and I worked on that
same piece of land raising tobacco, corn, and soybeans, until I
was almost 20 years old. I will use my testimony to give the
subcommittee a fresh update on our program, Integrity
Activities Involving Data Mining and Data Warehousing
Approaches.
At the outset, let me emphasize we are pleased with the
success CAE has had in this effort. USDA's risk management
agency, in its annual program compliance and integrity reports
to Congress, has conservatively estimated that over a period of
6 years, we have saved American taxpayers nearly a half a
billion dollars by highlighting potential fraud and abuse in
the program and as a result, helping RMA to avoid making
improper payments.
In the course of our analytical work, we have found that
the farmers who participate in the Federal crop insurance
program by and large are honest people who follow the rules.
Our spot-check program, described in more detail below,
designed to identify suspicious patterns indicating possible
program abuse has consistently found fewer than 1 percent of
producers falling into this category. It is a strong indicator
of program integrity and rates much better than comparable
lines of insurance in the property and casualty field, as my
friend Dr. Barnaby, has noted.
Each year with RMA staff, we use a database to identify
multi-year patterns that signal suspicious or anomalous crop
insurance claims. We use these results to produce what we call
the spot-check list, an actual list of producers who will then
become subject to increased compliance oversight. Most
producers on the spot-check list react to the scrutiny by
refraining from any contemplated abusive activities. The result
is a visible, measurable reduction in indemnities paid. Simply
put, growers change their behavior as a result of knowing they
are being scrutinized. Over 6 years, 2001 to 2006, spot-check
list initiative alone has produced measurable reductions in
unneeded indemnities of approximately $479 million.
The spot-check list that I have described is only one of
more than 100 research products that we at CAE produce
annually, aimed at improving program integrity. For instance,
we have provided assistance to other Federal offices including
the USDA office of the inspector general, the government
accountability office, and various Federal prosecutors and the
Federal Bureau of Investigation.
We believe the next logical extension would be to better
include in the process the reinsured companies who deliver crop
insurance to producers across the country, and we have begun
this process with a good response so far. Most recently, CAE in
collaboration with NASA Space Center Applied Sciences Division
has begun integrating satellite data that measures the
intensity of green light reflected by chlorophyll molecules in
plants. And CAE has invested its own non-Federal resources to
build a 42-terabyte data system to store satellite data for
this use. Our preliminary results are exciting, indicating a
better than 90 percent ability to evaluate crop production via
satellite using this system.
In the future, CAE hopes to incorporate in our system the
common land unit data held by USDA's farm service agency. We
see many opportunities to improve our analyses with the
inclusion of farm data reported to FSA, and we have been
requesting FSA to provide this data to us for this purpose for
a number of years.
I had a chance to look at the testimony of the man to my
left here, and I underscore their point, that data mining
involves more than just looking for isolate anomalies but
involves a highly integrated advanced, analytic discipline. And
I appreciate their support for the more far-reaching
innovations we have incorporated.
Thank you again for this opportunity to address the
subcommittee. Great strides have been made to improve the
policing of the Federal crop insurance program since the
adoption of ARPA in 2000, and we have been honored to be a part
of the process. Thank you for your consideration this morning,
and I would be happy to answer any questions you may have.
Mr. Etheridge. Thank you, Dr. Little. Mr. Ferens.
STATEMENT OF NICK FERENS, MANAGER, U.S. CIVIL MARKET, DETICA
DFI
Mr. Ferens. Chairman Etheridge, Ranking Member Moran and
members of the subcommittee, good morning. Thank you for the
opportunity to appear before you today. My name is Nick Ferens,
and I am the manager for the U.S. Civil Market for DeticaDFI. I
am here today to talk to you about the importance of employing
advanced data analytics to ensure the integrity and efficacy of
the crop insurance program.
But before I do that for context, please allow me to tell
you very briefly about myself. I have been a consultant for a
number of years and have been working with various government
agencies for over 8 years. My particular area of interest has
been in helping clients tackle the issues of fraud, waste, and
abuse. Prior to joining DeticaDFI, I worked with both CSC and
Booz Allen. Across my career, I have had a particular interest
in deploying advanced analytical capabilities to help our
government solve difficult problems.
As I noted, I work for DeticaDFI. As a member of the Detica
Group, DeticaDFI is a consulting organization that helps a wide
range of public and private sector entities convert typically
large volumes of data into actionable intelligence. We provide
a broad spectrum of intelligence and analytic services with
particular focus on the areas of fraud detection, risk
management, security, and regulatory compliance.
Although we are well known in the financial services arena,
we have a 30-year heritage of working with national security
and civil government clients to find organized fraudsters,
traffickers, criminals, and terrorists. Perhaps the easiest way
of helping you understand what DeticaDFI does is to provide an
example, but before I do that, I would like to tell you a
little bit about how DeticaDFI came to be here in the U.S.
For several years, DeticaUK personnel were working with a
Federal agency in the national security arena. At their
request, we opened a U.S. office, incorporated in the U.S. and
staffed entirely with U.S. personnel. Since then, we have
leveraged our experience and now work with numerous U.S.
agencies to help them deal with a variety of issues, including
those related to fraud.
As an example of the type of work we do, the Insurance
Fraud Bureau is a body established in 2006 to detect and
investigate serious and organized fraud in the UK. The IFB was
established because the insurance industry needs to tackle
distributed claims fraud. The insured in this example would
collude using a variety of techniques and make multiple
fraudulent insurance claims across multiple insurers.
For example, individuals would insure a vehicle with
multiple insurers using slightly modified information with each
insurer. With multiple policies in place, they would then stage
accidents resulting in a damaged vehicle and soft tissue injury
claims. Many would then continue to stage another wreck with
the same car and make claims again another one of their
policies. Detica applied a series of advanced new data analysis
techniques to detect patterns of fraudulent behavior in large
data sets.
The combined data is over 260 million records covering more
than 32 million families. By combining multiple data sources to
form the big picture, more accurate risk scores could be
generated and delivered to investigators to maximize their
capacity. This is in sharp contrast to traditional approaches
which look for individual anomalies in data.
Once we have helped our clients understand and articulate
the problems they want to resolve and formulate a strategy to
resolve it, we can then offer a range of technological
solutions as appropriate. These solutions do not just include
data warehousing and data mining, but include the full range of
predictive analytics.
Data quality assurance, web integration, enterprise content
management, text mining, search and retrieval, and
communications monitoring. In short, what we do through our
solutions is use the data, however voluminous it might be, to
identify whether there are linkages or connections between
people and entities. Once the linkages are created, the
customer, in this case RMA, can then begin to understand
whether the linkages are meaningful in terms of suggesting
potentially wrongful behavior and then further investigate
those patterns and linkages.
The strength of the system is that it identifies networks,
not just individuals. Equally important, it helps better direct
taxpayer resources, not just investigate large populations but
to focus investigators where there is a statistically high
probability that bad behavior by multiple persons is occurring.
Our vision for the RMA then is to employ a similar data-driven
investigation approach to look holistically at data to find
networks of suspicious activity.
The approach I have outlined requires more than data mining
but leverages data mining. The use of advanced analytics in
network detection capabilities will be added. Advanced
analytics provides the ability to look forward rather than
looking at data to see what has happened in the past. We let
the data tell the story and then use statistics to validate the
story. This approach will benefit RMA through earlier and
accurate detection of emerging patterns, lower cumulative
losses from earlier detection, better intelligence, more
targeted investigations with fewer false positives which waste
time, money, and investigative resources. And it will deter
additional networks from emerging.
Furthermore, additional benefits beyond RMA will accrue to
USDA, farmers, and the taxpayers. Some examples are that USDA
will be able to maximize the use of data across departments and
will achieve efficiencies in data applications. Farmers may
enjoy the potential for lower premiums or at least stable
premiums, and there may be an expansion of RMA's assistance to
other due to cost savings. Farmers will also benefit from our
proposed approach in that fewer of them will be compelled to
respond to investigations initiated as a result of false
positives. Insurance companies will benefit from better
oversight and control. And finally taxpayers will enjoy more
efficient use and stewardship of resources. All of this, of
course, requires adequate investment by Congress and the RMA.
With that, I conclude my statement. Thank you for the
opportunity to speak today.
Mr. Etheridge. Thank you, sir. Let me thank all the
witnesses. And we have been doing--Mr. Cooper and without
objection, they will be able to sit on the panel and listen in
to the testimony. We welcome him. Now we will recognize members
for 5 minutes, and the chair will recognize himself for the
first 5 minutes.
Mr. Brichler, the argument has been made that companies are
making money hand over fist, but as you pointed out in your
testimony, if that were the case, why are we not seeing many
new companies get in the business? Can you briefly give a
history of the number of crop insurance companies that have
been in operation over the course of the program's history and
how that is growing, where we are?
Mr. Brichler. Yes, Mr. Chairman. The number of companies
involved in delivering the MPCI or the crop insurance program
has varied over time, but it recently dropped by a few
companies. And then within the last year, it has----
Mr. Etheridge. What is that number?
Mr. Brichler. There are 17 insurance providers, I believe,
16 or 17. At one point, there were close to 50 companies
initially in the 1980s. And as far as systemic issues that have
caused the reduction in the number of companies involved, I
think, one, it is a very specialized line of business. It
requires a sophisticated information system. It requires a
group of employees that need to be trained in a unique line of
coverage and for the company to build a unique field adjustment
staff to service this business.
In all the lines of coverage that I have been exposed to in
the property and casualty industry, this is by far the most
complex and the most paper intensive, and the most data
transmitted to a regulator of any other line of coverage that I
have been involved with. All those, I think, make a difference
in how many people are willing to participate.
Mr. Etheridge. A common complaint we hear, Mr. Brichler,
from crop insurance companies is that the A&O reimbursements
for delivery expenses does not cover the cost. With crop prices
going up, price selections on policies have gone up, raising
premiums and consequently raising the A&O reimbursement. Is the
statement that A&O is not covering costs still true in this new
environment?
Mr. Brichler. Well, without knowing where the final premium
would end up this year, I couldn't answer that with any
definite response. But I will say that as prices increase and
as our policies reflect a combined yield and revenue exposure,
as Dr. Barnaby pointed out in his testimony, the more the price
component is an impact, the more claims that we end up having.
The comparison between the amount of work on the claims side
versus this line of business and other property and casualty
lines is immense. And so we look at more claims. We process
more paper due to that, and that all impacts the cost.
Mr. Etheridge. Thank you. Mr. Herring, I believe I
understood you to say that 100 percent of the farmers you deal
with carry crop insurance. Is that correct?
Mr. Herring. No, sir.
Mr. Etheridge. Okay. Well, let me ask my question then in
this way. What percent of the farm operating loans that you
make carry crop insurance? And what are the characteristics of
a farm in which your institution would require crop insurance?
And finally, are there many such farmers? In other words, that
you require to have it and you loan operating money to?
Mr. Herring. Typically, I would say 75 percent or more. It
is not 100 percent, but it well exceeds 75 percent of our
operating loans are insured by crop insurance. And requiring
crop insurance is not a yes/no answer. We have to look at
everything from their repayment capacity to their equity
position to other collateral we have. But typically on an
operating loan, we do require it.
Mr. Etheridge. But you also look at that balance sheet?
Mr. Herring. Yes, sir.
Mr. Etheridge. How much liquidity is in that balance sheet?
Mr. Herring. Yes, sir, and that is with the young beginning
small farmers, it is a major need because they are just
beginning to grow their balance sheet. And they are starting
off in a weaker position with low equity positions, and the
insurance allows us to take risk and way to move the risk to
the insurance companies and take it off of these young
beginning farmers.
Mr. Etheridge. Okay, thank you, sir.
Mr. Moran. Mr. Chairman, thank you very much. Dr. Barnaby,
I appreciate your testimony. I have always tried to find the
outside expert who can analyze for me what it is that is
happening as far as profitability or rate of return within the
crop insurance industry. If I understand your testimony
correctly, and I always struggle to understand your testimony,
in this case, I think what you are telling us is
straightforward, which is the operating margins, as compared to
other sectors of the insurance industry, are in line, in fact,
perhaps less, the operating margins are less than other areas
of the insurance industry. And the expenses of delivery of the
product are at least the same or more. Is that an accurate
summarization of what you are saying?
Dr. Barnaby. It is a correct summarization. That is exactly
what the data says.
Mr. Moran. Is the operating margins, is that the
appropriate criteria, the ingredient that needs to be judged? I
sometimes think of this as like a monopoly in which it is a
regulated industry and the commission in charge of regulating
monopolies is desirous of finding a rate of return on assets
that allows the industry to be profitable but not take
advantage of the consumer.
I know this is not a monopoly. There are 17 participants in
this program. There is competition within the crop insurance
industry, but I have always looked for that similar kind of
standard that would tell me that the rate of return is such-
and-such, such that the industry is viable, profitable. And is
there a difference between operating margins and rate of return
on investment? Is this the right standard that we should be
looking at?
Dr. Barnaby. It is the standard that is public, and I don't
have access to the financial statements of many of the
individuals companies that are involved because they are
privately owned. The first place I looked actually was on my
State Farm policy, which is a mutual, this is my personal
policy. They actually give you an income statement, and they
break all these items out: the amount that goes to loss
adjustment, the amount that goes to paying claims, et cetera.
And as far as I can go with this data, it is basically to
say exactly what you said. That the amount that is left over to
operate the insurance company is not, in fact, smaller than it
is with other property casualty lines. So I think basically you
could argue that the crop insurance companies are at least as
efficient as the auto insurance companies, the homeowners
insurance companies, et cetera.
Mr. Moran. And if you were looking to enter the insurance
industry, according to operating margins, it would make a
better investment by investing in property and casualty or
other lines of insurance than crop insurance?
Dr. Barnaby. Well, apparently that was Fireman's Fund
judgment. They withdrew from this industry, and there is a
company that has a lot of assets. These, for the most part, are
very small insurance companies. One of the things you might not
pick up on those auto polices, we are talking about $160
billion in premium versus $4 to $5 billion here to put those
numbers in perspective. Great American is actually kind of an
exception to that because they are a pretty good sized company
too. But most of the crop insurance companies are not that
large.
Mr. Moran. Let me ask a question. This is somewhat a
follow-up of the chairman's question. We have seen an increase
in commodity prices for many commodities grown on American
farms. The result of that is an increased premium paid by
farmers. Is there a corresponding increase in administrative
costs or risk associated with the increased price and premium?
Dr. Barnaby. There clearly is an increase in risk exposure.
I did a presentation in front of an industry group where I
looked at the supply demand numbers. This is back in February,
and as tight as these stocks are, as I was pointing out to
them, if we have a '93 excess moisture and '88 drought, I have
no idea how high that price could go. And with these revenue
products, the big risk is a short crop at high price. That is
when you pay out the really big bucks. And it won't be just the
insurance companies getting tapped. USDA is going to get tapped
too if that occurs, I should say when it occurs. I don't think
the weather has changed that we are through having disasters,
so their exposure is substantially higher.
The A&O, yes, I mean that clearly went up as a result of
higher prices. But the premium, what they are calling
underwriting gain, that is not exactly a correct definition of
underwriting gain. But what they call underwriting gain, we
don't know where that comes out until we see what the loss
experience is through the growing year. It is not going to be
good in Kansas.
Mr. Moran. Yes, sir. Mr. Chairman, thank you for the time.
Dr. Barnaby, I have run out of time, but I would welcome your
critique or review of the GAO report at our mutual convenience
perhaps. Thank you.
Mr. Etheridge. And if you would just submit that to the
full committee in writing, that would be great.
Dr. Barnaby. Yes, sir.
Mr. Etheridge. Thank you. The gentleman from Minnesota, the
chairman of the full committee, Mr. Peterson.
Mr. Peterson. I thank the chairman. I want to thank he and
the ranking member for their leadership. I am sorry. I had to
step out a minute that I might have missed something. But
apparently, Mr. Brichler, RMA has requested, and GAO and the
OIG have also said that they think that RMA needs the authority
to renegotiate the SRAs. Do you agree with that? I would like
to know what terms you think.
Mr. Brichler. My experience in the industry, I have gone
through three renegotiation processes since 1994. While I think
it is necessary that we always review what the contractual
terms are, given the current set of affairs, one thing that is
really difficult when you are a large company or a reinsurer of
a large company or a small, privately owned company, not having
an agreement that has multiple-year length makes it very
difficult to manage any kind of operation. Why would you invest
in a business for the future if next year they could change all
the rules on you and it would be no longer worthwhile for you
to stay in business?
So I think if we are going to renegotiate the SRA, it needs
to be for a duration long enough that there is a set time
period where companies can react to whatever the terms are,
reinsurers can be, you know, approached and explained what the
differences in risk or return have been made in the agreement,
and it is set and not every December, you know, the way the SRA
works currently, there is no negotiation because by
legislation, it is locked down.
In the past, it could be cancelled at any December 31, so
we always kind of sat on pins and needles until January 1 to
know if the deal was going to change on us. So in response, I
think it is appropriate to renegotiate it at some time, but not
every year and certainly not every 3 years.
Mr. Peterson. Apparently the studies, I guess that you
cited on the profitably, cover pre-ARPA dates. Are they still
reliable, given the climate we are in today where we put in
more government subsidy and we have a very different price
situation now than we had back then?
Mr. Brichler. I honestly couldn't tell you. I think it
would be appropriate to look at that, but if you look at the
data that, for instance, Dr. Barnaby has analyzed or what we
have access to in the public domain, there is clearly a close
relationship between the returns on the crop insurance sector
and what is normal on property and casualty lines. I don't see
a disparity there, and I think Dr. Barnaby's testimony leads me
to believe that there are other major companies that have
actually taken a different approach in saying this isn't a line
of business that we want to be involved in because the
volatility and the risk is too great for the amount of
investment we need to make. He mentioned Fireman's Fund.
Hartford got out. INA got out during my tenure. There are a lot
of large companies that were in this business that are no
longer in it.
Mr. Peterson. For both you and Dr. Barnaby, I guess this
A&O question, does it make sense to have a system where this is
set by a percentage. We have this situation now where my
farmers are telling me that policies are twice as much as they
were last year. And some of the agents that I have talked to
say there is some extra work because of the price situation. It
is more complicated now to try to figure out what you ought to
do. Does this make sense, or is there some better way to do
this than having a percentage in the law?
Mr. Brichler.I think it was two SRA negotiations ago, we
kicked around, different ways of compensation for overseeing
and managing this business. But we always came back to the
industry in general works off of commission numbers off of a
base premium. And that is where we always ended up. If there is
another suggestion, as long as it is equitable for all parties,
I think the industry would, you know, listen to that.
But again it has to be commensurate with what the returns
are or the expense components are for other lines of business,
or you will have people fall out of the program.
Mr. Peterson. I think my time is up. Do you have anything
to add, Dr. Barnaby? Have you looked at that?
Dr. Barnaby. Yes, I have a little bit. Obviously I don't
think very many people were forecasting $4 corn 6 months ago or
9 months ago. And so if you want to argue that was sort of a
windfall on the A&O, you could certainly make that argument.
Now, it is also true that if we had $2 prices, then that A&O
drops too. And so one of the things I thought about is one
alternative, if you want something more stable, is to base it
on a long run price rather than the current price as far as
A&O. Now, that is totally different when you get over to the
premium that your farmers are paying. The premium is
substantially higher because the risk is just substantially
higher, and that is measured by the Chicago Board of Trade.
Mr. Peterson. I understand that. Could I ask one more
question? This should just take a second. Okay, I think, Dr.
Barnaby, I think Dr. Collins stated that they get a lower the
loss ratio from the 1.075 to 1 without having much impact on
premiums. Do you agree with that?
Dr. Barnaby. That they can lower the loss ratio?
Mr. Peterson. Yeah, from 1.075 to 1.0. I think in the
hearing we had here a while ago that was stated.
Dr. Barnaby. I have broken these out by state, and
nationally the book, I would agree, is pretty close to the
actuarially sound number. But it is certainly different by
state, and the fact is my state is one of those that has a loss
ratio that exceeds one. So that means there are some states
that don't like Iowa and Illinois, and that is why it is a very
competitive markets, why there are a lot of insurance companies
there.
Mr. Peterson. But nationally it is pretty close to----
Dr. Barnaby. Nationally, I won't argue over three points. I
am not an accountant. I am an economist. You know, 3 or 4
percent doesn't mean anything to me, in the ballpark. It is
close. I won't argue with him over three points.
Mr. Etheridge. All right. I thank the gentleman.
Mr. Peterson. Thank you very much, Mr. Chairman.
Mr. Etheridge. Thank you. Mr. Boustany, 5 minutes.
Mr. Boustany. Thank you, Mr. Chairman. Mr. Ferens, could
you please explain further how what you are recommending is
different from what RMA currently does to identify waste,
fraud, and abuse?
Mr. Ferens. Certainly. Our approach is to take data mining
and leverage it further. We use a systematic approach where we
take in all available data, and we let that data tell us a
story. We do that through the statistical methods that we have
developed over time with a number of different clients, both in
national security and civil market spaces.
But it really is a story that the data tells us. It is not
looking for individual anomalies. It is not the human bias. It
is not the hypothesis-driven approach. We try to understand
what the linkages are between entities and individuals from
that, and then using the statistically-based approach, measure
those linkages in terms of strength. That gives us an ability
to prioritize investigations.
If a network of individuals seems suspicious, we can pull
in subject matter experts and say does this seem appropriate.
We can then retrain the data and look for additional anomalies
in large groups of individuals based on that subject matter
expertise. Or if that anomaly turns out to be, well, what we
would expect, we sort of set that aside, and we train the data
a different way to ensure that those false positives don't
continue to emerge.
But all in all, you get a prioritized profile of the bad
behavior. You actually get a case built before you. All of the
data is available at your fingertips. You don't have to go to
each of the multiple disparate databases and pull in
information. You know who the people are, how they are related,
what the entities are, whether it is a cooperative, whether it
is a group of farmers, whether it is a bad corporation. We can
tell all that information quickly.
Mr. Boustany. Thank you. Based on what you know at CAE at
Tarleton, how would you rate their work? And are you suggesting
that what they are doing is now one way to conduct oversight,
but there are certainly other ways to go further with it?
Mr. Ferens. I am suggesting that what they do is quite
good, and what we do is again to take that and leverage it. In
some instances, the data mining results would be superior to
what we might find. If the data sources are well mined, we
would probably find no incremental benefit. However, when we
pull together all of the data sources, we would look at
probably seeing incremental benefit accruing across the board.
Mr. Boustany. Thank you. And, Dr. Little, based on your
professional experience and testimony that you have heard from
Mr. Ferens, is it possible for you to use more of these
analytical techniques as part of your work with RMA?
Dr. Little. Congressman, the techniques that Mr. Ferens is
talking about are things that have been published and have been
around for a very long time. They are basically the foundations
of matrix algebra and multi-varied analysis.
And, if I may, I would like to address what he was talking
about in terms of linking entities together. My group won the
best paper in economics in 2004 for doing exactly what he just
described. It was published in ``The American Journal of
Applied Economics''. So I don't see the difference here. What
he described is exactly what we do. We try to integrate as much
data as possible. I mean I just told you that we are building a
42-terabyte system to hold all the satellite data from 2000
until now, to yesterday, for immediate use. And we are going to
share that with the crop insurance companies also. I really
don't see the difference. Thank you.
Mr. Boustany. Thank you. Mr. Ferens, do you have anything
else you want to add?
Mr. Ferens. I think that there are differences. I think
that we can work together to illustrate those differences.
Oftentimes what we as an organization do is perform proof
concept, again working with subject matter expertise of the
individuals. There is certainly opportunity for us to explore
if what we have done is aggregate information across numerous
agencies in the past. And without fail, we have found
improvement across the board.
Mr. Boustany. Thank you. Are you suggesting that you use
different analytical techniques than what Dr. Little and his
group are doing?
Mr. Ferens. I think we use a combination of techniques that
may be innovative in the way we combine them.
Mr. Boustany. Okay, thank you. That is all I have.
Mr. Etheridge. I thank the gentleman. The gentlelady from
Kansas, Ms. Boyda.
Ms. Boyda. Thank you, Chairman. Dr. Barnaby, thank you for
your testimony. It is actually the apples-to-apples comparison
that is quite helpful for those of us who really don't
understand the ins and outs of all of this. And I wanted to ask
you a couple of questions. My guess is, like you, I am real
happy to pay my taxes, but I am not interested in paying any
more than we just have to. So with all the different options
that are available to us, the current system being obviously
the one on the table today, is this the way that you would use
my tax dollars and yours? Anything that you would recommend to
make the use of our tax dollars more efficient? Basically what
I am asking is from your perspective, are the taxpayers getting
a good value for this? Anything that you would change that
would make it a good deal for our farmers and a better deal for
our taxpayers, or is this the optimum?
Dr. Barnaby. Well, first of all, maybe you are not aware I
created the crop revenue coverage contract. That revenue
contract is mine.
Ms. Boyda. See, I love this job. I love this job.
Dr. Barnaby. And obviously that started back in 1990. I
have been at this for a while, and, no, I think that created a
lot of marketing opportunities. We have some really good corn
prices right now where farmers can take advantage of those. And
it gives you the financial backing and the comfort level to
make those decisions.
Having said that, there is one new theory that I have
kicked around with Congressman Moran just yesterday, but I will
gladly share it with you too. Looking at the idea that, on the
government's spent dollars, is a general statement don't take
over what can be insured. In other words, target the government
dollars to the uninsured part of the revenue distribution
rather that duplicate what can be insured. One reason for that
is obviously it is still cheaper to do it under an insurance
program regardless of who administers it if farmers are paying
a share of the premium cost.
When we talk of things like loan deficiency payments and
all the other kinds of payments that may come to farmers, those
are essentially just variations of revenue insurance. But 100
percent of the premium is paid by the government. So if you are
going to target those, target to the part that you can't
insure. I haven't really fully pulled that document together
yet, but I will gladly send it to you when I get it done.
Ms. Boyda. I would appreciate that. The GAO report that Mr.
Brichler was speaking about earlier, again I am not up to date
on that. I know a little bit about it, but could you summarize
what that said. And again basically what Mr. Moran was saying
is what--just give me--we have got 2 minutes and 9 seconds now.
Can you help me understand that report?
Dr. Barnaby. I am going to have to come back to you on
that. I have not read the report. I saw it just a few minutes
ago. I was comparing my numbers to make sure they agreed with
theirs, and just doing some spot checks, I think I agree on the
numbers. Now, we probably don't agree on the interpretation
though, but I have not read the report. But I will send an
email to your staff.
Ms. Boyda. All right, I would certainly appreciate that. I
had a question then for you, Mr. Brichler. This is the
wonderful part of getting to learn about the whole process
here. So I don't come to it with any preconceived idea. When we
are talking about when we have lost so many of our companies,
the big companies, when they get out of that business, do they
sell that book of business to somebody else? Or is everybody
just picking it up bits and pieces? How is the market
accommodating from going from 50 down to 17?
Mr. Brichler. Congresswoman, the events, I guess, are
unique to each one of those circumstances. Most of the time a
company that currently is operating in the crop insurance
sector will buy the renewal rights for the policies that the
exiting company has. But we also have had issues in the past
where some companies just have gone bankrupt, and their
business has gone out and been absorbed by the direct
competition among everybody in the industry. So it works best
if there is a planned renewal rights purchase, but in the
absence of that, if there is business on the table, the
companies that are in this space will go after and compete for
it.
Ms. Boyda. All right. Thank you very much. I yield back.
Mr. Etheridge. Thank the gentlelady. The gentleman from
Texas, Mr. Neugebauer for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman. Dr. Barnaby, I
want to go to your chart, Table 1, I guess, and as you know,
the USDA is proposing to increase the amount of underwriting
gains retained by RMA in the farm bill proposal to kind of
rebalance the risk sharing. And so in 1997, according to Table
1, that would have been a good deal.
Dr. Barnaby. For the government, yes.
Mr. Neugebauer. Yeah.
Dr. Barnaby. Yeah, um-hum.
Mr. Neugebauer. How would that deal have been in 1993?
Dr. Barnaby. Well, they would get a share of the
underwriting loss.
Mr. Neugebauer. Yeah, a pretty substantial share, as well
as also in 2002, right?
Dr. Barnaby. As I understand that proposal, their proposal
is to take 25 percent of the underwriting gain/loss, so
whatever it is. Again I sort of cringe when we say underwriting
gain or loss. It is really margin on the gross premium is what
it really is, but yes, sir.
Mr. Neugebauer. And so what, you know, and then maybe in
the last few years, that could have been a good deal for the
government. What happens to the industry though if the Federal
government starts trying to pick those years or to anticipate
going into those years and taking a greater participation in
that. Does that -- what happens to the companies long term? Do
they begin to say since the government is getting into the
interest business we are getting out?
Dr. Barnaby. Eventually that would be the case. I don't
know where that point occurs. One thing I might point out to
you just over the last 4 years, the government effectively had
a billion dollar underwriting gain over that period.
Mr. Neugebauer. Um-hum.
Dr. Barnaby. So they didn't pay in to those numbers. They
are not listed here on this table. Now, in other years, the
government effectively had an underwriting loss. So, you know,
this is just the different sharing arrangements. So it kind of
depends on what year happens. If this were to go into effect
next year, and we get an '88 drought next year, why the
government wouldn't only have underwriting losses, but then
they would have a share of the company's. And they would
probably be glad that you they have a share of it at that
point.
Mr. Neugebauer. Um-hum. Mr. Herring, one of the things that
I think I am most concerned about, I am recently from the
private sector. And some people think that profit is a 4-letter
word. I always remind them that loss is a 4-letter word
actually, and that to the degree we have healthy insurance
companies, particularly in relation to crop insurance, that is
vital to the agricultural industry. And quite honestly, in my
part of the world, if you don't have crop insurance, you
probably couldn't get a loan for your crop production.
Mr. Herring. Yes, sir. That is the general rule, but
sometimes there are other factors that we look at. But
typically you have to have it.
Mr. Neugebauer. Would you say that the current coverages
available for some producers is adequate?
Mr. Herring. Yes, sir, I would. I mean in eastern North
Carolina, I feel like----
Mr. Neugebauer. In your part of the world. In my part of
the world, because of some of the production history, we have
people who are not able to actually take out enough insurance
to cover the cost of planting that commodity.
Mr. Herring. Yes, sir.
Mr. Neugebauer. So one of the things that I think makes
more sense rather than trying to limit the amount of money that
crop insurance companies make is working at making sure that we
have a crop insurance program that covers the needs of the
folks that are relying on it. Because as you know, and I am
sure in your part of the world as mine, the small family farm
is unfortunately becoming extinct and that agriculture is
really big business and that these producers are taking big
risks. And to the extent we have a well-funded, healthy crop
insurance market will really in a lot of ways determine what
the future of agriculture is in this country. Would you agree
with that?
Mr. Herring. Yes, sir, operating expense is now at a higher
ratio than they have ever been with the fuel prices and
everything. And the margin is smaller, and that we can't handle
any more risk.
Mr. Neugebauer. And when you look at what we spent on ad
hoc disaster programs, I notice someone alluded to that. But
really when you look at what we spent on ad hoc disaster
programs over the last few years in this country. The ability
to enhance our crop insurance programs really would have been
able to limit what we would have had to pay out had we had a
better crop insurance program.
And just I know Ranking Member Moran would be disappointed
if I didn't bring up the fact that I do have introduced some
legislation that would actually increase the ability for
producers to carry higher levels of coverage without really,
even Dr. Collins who is going to testify later on, has
scratched those numbers out.
And let me tell you when Dr. Collins scratches some
numbers, he scratches them pretty hard. Is that really it is a
very cost effective program, and so, I think, as we look at
this issue of who gets what and how much money people get to
make, I think what we need to do is make sure that we are
looking after the interest of the producers in this country.
Mr. Etheridge. We thank the gentleman for his comments, but
he is getting long-winded.
Mr. Neugebauer. I am sorry, Mr. Chairman. I apologize. I
yield back the balance of time that I don't have.
Mr. Etheridge. We thank the gentleman. The gentleman from
Georgia, Mr. Marshall. We are running short of time. We got a
vote.
Mr. Marshall. Thank you, Mr. Chairman.
Mr. Etheridge. Just to let everyone know, we got a vote
coming very shortly, and we are going to try to get everybody
in before we have the vote.
Mr. Marshall. Mr. Chairman, in response to Mr. Moran and
Ms. Boyda, Dr. Barnaby indicated that he is going to be willing
to take a look at the GAO report and provide them both with his
comments. Is it possible for the record remain open and let Dr.
Barnaby take a look at the GAO report and submit something for
our record in regard to that so we will all have it and it will
be in the record permanently?
Dr. Barnaby, Ms. Boyda mentioned that it is nice to be able
to look apples to apples, and taking a look at Table 1 and
comparing the subsequent tables, there are two columns, I
think, effectively two columns that don't appear. And one is
this underwriting gains column, and the other is the premium
subsidy column. Could you help me out in better understanding
your analysis? The reason those two columns don't appear in
your comparisons, obviously one column doesn't appear because
there are no premium subsidies provided by the government with
regard to that kind of insurance, but the underwriting gains?
Dr. Barnaby. Yes, well, that is the problem. Underwriting
gains, I put it in quotes because what USDA is calling
underwriting gains is not what is called underwriting gains in
private property casualty. They start off in private property
casualty with a dollar coming in and then from that, they
subtract the marketing cost, which is primarily insurance agent
commissions. They subtract off the loss adjustment expense.
They subtract off the claims that are paid out to
policyholders, and then the overhead of the company, you know,
turn on the power and the lights, et cetera. And after you
deduct all those from your gross premium, then you get
something called underwriting gain, and then from that, they
add investment income, which there really isn't any here
What I have done is simply take all those dollars and say
if I am a private company, I have to get all my expenses plus
pay my claims out of that $1 that comes in. And that total
dollar coming in is that combined A&O underwriting gain, and I
am treating it as a cost rather than something that is at risk.
I know it is at risk, but I am treating it as a cost, plus the
premium subsidy, plus the farmer paid premium. That dollar
comes into the insurance company, and then out of that dollar,
over a period of years, you can pick out individual years, as
Congressman Neugebauer did, and you would have paid, you know,
60 cents out of it. Other years, you would have paid a dollar
out of it. But the long-run average you have got about 75
cents.
Mr. Marshall. Well, what----
Dr. Barnaby. And 30----
Mr. Marshall. --I wound up doing is taking the total number
of years that you have here----
Dr. Barnaby. Um-hum.
Mr. Marshall. --and I deleted two outlyers, which would be
a fairly standard statistical technique, and I came up with 66
percent just as I was sitting here. But it is pretty close to
the figures that you have as far as average is concerned, so I
have no quibble with that. In your mind, does it make any
difference in comparing--again it is this apples-to-apples
analogy that was used earlier. Does it make any difference in
comparing any returns to this industry with returns to the
other industries, that 30 to 40 percent of the premiums----
Dr. Barnaby. Um-hum.
Mr. Marshall. --are pretty much guaranteed. They just come
in the form of checks from the government.
Dr. Barnaby. Well, one of the things you need to look at, I
would suggest to you, is how much variation there is in the
annual payout out of that dollar. You say you deleted a couple
of the outlyers. Well, there are two other outlyers that are
not in here, 1988 and 1983, very long-run insurance. If you
look at the property casualty, it doesn't vary that much
annually.
Mr. Marshall. So that was going to be another one of my
questions. You don't use very many years in statistical
analysis normally. You take at least 19 samples, and you have
got about 5 or 6 years for each of the others. And you did that
simply because it is pretty standard. It is just with the
others----
Dr. Barnaby. All the data that is available to me. If RMA
wants to make the data public, I would be glad to work with it.
Mr. Marshall. No, I was referring actually to your
comparison.
Dr. Barnaby. The----
Mr. Marshall. Your comparisons are pretty short on years.
Dr. Barnaby. On the auto policy for example? Yes, but again
they don't change a lot from year to year.
Mr. Marshall. So basically your testimony is that we can go
ahead and rely on that even though the sample number of years
is pretty brief?
Dr. Barnaby. Yes, I don't think that is going to change
very much. In fact, that is----
Mr. Marshall. I am going to have to interrupt you because I
am running out of time. Real quick question. We mentioned this
notion of changing the way the government participates in
underwriting this risk and maybe the government getting more
involved. If the government gets more involved. It is a bad
year, then the government is going to experience some loss. If
it is a bad year, don't we do disaster payments anyway? What
would be a better deal, from the government's perspective, if
we were able to restrain ourselves where disaster benefits are
concerned and make crop insurance even more available? Net, how
would the taxpayers come out?
Dr. Barnaby. Well, it is pretty much a hypothetical. I
don't know exactly what this new program is going to look like.
I have looked at the one that Congressman Neugebauer mentioned,
primarily using a county yield number to design an insurance
program that would tied to the individual that was based off of
county yields. The only thing I would question on that, you
need to make sure that those expected county yields are
correct, and I would take issue that they are probably not. But
in any case, I don't know the answer to that without doing more
analysis that I have got at this point.
Mr. Marshall. Yield back what I don't have.
Mr. Etheridge. Thank the gentleman. Gentleman from Texas,
Mr. Conaway.
Mr. Conaway. Thank you, Mr. Chairman. Dr. Little, I know
this is a crop insurance hearing, but would you give us a
couple of thoughts on use of your data mining techniques and
work being applied to other disbursement areas within USDA,
such as the nutrition program used to apply what you do on
looking for waste, fraud, and abuse in the nutrition program?
Dr. Little. I think it has a wide application there, and we
have discussed this with the FNS folks, and they feel that it
has a great potential also. One of the data issues with FNS is
that the vendors for the food stamp program are monitored by
the Federal government, and the recipients are monitored by the
states. That is a mistake, and those things need to be brought
together so that you can do the kind of link analysis that has
been mentioned here. And once you do that, I think that you
will be able to recover quite a bit of maybe it is slop, maybe
it is waste, fraud, abuse or all of it. But something that
accounts for over half the USDA's budget certainly needs better
oversight.
Mr. Conaway. Okay, give us a couple thoughts on how would
you fix that disconnect between the state oversight and the
Federal oversight? What would be your plan there?
Dr. Little. I would consolidate the data. I would require
the states to report the recipients. You have got California,
for example, that won't report to USDA OIG on request who the
recipients are. They give them aggregate county numbers,
masking any possible abuse.
Mr. Conaway. Okay, so this field might be ripe for harvest,
to use a phrase.
Dr. Little. Sir, it is overripe.
Mr. Conaway. Okay, thank you. Mr. Barnaby--or Dr. Barnaby.
I apologize. Or Mr. Brichler. Getting back to the differences
between property and casualty insurance companies, they get the
premiums up front in advance, and then they invest those
premiums over some period of time in an attempt to make money,
which as my good colleague from north of Texas said is not all
bad, versus how the crop insurance. Would you flush that out a
little bit?
Dr. Barnaby. Well, you don't pay for your crop insurance
policy until after the growing season is over, not at the start
over the coverage. Whereas with an auto policy, you pay for the
premium up front before you have any--in fact, if you don't pay
it right away, they will cancel your policy within----
Mr. Conaway. Right.
Dr. Barnaby. --30 days. So, yes. And if you look it is
significant, again because State Farm is a mutual company, I
get an income statement along with my premium notice. And you
look down their income statement, the investment income is a
significant part of their net returns to the company.
Mr. Conaway. If you had a similar approach under crop
insurance, what would that do for the program itself? In other
words, what is that impact of that? I mean I know the answer,
but I want you to tell us what the impact would be if we had a
similar circumstance in crop insurance.
Dr. Barnaby. If you paid the premium up front?
Mr. Conaway. Yes.
Dr. Barnaby. Yeah, well, you would add investment income to
the industry.
Mr. Conaway. To the----
Dr. Barnaby. I might add that I have been involved in
developing private insurance contracts, and that is two things
I always do. Let us get the premium up front, and the expense
load usually is 40 percent when it is done privately.
Mr. Conaway. All right, and again, this is for Mr.
Brichler. Is this percent of premium the best way, the most
reasonable way to determine the administrative subsidy pay on
behalf of farmers to companies?
Dr. Barnaby. Congressman, as I said this earlier in
response to Chairman Peterson's question, we have talked
whether there are other ways to do that, but the entire
industry always ends up focusing as a percent of premium. So
while there may be better solutions, I don't know of one. It is
certainly the industry standard. And if I could take one second
to comment on your investment income, just to kind of put four
corners around that, the estimated underwriting gain for the
whole property and casualty industry in 2006 was $15.7 billion.
Now, the investment income for that same period of time was
$54.6 billion. So, as Dr. Barnaby said, there is a gigantic
difference between this line of coverage not having any
investment income and only relying on underwriting gain.
Mr. Conaway. All right, thank you, sir. And, Mr. Chairman,
I will yield back time that I have.
Mr. Etheridge. I thank the gentleman very kindly. Let me
thank each member of the panel for being with us today. It is a
little unprecedented that our government witnesses are second
rather than first, but I want to thank them for waiting and ask
them if they would come to the table. Today we want to do it
this way so they would have an opportunity to have their
comments on what they heard from the first panel. We are going
to try to get started with the second panel.
Please understand that we may have a vote called any time.
We have been notified that any time from 11:30 on, we could
have a vote. Maybe we can get through the testimony before we
get started. I am asking Administrator Gould, if he would
please, Administrator of the Risk Management Agency for the
Department of Agriculture.
Okay, well, we will let you take a break, the vote is
ongoing. I didn't get a buzz on it. How much time do we have?
We have 11 minutes left on the vote, so we will have two votes.
We should be back in about 20 minutes maybe if we can rush
back, and I will try to come as soon as the second vote starts.
Administrator Gould would come to the table. He will be
accompanied by Dr. Keith Collins, Ms. Tighe accompanied as a
Deputy Inspector General of the Office of Inspector General,
and Mr. Robert Robinson, Managing Director of Natural
Resources.
And if you don't mind, we will stand in recess until we get
back, and as soon as we get back, we will get started. We won't
have to start with introductions at that point.
[Recess.]
Mr. Etheridge. Mr. Gould, if you would please.
STATEMENT OF ADMINISTRATOR ELDON GOULD, RISK MANAGEMENT AGENCY,
U.S. DEPARTMENT OF AGRICULTURE, ACCOMPANIED BY DR. KEITH
COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE
Mr. Gould. Mr. Chairman, I guess I can still say good
morning, Mr. Chairman and I will cross out the portion here
``members of the subcommittee''. I am Eldon Gould,
Administrator of the USDA Risk Management Agency. I am also a
lifelong Illinois farmer who values crop insurance program that
makes the best use of taxpayer dollars. I am fortunate to have
with me today Dr. Keith Collins, Chairman of the Federal Crop
Insurance Corporation Board.
The FCIC board and RMA have established overall program
integrity as a high priority. RMA maintains program integrity
within the Federal crop insurance program by the use of
prevention, detection, and enforcement. The Federal Crop
Insurance Program is meeting its mandated target loss ratio.
That is not to say that more cannot be done, with regard to
reducing program fraud, waste, and abuse.
We estimate that in 2007, we will reach $68 billion in
insurance protection for American agriculture. In a program of
this magnitude, we must be diligent in order to deliver a
flexible, fair, and fraud-free program. RMA completed the
second year of a structured random policy reviews in 2006. It
is noteworthy that RMA's observed error rate from reviews on
600 randomly selected policies was 2.68 percent. We initially
projected five percent on the first reports, so this number is
lower than we expected.
Essential to the Federal crop insurance program are the 16
private insurance companies who actually deliver insurance to
America's farmers and ranchers. There has been recent criticism
of the profits that companies make by selling crop insurance.
There is no question that in recent years insurance companies
have benefited from this program. Moreover, we agree that
rebalancing of the program should be a priority to allow a
redistribution of the underwriting gains so that the Federal
government would receive an increased share. In fact, this is
one of the administration's Farm Bill proposals.
In addition, permitting RMA to renegotiate the terms of the
standard reinsurance agreement every 3 years would give it the
flexibility to routinely monitor program performance and
maintain the proper risk sharing balance. That being said, the
reimbursement of the company's A&O expenses and the
underwriting gains made by the companies is a complex matter,
and any analysis must include data specific to the crop
insurance industry.
Recent underwriting gains by crop insurance companies have
tended to be higher than other similar lines of insurance
within the industry primarily because of an unusually good run
of favorable weather over the past few years. It won't always
be that way. If next year happened to be an extremely dry year,
as 1988 was, at today's level of liability, the companies would
lose $980 million in underwriting. On the other hand, if next
year happened to be a significantly wet year like 1993,
companies would stand to lose an estimated $440 million. It is
not a matter of if but when similar kinds of weather events
will occur in the future.
RMA has preempted millions of dollars worth of expected
payments, and we continue to find ways to reduce program abuse.
We continue to use data mining to identify anomalous producer,
adjuster, and agent results, and with the assistance of FSA
officers, conduct growing season spot checks of anomalous
producers. Reduced indemnities on spot check policies over the
past 5 years total approximately $430 million.
I thank you for this support and cooperation provided by
the committee to help improve the Federal crop insurance
program, and I appreciate the opportunity to participate in
this important hearing. And if we have time, at the appropriate
time, I look forward to answering questions.
Mr. Etheridge. Thank you, sir. Ms. Tighe.
STATEMENT OF KATHLEEN S. TIGHE, DEPUTY INSPECTOR GENERAL,
OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF AGRICULTURE
Ms. Tighe. I think it is officially good afternoon,
Chairman Etheridge, Ranking Member Moran, and Congressman
Cooper. Thank you for inviting the Office of Inspector General
to testify today concerning our views on the Federal crop
insurance program. The crop insurance program represents a
significant investment by the Department of Agriculture and
Congress to support and strengthen the Federal safety net for
America's producers.
We at the Office of Inspector General have conducted
substantial audit and investigative work pertaining to the crop
insurance program and its participants. I am pleased to be able
to share with you our findings and recommendations. My written
statement contains my full testimony, so I will just briefly
summarize a few highlights.
There is clearly a significant upward trend in Federal
payments to approved insurance providers for their expenses in
underwriting gains. From 2000 to 2006, total payments to
insurance providers increased to record levels to over $1.8
billion an increase of over 120 percent. The Federal
reimbursement to insurance providers for administrative and
operating expenses for each producer policy has increased to
almost 100 percent during that period.
While Congress has successfully broadened the safety net
for producers, we believe it is time to reassess what
constitutes an acceptable cost to the government. To have an
effective crop insurance program, we believe three elements are
essential: proper assignment of risk between the insurance
providers and the government, effective management controls
including particularly a strong quality control system, and
aggressive enforcement actions to address fraud.
In contrast to other insurance programs, the approved
insurance providers that participate in this program face very
low risks. Since RMA is underwriting most of the risk for the
crop losses, the insurance providers have less incentive to
vigorously administer Federal crop insurance policies in
accordance with the best interest of the government and the
taxpayers.
To ensure that Federal funds are used more responsibly and
efficiently, the insurance providers need to consistently
monitor policyholders, deny questionable claims, and address
weaknesses in their own practices. We have reported on concerns
such as conflicts of interest among sales agents, loss
adjusters, and policyholders, and inadequate verification of
losses by loss adjusters.
While RMA has taken positive steps to strengthen its
quality control review system, more can be done to evaluate the
private sector's delivery of the crop insurance program and
prevent improper crop insurance payments. In addition, the full
implementation of a common information system between RMA and
FSA is critical, in our view, to improving integrity within the
farm programs and reducing the risk of improper payments.
In the enforcement area, the Office of Inspector General
works closely with RMA, FSA, and the Department of Justice to
aggressively pursue fraudulent crop insurance schemes that
undermine the program and burden taxpayers. Compared to fraud
affecting other USDA farm programs, these cases are
particularly complex in their details and time consuming to
investigate. Since fiscal year '99, our investigations have
resulted in 70 indictments, 53 convictions, and over $54
million in money recoveries.
Some of the common schemes our investigations have revealed
include losses claimed on crops that were never planted and
collusion between program participants to fabricate or inflate
crop losses. While the great majority of participants and
beneficiaries of this program are honest and faithfully comply
with its requirements, there have been a few participants whose
improper conduct has tarnished the program's reputation.
My full statement details our recommendations for steps
that the department and Congress can consider to improve the
program. Legislatively, we do support the crop insurance
proposals contained in the department's 2007 Farm Bill
proposal. Other actions that we believe are critical to
providing effective management of the crop insurance program
and to prevent fraud waste and abuse include, as I mentioned
earlier, accelerating the full implementation of a
comprehensive information system, finalizing conflicts of
interests, policies, and procedures, and expanding RMA's data
mining activities.
This concludes my testimony. I would be happy to answer
questions at the appropriate time.
Mr. Etheridge. Thank you, ma'am. Mr. Robinson.
STATEMENT OF ROBERT A. ROBINSON, MANAGING DIRECTOR, NATURAL
RESOURCES AND ENVIRONMENT, GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Robinson. Thank you and good afternoon.
As we in GAO have pointed out in many forums, the Nation's
bleak financial condition should be a cause of great concern to
all Americans. In this financial context, it is vital that
every federal program be operated as effectively and as
efficiently as possible, and that major spending leakages be
plugged when they have been identified.
We have recently identified federal crop insurance as one
such program in need of attention to better protect tax payer
interests. Based on our most recent work, additional attention
is needed in two areas. First, tightening procedures to reduce
fraud waste and abuse in the payment of insurance claims, and
second, adjusting excessive compensation insurance companies
are paid to sell and service crop insurance policies.
Let me start with the fraud waste and abuse. On this front,
RMA has taken a number of steps, as Administrator Gould has
pointed out, to reduce previously identified problems. In
particular, its use of data mining enabled it to identify
producers with claim patterns consistent with fraud and abuse
that warranted heightened inspection activity. Combined with
other related actions taken by it and FSA, RMA has reported
over $300 million in avoided payments between 2001 and 2004.
That is certainly good news.
Still, in our most recent work, we found that a number of
important vulnerabilities open the system up to well over
perhaps $100 million a year in potentially fraudulent claims.
Specifically, first, FSA was not conducting all the field
inspections RMA requested to identify suspicious claims;
second, RMA's data analysis of the largest farming operations
was incomplete, reducing its ability to identify potential
fraud. RMA and FSA started to do the information sharing to
improve this analysis, but has now stopped because of privacy
concerns.
Third, RMA was not effectively overseeing insurance company
quality assurance programs, which are an important component of
the fraud detection system. And finally, RMA has infrequently
used its full sanctioned authority to address identified
program abuses. Likewise, we found out the basic program design
components laid out in both regulation and statute contribute
to increased chances for abuse. In particular, allowing farmers
the option of insuring fields individually rather than as one
unit enables farmers to switch production among fields either
to make false insurance claims or to build up higher yield
histories to increase eligibility for future insurance
guarantees. Yield switching could be at the root of 10 to 12
percent of irregular claims.
Also, offering prevented planting coverage opens up a
significant exposure to claims of loss whose legitimacy can be
difficult to determine. RMA pays about $300 million annually in
such claims.
My second main point this morning, and obviously the one
that drew the most attention in the earlier panel, is that
compensation to insurance companies has been excessive. To this
end, over 40 percent of the $16 billion in Federal program
costs over the last 5 years were payments to insurance
companies, not benefits to farmers. In the last 3 years, this
percentage is appreciably higher. Any system frankly that
requires $2 to deliver $1 of net benefits would seem to have
some efficiency problems.
In this regard, USDA pays the insurance companies
participating in Federal crop insurance both underwriting gains
and cost allowances. Underwriting gains total $2.8 billion from
2002 through 2006. These gains represent an average annual
return of about 17.8 percent. This rate is nearly 2-1/2 times
the benchmark for other insurance lines, and I suppose that is
what we are going to be discussing a lot more in the next few
minutes.
USDA had a one-time authority to renegotiate the financial
terms of its SRA with the companies which took effect in 2005.
Nonetheless in 2005, insurance companies received a rate of
return of 30 percent, and in 2006, the return was 24 percent.
In addition to underwriting gains, USDA paid a cost allowance
to the insurance companies of $4 billion to cover
administrative and operating expenses for program delivery from
2002 through 2006. USDA expects these expenses to increase by
about 25 percent by 2008 because of higher crop prices.
Mr. Chairman, this means that the companies will receive a
higher cost allowance without a corresponding increase in
expenses for selling and servicing the policies, creating a
windfall of sorts. Let me close by offering this observation.
Congress has an opportunity in authorizing the farm bill to
provide USDA with the authority to periodically renegotiate the
financial terms of the SRA so that the company's cost of
reimbursement is not overly generous, and its overall rate of
return is more in line with private markets.
It also has the opportunity to address several statutory
provisions that have proven to place the program at greater
risk of fraud, waste, and abuse. We hope that Congress will
take full advantage of this opportunity. Thank you very much
for this opportunity to give our views.
Mr. Etheridge. Thank you, sir. We now will turn to the
members for their questioning. You each will have 5 minutes,
and I will yield myself the first 5 minutes.
Administrator Gould, Deputy Inspector General Tighe states
that you all believe that full implementation of a
comprehensive information management system is not expected
until 2012. What are the reasons for the delay, and is this
just a question of resources, and what are the fundamental
problems that are delaying the implementation? And finally had
Congress not repeatedly cut the funds for it in the
appropriations bill for the department in previous years, would
we already have a CIMS system in place?
Mr. Gould. Yes, thank you for the question. I would be
happy to respond to that. Actually, the information about that
not being fully implemented, the CIMS project, a comprehensive
information management system, will be implemented long before
2012. That date has been used for full implementation, but in
fact, there is some implementation already underway. And it is
anticipated that, if we can get the system of records sorted
out between RMA and FSA, that there will be much of the
implementation done for the 2008 crop year. And then as time
goes along, and we gain more experience, that CIMS project will
come along nicely. And hopefully by 2012, it is fully
functional.
Mr. Etheridge. So 2008 to begin, but 2012 still for full
implementation?
Mr. Gould. That is right.
Mr. Etheridge. Okay, so the statement is not that far off.
Ms. Tighe, in your opinion, what is the level of fraud in crop
insurance program in terms of percentage of policies or
percentage of premiums? Is Dr. Little's measure of 0.02 percent
of the claims that he has detected through data mining an
accurate representation of fraud in the system in your opinion?
Ms. Tighe. Mr. Chairman, we don't have a good basis for
evaluating the total fraud in the program in terms of number of
claims, and I can't speak specifically to Dr. Little's data. I
can point out that RMA has itself has an error rate in improper
payments of something just under 3 percent. Those are payments
also that can give rise to fraud. We don't sort of track or
evaluate that way. All we know is anecdotally, we have a lot of
cases dealing with fraud in crop insurance. And we know, you
know, the statistics I gave you in terms of dollars recovered
and everything, but we really have no good way of evaluating
the totality of the program.
Mr. Etheridge. Okay, thank you. Mr. Robinson, has GAO
conducted a profitability or rate of return analysis on crop
insurance? And if not, are you aware of any studies that have?
Mr. Robinson. We certainly have looked at it as part of our
work for the hearing in May. We certainly did a comparison of
underwriting gain and profitability for this line of insurance
and using the AM best averages for both 5 years and 10 years I
might add. And that is where we came up with the, you know,
roughly 2-1/2 times over that full 10-year period. That is
where we came up with that number.
Mr. Etheridge. Well, let me follow that up a bit. And as
you use that over that 2-year period though, does it go far
enough back to cover where you have those anomalies where you
would have heavy drought and heavy losses as it relates to
flood, et cetera geographically?
Mr. Robinson. Mr. Chairman, I think underwriting losses
have been experienced under this program twice in the last 17
years, once in the last 10. So by having a 10-year analysis, we
certainly cover one of those years. Yes, sir, and that is why
we tried--obviously the most relevant comparison in looking at
this program is since ARPA because so many rules changed. When
you go way back, you are analyzing something that is not
exactly the current situation. So that is why we started out
with a 5-year period. But just to be on the safe side, we went
ahead and did it over 10 years as well. And that 10-year period
would have covered the 1 year where underwriting losses were.
Mr. Etheridge. Where you had heavy losses. Thank you. I
yield.
Mr. Moran. Mr. Chairman, thank you very much. Part of the
difficulty I have in trying to sort this out is the continued
use of the phrase underwriting gain. Is that the correct
standard by which we ought to be judging the profitability of
the crop insurance industry? And does that allow for a
satisfactory comparison to other insurance or other companies
involved in trying to earn a profit? Is underwriting gain the
standard by which we ought to be discussing these issues?
Mr. Gould. Well, I am going to defer that question to Dr.
Collins. My opinion is that it is a little bit like comparing
apples to oranges because the crop insurance program is kind of
a unique entity between the private sector and government. But
I am sure Dr. Collins has got a good handle on that.
Mr. Collins. Thank you, Administrator Gould. Mr. Moran, I
think underwriting gains is probably not the best way to be
comparing returns from one business or one industry to another.
There are lots of different measures that can be used. There
are rates of return on equity, rates of return on assets, rates
of return on sales. Those are typically the kinds of metrics
that we use in comparing profitability across companies and
industries.
The problem with crop insurance, as Dr. Barnaby noted, is
there is problems with access to data. Crop insurance is a line
of business sometimes in big companies. When you look at other
lines of insurance, there are many different lines of insurance
they have in those companies. So there are allocations of cost
that have to be made.
There have been some studies on rates of return that have
tried to move away from underwriting gains and look at a
measure of profitability. The ones that have most often been
quoted are the Price Waterhouse Cooper study, which covered
data through 1995. There was the Milliman study, which we
contracted for, to help us get prepared for the SRA
negotiations. That had data through 2001. There was also the
Deloidin 2 Study that NCIS contracted for that had data through
2002. So there are three studies right there that tried to move
away from just the concept of underwriting gains and look at
the concept of profitability. Now, all three of those studies,
you could argue, are dated. They don't capture the post-SRA
world, the low loss ratios of the last couple of years.
I still personally look at underwriting gains,
understanding that underwriting gains are a complicated
concept. They have to cover a lot of things. They have to
cover, as noted earlier in the other panel, excess costs over
reimbursement. And we believe that the costs of delivering a
program do exceed the reimbursement for most companies.
You know our data for 2006 suggests that out of 14
companies for which we have data, 12 of them have delivery
costs in excess of the reimbursement rate. So underwriting
gains have to go to that. They have to cover the excess cost.
They also have to go to cover a policyholder surplus. You have
to have capacity to sell crop insurance.
We require companies to have 2 to 2-1/2 years worth of
basically policyholders surplus to cover 2 to 2-1/2 years of
500 percent loss ratio years. We have to have policyholder
surplus to cover that. So they have to build up that surplus.
So there is a lot of things that underwriting gains are going
for, as well as profit.
Having said all that, we still use the simple concept that
GAO used of looking at underwriting gains as a percent of
premium, and when we started the SRA negotiation in 2004, we
had in mind a goal there of 12 to 13 percent would be a goal
that we thought was a reasonable measure of underwriting gains
relative to premium. And if you look at the crop insurance
program from 1981 to 2006, that is 26 years, the average of
underwriting gains to premium is 9.6 percent. So it was less
than what was had as our goal going into the SRA.
Now, look at the last 3 years, 2004, 2005, 2006. That
measure, underwriting gains to premium, is 26 percent. So it is
way beyond what we had set as a goal for the SRA negotiation,
and it is way beyond what the historical performance of the
program is.
So the question becomes difficult. You know, what do you
read into that? Are the companies making too much money, or is
that just simply the reflection of 3 good years of really
unusual weather. So there is an uncertainty here about how to
draw the line when you have an industry that has potential for
very big losses, systemic losses, system-wide losses should we
get a natural disaster.
Mr. Moran. Mr. Chairman, I should never anticipate being
able to ask more than one question when Dr. Collins is
answering the one question. My time has expired----
Mr. Collins. Sorry.
Mr. Moran. --some time ago, and the list is still on the
piece of paper. What I would like to follow up with you,
Doctor, is does that measure, underwriting gain, correlate with
rate of return on assets or rate of return on investments,
which is something that is much more understandable, at least
for me, as to what the measure is? And so when you say we are
shooting for 12 to 13 percent, we are significantly higher than
that, would that also say that if we are shooting for a certain
rate of return, that same increase, that corresponding
increase, would be true for rate of return? Or does
underwriting gain mask the difference? And Chairman has got his
finger on my light. So we can talk, sir.
Mr. Collins. My guess is that they correlate.
Mr. Moran. Okay.
Mr. Etheridge. Thank you. The gentleman from Georgia, Mr.
Marshall.
Mr. Moran. It is a disadvantage of no longer being the
chairman.
Mr. Marshall. Mr. Robinson, thank you for your testimony,
and I have not read your report. And I actually stumbled into
this hearing unaware of this big dispute, and so I am learning
a lot. And what would be helpful to me, I suspect the committee
as well, is if you could comment on Dr. Barnaby's analysis. You
heard his testimony. I suspect you have read it. I have his
Table 1 in front of me. There is a stark difference of opinion,
I think, between you and Dr. Barnaby about whether or not this
industry is functioning appropriately. And if you could help us
by commenting on his testimony.
Mr. Robinson. Yes, I hope you can appreciate I heard Dr.
Barnaby's comments for the first time a few moments ago.
Mr. Marshall. Have you seen the written testimony?
Mr. Robinson. I have not.
Mr. Marshall. Okay.
Mr. Robinson. But what I was going to suggest doing is we
would love to have the opportunity to give you something in
writing to give some real kind of analysis rather than some
off-the-cuff instant analysis that I could give here today.
Mr. Marshall. And, as a matter of fact, it certainly would
be helpful to me, and I suspect the committee as well, if we
have already asked Dr. Barnaby to comment on what you have
prepared, and he is going to do so and supplement the record.
And Chairman just nudged me. We would be very interested in
your comments on his testimony and having those submitted for
the record. But I think what would be most helpful is for the
two of you to talk with one another so that you can narrow your
differences of opinion. We are lay folks at least with regard
to some of the more esoteric points that the two of you can
make. And if you could agree that you are on the same page then
we don't have to wade through understanding all of that. We can
get to the nub of the conflict between the two of you.
Mr. Robinson. I think it is a good idea, and also to shed
the maximum sunshine on something which is admittedly not like
falling off a log in terms of difficulty. I think that is an
excellent idea. I took some note of Dr. Barnaby's comment that
I don't know that we disagree so much on the facts but on the
interpretation of the facts. So hearing that comment, I think a
good conversation between us would be good.
Mr. Marshall. I am not sure who to address this--well,
actually one of the things I would like to do, Mr. Chairman, if
I am permitted to do it, I see that Mr. Cooper is here, and I
was going to yield time to Mr. Cooper. If that--it is not. So,
Mr. Cooper, you will remain mute in this hearing. But I will
have a second round here, so you can go ahead and whisper in my
ear, and I will ask it. We will not? You have decided not to?
Okay. Dr. Little, in his testimony, made reference to spot
checks and then a spot-check list and improved behavior by the
farmers on that spot-check list. And I am sure that is of real
interest to RMA and to the department. To me it is a rather
unusual way of going about things, and it would be quite
telling to me, if the improvement in behavior by these folks
who have been identified is pretty significant. I would wonder
to what extent behavior could be improved throughout the entire
sample. Are these folks that unique? And is Dr. Little's
testimony that there is about 1 percent fraud--I thought it was
a little higher than what you mentioned. Mr. Chairman is that
accurate? I am not quite sure who to address that to, but that
spot-check list seemed pretty interesting to me.
Mr. Gould. I will make a brief comment. Actually, I have
had the opportunity to look at the data and the subsequent
behavior of the people that were on the spot-check list, and it
is really telling that people--I should mention that the people
that are placed on the spot-check list get a notice from their
local FSA office that they are on a list. They are not accusing
them of anything, but just say that some of their losses or
behavior is an anomaly and just the fact that they are being
watched causes a dramatic difference in their behavior. And we
have tracked that over time, and they kind of tend to have less
losses over time. And also then we have also tracked when they
go off the list, they tend to revert back to their original
behavior.
Mr. Marshall. Too bad we can't put the entire country on a
spot-check.
Mr. Gould. Well, that is----
Mr. Marshall. Members of Congress included.
Mr. Gould. And we frankly would like to enhance the spot-
check list and do more of it, but that is kind of a compromise
between what we have with our resources and FSA has with their
resources at the moment.
Mr. Marshall. Thank you, Mr. Administrator. Thank you, Mr.
Chairman.
Mr. Etheridge. I thank the gentleman. Let me thank each of
you for your patience. There is no need to, we will apologize
but only for the fact that we couldn't continue straight
through because you understand how this system works. If they
ring a bell, we have got to go. And they expect us to be there
and vote, but thank you very much for taking your time and
being here for your testimony. Mr. Robinson, let me follow up
on the gentleman from Georgia's question. I would ask that you
submit to us, if you would please, in writing after you have
had a chance to comment on his question. I think it would be
helpful to have that for the record.
And before I adjourn, I would invite the ranking member for
any comments he might have.
Mr. Moran. No, sir.
Mr. Etheridge. Under the rules of the committee, the record
of today's hearing will remain open for 10 days to receive the
additional material and supplemental written response from the
witnesses to any questions posed by members of the panel. The
ranking member has asked that we extend that for 30. We would
like to tighten it as we can. Would that be too much of an
imposition on you, Mr. Robinson, 10 days since we are going to
be moving to do something? If not, we will make it 30.
Mr. Robinson. We work for you, sir. We will do what you ask
us to do so----
Mr. Etheridge. Let us stick to 10 days.
Mr. Robinson. Okay.
Mr. Etheridge. Okay, because I think that will help us have
the information we need. If you could, that would be very
helpful. With that, let me again thank each of you and the
previous panel for being here. With that, the Federal hearing
on the Subcommittee on General Farm Commodities and Risk
Management stands adjourned.
[Whereupon, at 12:33 p.m., the Subcommittee was adjourned.]
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