[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
       HEARING TO REVIEW THE STATE OF THE CROP INSURANCE INDUSTRY

=======================================================================

                                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

                               __________

                          TUESDAY, MAY 1, 2007

                               __________

                           Serial No. 110-15


          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov



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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania,            BOB GOODLATTE, Virginia, Ranking 
    Vice Chairman                    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

                 April Slayton, Communications Director

           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, Ranking 
JIM MARSHALL, Georgia                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

                              ----------                              
                                                                   Page
Etheridge, Hon. Bob, a Representative in Congress from North 
  Carolina, opening statement....................................     1
Goodlatte, Bob, a Representative in Congress from Virginia, 
  prepared statement.............................................     8
Moran, Hon. Jerry, a Representative in Congress from Kansas, 
  prepared statement.............................................     7
Neugebauer, Hon. Randy, a Representative in Congress from Texas, 
  opening statement..............................................     1
Peterson, Collin C., a Representative in Congress from Minnesota, 
  opening statement..............................................     2
    Prepared statement...........................................     4

                               Witnesses

Collins, Ph.D., Keith, Chief Economist, U.S. Department of 
  Agriculture, Washington, D.C...................................    10
    Prepared statement...........................................    12
Gould, Eldon, Administrator, Risk Management Agency, U.S. 
  Department of Agriculture, Washington, D.C.....................    22
    Prepared statement...........................................    24
Parkerson, Robert W., President, National Crop Insurance 
  Services, Overland Park, KS....................................    54
    Prepared statement...........................................    57
Harms, Steven C., Chairman, American Association of Crop 
  Insurers; President and Chairman, Board of Directors, Rain and 
  Hail, L.L.C., Johnston, IA.....................................    67
    Prepared statement...........................................    69
Fowler, Kathy, President, National Association of Crop Insurance 
  Agents, Memphis, TX............................................    77
    Prepared statement...........................................    79
Rutledge, Steven C., Chairman, Crop Insurance Research Bureau, 
  Inc.; President and CEO, Farmers Mutual Hail Insurance Company 
  of Iowa, West Des Moines, IA...................................    88
    Prepared statement...........................................    90

                           Submitted Material

Answers to submitted questions...................................   117


       HEARING TO REVIEW THE STATE OF THE CROP INSURANCE INDUSTRY

                              ----------                              


                          TUESDAY, MAY 1, 2007

                  House of Representatives,
 Subcommittee on General Farm Commodities and Risk 
                                        Management,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:02 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. Bob 
Etheridge [Chairman of the Subcommittee] presiding.
    Members present: Representatives Etheridge, Scott, 
Marshall, Salazar, Boyda, Herseth Sandlin, Space, Pomeroy, 
Peterson (ex officio), Moran, Conaway, Neugebauer, and 
Goodlatte (ex officio).

 OPENING STATEMENT OF HON. BOB ETHERIDGE, A REPRESENTATIVE IN 
                  CONGRESS FROM NORTH CAROLINA

    Mr. Etheridge. Thank you. The hearing of the Subcommittee 
on General Farm Commodities and Risk Management to review the 
crop insurance industry will come to order.
    Today this Subcommittee continues its proud tradition of 
thoughtful and careful oversight of one of the key components 
of the farm safety net--crop insurance. The last Congress, our 
previous Chairman, my good friend and colleague, Jerry Moran, 
was diligent and aggressive in this area and I hope to follow 
his example. Jerry will be here a little later. I understand 
his flight has not arrived yet. I am going to submit my opening 
statement for the record, because I want to move quickly to the 
witnesses' testimony and to the questions of Members of this 
Committee. In addition, another subcommittee will be holding a 
hearing at 1 p.m. today and I want to give staff ample time to 
prepare the hearing room and hopefully catch a bite of lunch 
myself, in the meantime, if we have an opportunity.
    With that, I will yield to the Ranking Member. I was going 
to yield to my good friend Jerry Moran, who is not here, but I 
will yield to my good friend, Mr. Neugebauer, for opening 
comments.

OPENING STATEMENT OF HON. RANDY NEUGEBAUER, A REPRESENTATIVE IN 
                      CONGRESS FROM TEXAS

    Mr. Neugebauer. Well, thank you, Chairman Etheridge, for 
calling this hearing. As you know, I have a tremendous amount 
of interest in crop insurance because I believe it is an 
equally important safety net for producers all across the 
country, and I know that many of us went on some listening 
sessions around the country. I have traveled my district, just 
recently, I had three listening sessions. I heard loud and 
clear from my constituents that a better Crop Insurance 
Program, one that gives them more coverage, is a much needed 
piece of the safety net as we sit down and write the next farm 
bill. So I look forward to hearing from our witnesses. It is 
good to have Dr. Collins and Administrator Gould here today. I 
appreciate you coming and sharing your thoughts and ideas and 
look forward to having a dialogue here as you present your 
testimony.
    Mr. Etheridge. Thank you very much. And before we go to our 
witnesses, I will ask the Chairman of the full Committee, Mr. 
Peterson, if he has comments he would like to make.

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE 
                   IN CONGRESS FROM MINNESOTA

    Mr. Peterson. Thank you, Mr. Chairman. I will try to be 
brief here, but I want to thank you and the Ranking Member for 
your leadership on this and thank Dr. Collins and Administrator 
Gould for being with us today.
    You know, when we did the crop insurance overhaul we put 
significant new money into this program and it has accomplished 
part of what we tried to do. The coverage is better and certain 
aspects of it are working better, but we still have not 
accomplished one of the things that we were trying to do back 
then; and that is to eliminate the need for ad hoc disaster 
programs. And we are, as you know, dealing with another one of 
them right now. And if you look at the baseline spending and 
the different components of the farm bill, the crop insurance 
part of things was a significant increase from what the 
baseline was in 2002, and yet we still have a big hole in this 
safety net.
    And so you know, I agree with Mr. Neugebauer, that this is 
something that we have got to try to figure out how to do. 
There has been a proposal from the Department to look at some 
kind of risk management or crop insurance policy to cover this. 
One of the things I want to know is, we haven't, I don't think, 
seen the details of this or seen the scoring or how it is going 
to work. The sooner you can get that to us the better. I have 
to tell you that ever since I got to Congress, given my 
experience trying to put something together in this area, I am 
skeptical about whether this can be done with crop insurance. 
Given the parameters that you guys have to work with and I 
guess I am willing to be convinced otherwise, but generally, I 
have some skepticism.
    And the other issue that I think we are going to have to 
deal with are noninsured crops, which I think cause a problem 
in terms of building pressure for these ad hoc disasters. 
Somehow or other we have got to deal with them, and it just 
seems like it is very slow and very hard to get new crops 
covered and so forth. We have got to figure out some way to 
streamline that process and try to broaden the coverage so that 
we get a majority of these crops covered somehow or other under 
the program.
    So I look forward to your testimony and look forward to 
working with you, but we need that information sooner rather 
than later, because we are about to get started here marking 
things up in Subcommittee and we need to know what the 
different options are. So thank you, Mr. Chairman.
    [The prepared statement of Mr. Peterson follows:]
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    Mr. Etheridge. Thank you, Mr. Chairman. The Chairman 
requests that other Members submit their opening statements for 
the record so the witnesses may begin their testimony and that 
we ensure that they have ample time for questions.
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    Mr. Etheridge. With that, I would like to welcome to the 
table Dr. Keith Collins, Chief Economist, the U.S. Department 
of Agriculture, and Administrator Eldon Gould, Risk Management 
Agency, U.S. Department of Agriculture, as well. Dr. Collins, 
please begin when you are ready and let me remind you there are 
5 minutes for opening statements and your full statements will 
be submitted for the record. Dr. Collins.

   STATEMENT OF KEITH COLLINS, Ph.D., CHIEF ECONOMIST, U.S. 
          DEPARTMENT OF AGRICULTURE, WASHINGTON, D.C.

    Dr. Collins. Chairman Etheridge, Chairman Peterson and 
other Members of the Subcommittee, thank you very much for the 
invitation to come up here today and join Administrator Gould 
and talk about the Federal Crop Insurance Program. My brief 
comments here are going to reflect the perspective of the Board 
of Directors of the Federal Crop Insurance Corporation.
    I am Chairman of the Board. The Board currently consists of 
nine Members, three from USDA, Under Secretary Keenum, 
Administrator Gould and myself, as well as six Members from the 
private sector: four producers, a person experienced in 
insurance regulation and a person experienced in the insurance 
industry. We are very pleased that crop insurance continues to 
see strong growth and excellent performance.
    To reiterate a few statistics you have probably seen, 
insured acreage increased from 182 million acres in 1998, just 
before we increased buy-up premium subsidies, to 242 million 
acres in 2006. Insured liability last year was $50 billion; 
that was up 80 percent from 1998. Total premiums last year were 
$4.6 billion; that was up 140 percent from 1998. And with the 
first sales of the new pasture, range and forage products this 
year, and the increase in major crop prices which is raising 
price elections, insured acreage, liability and premiums for 
2007 are all going to expand sharply above the 2006 record 
levels. Producers also continue to increase coverage levels, 
with catastrophic coverage now down to only 12 percent of 
insured acreage.
    The program continues to have no excessive losses. 
Indemnities averaged only 91 percent of total premiums during 
2001 to 2006. This low ratio reflects a combination of things, 
the fact that we have more and better data; we have made steady 
improvements in our ability to establish rates and use the data 
that we have; and we have also had no major systemic weather 
disasters in recent years.
    A key Board responsibility is to approve new products for 
sale. Proposed products come to us from the private sector and 
they come from products developed under contracts awarded by 
RMA. The Agricultural Risk Protection Act of 2000, ARPA, 
introduced the so-called 508(h) authority that permits private 
individuals to submit products for approval and be reimbursed 
for research, development and maintenance costs if the Board 
approves the products. Under ARPA, 70 such products have been 
submitted to the Board. Forty-two have been approved. The rest 
were disapproved, withdrawn, returned as incomplete or illegal 
or remain under review.
    Many of these submissions became pilot programs or improved 
or expanded existing pilots. RMA currently administers 28 pilot 
programs. After a pilot program is complete, normally 3 years, 
there is a year of evaluation. After evaluation it comes to the 
Board and the Board has to determine whether the pilot should 
be modified and extended, made a permanent policy or 
terminated. Of the pilots initiated in the late 1990s and under 
ARPA, the Board has acted on 26 of them. We have terminated 
seven, we have extended six and we have made 13 permanent.
    During the past year, to give you a few examples, after a 
completed evaluation, the Board approved continuation of the 
livestock price and margin plans of insurance, with a number of 
changes to improve them. A new lamb price insurance pilot was 
also approved. An evaluation report was completed on the 
adjusted gross revenue pilot plan of insurance, and we are 
making changes in that product, plus AGR-Lite, a derivative 
product. The Board is also very pleased to work with RMA and 
its contractors to develop the pasture range and forage 
products, which are for sale for the first time this year. One 
product that the Board disapproved during the past year was a 
so-called good experience discount. Board Members believed the 
product was inequitable and not in the best interests of 
producers.
    An issue that has been of great interest to this 
Subcommittee has been to find a way to help producers who 
experience successive years of low yields. When that happens, 
producers' coverage declines and their premiums increase. Last 
week, the Board met to consider two contracted products that 
were developed to address the issue of declining yields. 
Unfortunately, most of the expert reviews, as well as RMA and 
the Board itself, found many concerns. The main problems were 
actuarial, concerns with over-insurance and adverse selection. 
Both products were tabled, but the Board asked RMA to assess an 
alternative idea for an indexed yield plug that would replace a 
producer's yield in a year when it falls below a certain level.
    To conclude, on behalf of all Board Members, I want to say 
that we consider it an honor to work with RMA and within our 
statutory parameters to help improve the Federal Crop Insurance 
Program and to work with the crop insurance companies and their 
agents, who do a tremendous job every day in delivering this 
critical part of the farm safety net to America's farmers and 
ranchers. Thank you.
    [The prepared statement of Dr. Collins follows:]
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    Mr. Etheridge. Thank you, sir. Administrator Gould?

         STATEMENT OF ELDON GOULD, ADMINISTRATOR, RISK
             MANAGEMENT AGENCY, U.S. DEPARTMENT OF
                 AGRICULTURE, WASHINGTON, D.C.

    Mr. Gould. Mr. Chairman, Congressman Peterson and Members 
of the Subcommittee, I am Eldon Gould, Administrator of the 
Risk Management Agency. I am a life-long farmer from northern 
Illinois, with a 1,500 acre corn, soybean and wheat farm and a 
700 sow farrow-to-wean hog operation. I am here today to report 
on the progress and the challenges of the Federal Crop 
Insurance Program.
    Under the auspices of the Federal Crop Insurance 
Corporation Board of Directors and its Chairman, Dr. Keith 
Collins, the Federal Crop Insurance Program has experienced 
extraordinary growth in the last quarter century. In 2006, RMA 
provided $49.9 billion of protection to farmers, covering 
nearly 80 percent of the major crops. This coverage was offered 
through 1.1 million policies, insuring about 242 million acres. 
For 2007, we estimate we will reach $65 billion in protection 
for American agriculture.
    To continue to offer this important protection, we must 
modernize the tools we use to administer the program. For 
example, RMA must update its information technology systems. 
Our current outdated IT business systems are at the end of 
their expected lifecycle. We now use 120 databases to gather 
and store information. As a result, comparisons across multiple 
crop years that are useful in detecting unusual patterns of 
activity cannot be made without expensive and separate data 
manipulation that exceeds the technical and funding capacity of 
the agency. In a re-proposal of last year's request, we have 
asked for help from insurance providers for the development and 
maintenance of a new IT system. The companies would be assessed 
a fee based on \1/2\ cents per dollar of premium.
    We also propose to expand the use of mandatory ARPA 
research and development funding for data mining and data 
warehousing activities required by ARPA, and to continue the 
testing and development of a comprehensive information 
management system known as CIMS. CIMS allows RMA and the Farm 
Service Agency to standardize our common business elements, 
reporting requirements, producer identification and acreage 
reporting, as required by the 2002 Farm Bill. The first stage 
of CIMS is operating internally as a proof-of-concept project. 
When fully operational, it will provide RMA, FSA and 
reinsurance companies secure electronic access to information 
and identify discrepancies between RMA and FSA data.
    RMA's program compliance function workload has increased 
substantially over the years since the implementation of ARPA 
and the subsequent expansion of the program. RMA is now 
emphasizing preemption through better quality control and 
assurance. Efforts such as data mining, remote sensing, 
geospatial information technologies and other computer-based 
resources are heavily reliant on information technology and 
they emphasize our urgent need to update our IT systems. We 
have preempted millions of dollars worth of expected payments 
through the expanded use of data mining, which allows us to 
search out unusual patterns and with the assistance of FSA 
offices, conduct growing season spot checks. We are constantly 
identifying ways to balance competing needs to make our 
products fraud proof, while seeking to provide responsive, 
useful risk protection to farmers. We still have work to do and 
improvements to make, but we are making good progress in our 
fight against program abuse.
    In his 2007 Farm Bill proposals, Secretary Johanns offered 
several ideas to strengthen the Federal Crop Insurance Program. 
One proposal that has generated a great deal of interest is the 
idea of a supplemental deductible coverage. We are proposing 
literal gap coverage that a producer can buy to cover 100 
percent of their deductible losses under the Crop Insurance 
Program. This approach would help to address the gap and safety 
net to cover crop losses that are less than the size of the 
deductible. The growth and effectiveness of the Crop Insurance 
Program is dependent upon a reliable delivery system, insurance 
products that meet the needs of producers, and an adequate IT 
investment strategy.
    Again, I think you for the opportunity to participate in 
this important hearing and I look forward to responding to your 
questions.
    [The prepared statement of Mr. Gould follows:]
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    Mr. Etheridge. Thank you, Mr. Gould. The chair would like 
to remind Members that they will be recognized for questions in 
order of seniority for Members who were present at the time the 
gavel fell when we started the hearing. After that, Members 
will be recognized in order of arrival and I appreciate the 
Members understanding of this. I now recognize myself for 5 
minutes.
    Dr. Collins, first, I have two questions regarding organic 
crops. Today, when it insures organic-grown crops, the FCIC 
charges a 5 percent premium surcharge. Many organic growers, 
however, feel that this surcharge is unfounded, because the 
risks of loss for organic crops are no different from 
conventional-grown crops in the same place, the same time, and 
that premiums really should be the same. Additionally, they 
would like to be able to purchase Federal crop insurance to 
cover their crops at a higher price. I understand that, over 
the past year, FCIC has been working with the Agricultural 
Marketing Service on a system to collect higher sales prices 
for organic crops, both retail and wholesale, at various points 
along the marketing chain. So my question to you is, as 
Chairman of the FCIC, what kind of data would you need to 
convince you to eliminate the 5 percent surcharge, and if 
presented with that information, could the FCIC take the 
initiative to eliminate the surcharge? And finally, will the 
data collected with AMS provide FCIC with the information it 
needs to insure organic crops at their actual market price?
    Dr. Collins. Okay, Mr. Chairman, I will offer a couple of 
thoughts on this issue. We get a lot of questions about organic 
agriculture and of course, for all of our products that we 
have, organic producers can buy crop insurance. They do pay, as 
you indicated, a 5 percent premium load for the risks of 
organic production, that is, the variability of yields on 
organic production relative to conventional production. I would 
point out that the 5 percent load does not apply to GRP or GRIP 
policies. It only applies to individual yield policies. The 
question does come up frequently about whether that load is 
merited.
    First of all, let me say that organic production is small 
relative to the size of our program and we don't have a long 
history of data. In 2006, we had 355,000 acres of organic crops 
insured, compared with 242 million acres in our program. So you 
are talking about \1/10\ or \2/10\ of a percent of our total 
book of business. It was not until 2004, when organic 
agriculture really began to take off in our program, that we 
started collecting data on organic production as a practice now 
have the acres that are identified in our data system as 
organic. The first 2 years we have that data are 2005 and 2006. 
We have looked at the loss ratio for organic production 
compared with conventional production for both of those years 
and the loss ratio was higher for organic production than it 
was for conventional production. So that tells us that we are 
probably justified, at this point, with the 5 percent load on 
the premium for organic agriculture. Our goal in the long term 
would be to have a unique price for organic products and a 
unique rating for organic products.
    Mr. Etheridge. So the answer is probably not now?
    Dr. Collins. The answer is probably not now. We have just 
started collecting------
    Mr. Etheridge. All right. Can you keep us informed of that 
as it moves along, because I think that is of considerable 
interest.
    Dr. Collins. Absolutely.
    Mr. Etheridge. All right. Next, let me talk about the 
recent GAO report on climate change and its potential impact 
regarding Federal crop insurance. The report recommended that 
the administration of RMA conduct an analysis of potential 
long-term implications of climate change on the FCIC and its 
mission use and the assessment from the Interagency Climate 
Change Science Program and the Intergovernmental Panel on 
Climate Change. In response to GAO's report sent by the Under 
Secretary, who is a Member of the FCIC Board, USDA agreed with 
the recommendations, generally, then proceeded to explain that 
RMA does assess the long-term implication future weather events 
can have on crop insurance, all without directly responding to 
the recommendations. Given the inherent difficulty of 
forecasting weather events, how does RMA evaluate future risk? 
What specific action items are RMA and FCIC taking to respond 
to the GAO recommendations, and will RMA be utilizing the 
findings of the Climate Change Science Programs and 
Intergovernmental Panel on Climate Change as it evaluates 
future weather conditions and the future crop insurance system, 
because that is certainly going to have an impact.
    Mr. Gould. Mr. Chairman, all of USDA is very much involved 
with looking at climate change. We, as the Risk Management 
Agency, are alert to opportunities to improve our rating data 
on an ongoing basis. Presently, the agency works, as we look 
back at producers' average production histories, so if there 
were changes in climate, it would reflect over time with a 
producer's average production history and it will affect our 
rating accordingly. But as we look forward, if there were new 
opportunities and somebody somehow can predict the weather, 
whether it is dramatic or less dramatic, I am sure we would be 
more than interested and willing to take a look at that 
information.
    Mr. Etheridge. I may want to come back to this, because I 
am not really sure we got an answer on that one and my time has 
expired and I will yield to Mr. Neugebauer for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. I had several 
people from the crop insurance industry in my offices last week 
and by the way, I had Administrator Gould in there as well, and 
I think many of them are concerned about some of the new 
proposals, particularly the reduction of the A&O by two 
percentage points, and the other, increasing the USDA's net 
book quota share of premiums retained by the companies. Some of 
them are concerned about what kind of implications that has 
long term in the industry. Can you alleviate some of their 
concerns about that?
    Mr. Gould. I can try. I would say that, as we look at the 
crop insurance in its entirety, not only from the Risk 
Management Agency's standpoint, but from the companies' 
standpoint as well, if we stand back and look and see how the 
marketplace is changing, the amount of dollars that we are 
spending for the delivery of the Crop Insurance Program and 
because of that, we are suggesting that, as the value of each 
individual premium has nearly doubled in recent years, that it 
seems like there would be a need for less compensation for the 
A&O expenses, so our proposal to reduce that by 2 percent is 
proposed for that reason. As far as the reinsurance, we have 
looked at that and simply have suggested that the government, 
through the FCIC, retain some of that reinsurance that is now 
going either to the companies--to reinsurance companies.
    Mr. Neugebauer. What happens if the loss ratios, though, 
move up, isn't that going to--what kind of impact, then, does 
that have on the agency?
    Mr. Gould. Well, that would impact everybody that is 
involved with the insurance business, whether it is the 
companies, the reinsurance companies or of course the agency. 
As we monitor the financial health of the companies, we expect 
them to be able to withstand a loss ratio of 5.0 for any 1 
year, so we think that is a viable threshold for the companies. 
And if you look back over recent years, the loss ratio has been 
less than one, so it has been profitable, not only for the 
companies and reinsurance companies, but the taxpayer as well.
    Mr. Neugebauer. One of the things that the industry says is 
that underwriting gains are not necessarily profits, that in 
fact allows them to build up reserves for future years. In some 
years when the losses are lower, the underwriting gains are 
higher, but in those years where we have a pattern of heavy 
losses, that allows them to sustain that. They are concerned 
about the Federal Government dipping into their ability to be 
able to build up those reserves. Is that good policy?
    Mr. Gould. Well, I guess it depends. First of all, let me 
say that we agree with that concept. The question is, what 
period of years do we want to go back and look and see what the 
loss ratio is? Ultimately, the question comes down to what 
those profits should be, and I am not an owner/operator of an 
insurance company, so I am not going to go there. I guess the 
only thing I would add was that we have no new insurance 
companies coming into the program and we have none leaving, so 
that might be a long way of saying maybe it is about right.
    Mr. Neugebauer. It is about right the way it is now?
    Mr. Gould. Again, I would rather not go that far. I am just 
saying we have no new insurance companies coming into the 
program nor do we have any leaving for lack of profits.
    Mr. Neugebauer. But we don't know what might happen if we 
began to move in this direction?
    Mr. Gould. That is probably accurate.
    Mr. Neugebauer. I want to move quickly, and I hope we will 
have a chance for some other questions, because there is a 
particular bill that I have introduced that I want to discuss 
with you, but we talked a little bit last week and for the 
record, can you kind of tell me where we are on doing something 
about these declining yields? I know that two different 
proposals were submitted to you. I understand you didn't like 
either one of them. But where are we going to move in that 
direction?
    Mr. Gould. Well, as Dr. Collins said in his testimony, we 
are taking a look at that. The two proposals that came before 
the Board, they had problems with those. They didn't seem to 
fit real well, were not in the best interest of producers, had 
some statutory question marks attached to them, and so 
currently, hopefully we can take the best of both of those 
proposals and put those together and make something, probably 
an indexed yield approach that would be beneficial to 
producers.
    Mr. Neugebauer. Would that require any kind of a statutory 
change or do you think you can do that internally?
    Mr. Gould. With the proposal that we are currently looking 
at, it would not require a statutory change, but we are limited 
to a degree of what we can do under the current statute.
    Mr. Etheridge. The gentleman's time has expired and I 
recognize the Chairman of the Committee, Mr. Peterson.
    Mr. Peterson. Thank you, Mr. Chairman. Dr. Collins or 
Administrator Gould, we now have 16 insurance companies, right?
    Dr. Collins. Yes, sir.
    Mr. Peterson. How many did we have before ARPA and how many 
new companies have joined since ARPA? I mean completely new, 
not mergers or acquired or so forth. Do you have those numbers?
    Dr. Collins. I can't tell you exactly. I think, when I 
first became Chairman of this Board, which was right after ARPA 
was enacted, my recollection is that we had about 17 companies. 
We had American Growers become insolvent. We had another, The 
Hartford leave. We had another merge. So we got down as low as 
14 and we are at 16 today. And this is rough. I am just giving 
you------
    Mr. Peterson. So are there any new companies?
    Dr. Collins. Yes, we have had new companies over the last 
couple of years.
    Mr. Peterson. Completely new?
    Dr. Collins. Completely new, yes.
    Mr. Peterson. Two new companies?
    Dr. Collins. As many as five. That is my recollection. I 
can check that for you, but I think that is my recollection.
    Mr. Peterson. Apparently, you are proposing to lower the 
loss ratio. I guess that was the discussion we were having 
here. From 1.075 to 1.0, what impact is that going to have on 
the premiums that farmers pay, and would the impact be felt 
nationally or is it going to affect some states more than 
others?
    Dr. Collins. Yes, that is a little bit of a difficult 
question. The statutory loss ratio that we have to shoot for is 
1.075. In our President's budget baseline, we use 1.04, so we 
project indemnities based on a loss ratio of 1.04. Our 
historical experience over the last half dozen years or so has 
been .9, so we are well below that. We have done what analysts 
call backcasting. We have looked at our current rates and asked 
what the loss ratios would look like if we had the experience 
of the past and we get a loss ratio of about one. So we think 
that going to a 1.0 statutory rate implies very little change 
in premiums. Nevertheless, it gets a budget savings because our 
long-term baseline assumes 1.04.
    Mr. Peterson. How much are the savings?
    Dr. Collins. We scored it at a little over a billion 
dollars over 10 years. The Congressional Budget Office, who 
also uses 1.04 as the long-term loss ratio, somehow came up 
with a much lower number. Theirs was $200 million to $300 
million over 10 years.
    Mr. Peterson. That is normal, I think.
    Dr. Collins. My experience as well.
    Mr. Peterson. Under, I guess, what we know of your 
supplemental deductible coverage, apparently the way you are 
going to do this you are going to dictate how much of a 
producer's deductible for crop insurance will be covered 
depending on how low a county's yield will fall below 90 
percent of the county's average yield for the crop. Why 
wouldn't you allow the producer to decide for himself how much 
of the deductible acreage he wants to cover with the 
supplemental insurance? Why have you set it up like------
    Dr. Collins. Yes. Well, in our book, the 183 page book that 
has the Administration's proposals in it, we had one example in 
there and in that example, if someone buys an individual policy 
with 75 percent coverage and the county yield goes below 75 
percent of the average county yield, then the whole deductible 
would get covered 100 percent. So in that sense, we have fixed 
it and we haven't given the producer a choice. However, in the 
proposal, as we have further developed it, we believe that the 
producer should have a choice and we would propose that the 
producer does have a choice. We think that the producer could 
select the trigger level at which the producer would get 100 
percent of the deductible covered. For the 75 percent example I 
just gave you, a producer might say okay, I am going to select 
the 75 percent as the trigger level. If the county yield falls 
below 75 percent of its average, then I am going to get 100 
percent of my deductible covered. Or the producer could say I 
am going to select 50 percent as the trigger level. If the 
county yield falls below 50 percent of the average, then I will 
get 100 percent of my deductible covered. And of course the 
lower the producer selects that trigger level, the lower the 
producer's premium is going to be, because the less likely that 
the indemnity is going to trigger and cover the deductible. So 
as we envision it now, we would like to give the producers some 
flexibility to figure out just how fast that deductible would 
be covered and thereby have more flexibility over the premium 
rate that they would have to pay.
    Mr. Peterson. You can submit this to me, but you haven't 
got any actual numbers on what this would cost to buy a certain 
kind of coverage? Do you have that information?
    Dr. Collins. We have done some examples. I don't know that 
we have made these public yet, but we certainly could.
    Mr. Peterson. Well, if you could get that to------
    Dr. Collins. We certainly could.
    Mr. Peterson.--me as soon as------
    Dr. Collins. Sure.
    Mr. Peterson.--you can. We need that.
    Dr. Collins. I think, if we want to promote this idea, we 
ought to give you what you want.
    Mr. Peterson. Right.
    Dr. Collins. So we will do that.
    Mr. Peterson. All right. Thank you. Thank you, Mr. 
Chairman.
    Mr. Etheridge. Thank you. And I would ask that you make 
that available to the Subcommittee as well. Thank you.
    Dr. Collins. Yes, sir.
    Mr. Etheridge. Thank you, Mr. Chairman. I now would yield 
to the gentleman, Mr. Conaway, from Texas. Five minutes.
    Mr. Conaway. Thank you, Mr. Chairman. I am familiar with 
work that is being done at Tarleton State on data mining and 
the opportunity to try to find folks who either, by accident or 
intent, are trying to game the system and Mr. Gould, you 
mentioned briefly something about that. If you wouldn't mind 
expanding on that and talking to us about the conflicts between 
RMA and FSA, in terms of sharing data and taking full advantage 
of the FSA's local committees, in terms of moving some of these 
cases forward. As well as expanding your general attitude 
toward auditors and prosecutors and other folks who would take 
the information that is gleaned through the data mining and 
push it to conclusion, as to folks who may or may not be gaming 
the system. Do you have enough assets? Do you have enough 
people to exploit the information that you are getting, as it 
relates to the work done at Tarleton and I think some other 
places as well?
    Mr. Gould. Well, it seems like you have a number of 
questions there.
    Mr. Conaway. Well, I assumed you would filibuster the last 
4 minutes.
    Mr. Gould. Thank you. First of all, let me talk a little 
bit about the relationship between RMA and FSA. The common 
thread there is a common information management system, the 
CIMS project that was actually mandated in the 2002 Farm Bill. 
We have gone to great lengths to get that off the ground, get 
it implemented and make it useful for both agencies. It 
probably comes as no surprise, as we move in that direction, we 
have encountered more hurdles and more obstacles than we 
thought could possibly be there, but nevertheless, we are 
moving forward. We have a good working relationship between the 
two agencies and I can assure you that both the Administrator 
of FSA and myself are committed to moving the project forward. 
So as that project does move forward, then we will be able to 
share information between the two agencies and also with the 
companies, as it relates to the Crop Insurance Program.
    To talk more specifically about data mining, that is 
actually a very fascinating, interesting and rewarding effort 
that we do. As we look for anomalies in the program, not only 
amongst producers, but agents and claims adjusters, and as we 
look at those and go forth and pursue some of those and in the 
case of producers, if they are anomalous, for whatever reason, 
they show up on a county FSA spot checklist. Then the FSA 
personnel within the county, at the local level, then are 
charged with the responsibility of keeping an eye on those 
producers to provide a little ground truth. At the same time, 
the producers are provided a letter so they know that they are 
on the spot checklist and it is amazing how fast those 
producers respond to the fact that they are being watched and 
their behavior carries forth for many years.
    And so to make a long story short, data mining has been 
very rewarding and we just wish that we had the dollars and the 
manpower to do more. It just seems to be a very worthwhile and 
an efficient way of providing integrity to the crop insurance 
business.
    Mr. Conaway. Well, given the positive cash flow that 
results generally from it; you mentioned that you pursue some 
of the anomalies. It would be helpful to the Committee to 
understand exactly what the level of commitment that RMA has to 
this and if there are unfunded wish lists that you would say if 
we had X dollars to provide additional resources to the 
investigatory piece of this, it would be positive to the 
overall position of the system. I don't want you to look 
flatfooted on this, but it seems to me that if you think this 
does work, that we would want you to at least let us know what 
you think the proper level of commitment to this ought to be 
with respect to resources and funding.
    Mr. Gould. We are suggesting that if we had 15 more FTEs, 
provide two in each of the regional offices, plus three more 
people in Washington to oversee the program, and if we could 
more adequately fund our IT system to provide that portion of 
the effort, then we could go a long ways towards doing a better 
job there.
    Mr. Conaway. Was that in your 2008 budget request?
    Mr. Gould. Yes, it is.
    Mr. Conaway. Okay. Thank you, Mr. Chairman.
    Mr. Etheridge. The gentleman yields back. The gentle lady 
from Kansas, Mrs. Boyda, is now recognized for 5 minutes.
    Mrs. Boyda. Thank you, Chairman Etheridge. And thank you 
for your testimony here today. I come from Kansas, so certainly 
crop insurance is a topic of a great deal of discussion. FSA 
closures and the lack of technology or some of the technology 
problems that we are experiencing in Kansas as well. So you 
have my full support on making sure that we keep technology 
relevant and operable. Please move forward with that.
    I would like to go back to the issue of climate change, if 
we could. One of you mentioned a littler earlier that there 
didn't seem to be systemic weather problems. Coming from 
Kansas, we are in either the seventh, eighth or ninth, 
depending on how you are going to count it, year of severe 
drought, especially in western Kansas. So my question to you 
is, when we are looking at climate change, how does the agency 
plan for that? Or maybe I should ask, is the agency planning 
for that or are we marching ahead as if weather or climate 
change really isn't an issue?
    Mr. Gould. Well, that is a difficult question. I guess the 
question ultimately comes down to if we have a weather pattern, 
if it is in Kansas or someplace else, that has been, in your 
case, dry now for a number of years, is that really climate 
change? And we might look at other parts of the country where 
we have had--it has been dry for a number of years and then the 
rainfall pattern changes and so then it doesn't look so much 
like climate change. I can assure you that up until the time I 
came to Washington, I planted 44 crops and over that period of 
time, you would go through years when it was either too wet or 
too dry and then there were some years in there it was just 
right, but being a typical producer, I don't ever remember 
those.
    Mrs. Boyda. Yes.
    Mr. Gould. So I think the real issue then is how do we 
define climate change and what do we do about it? I think that 
the bigger issue that we can respond to more near term is what 
we can do about our declining yields for the producers that are 
going through those periods of ongoing yield losses; and 
whether we want to attribute them to climate change or an 
anomaly in weather pattern.
    Dr. Collins. Could I comment on this as well?
    Mrs. Boyda. Sure.
    Dr. Collins. Well with respect to climate change and crop 
insurance, it is a very complicated issue, obviously, because 
most climate change projections are for the year 2100 and they 
are long-term, slowly evolving changes and as that change 
occurs, there are mitigations that occur. Ecosystems adjust. 
There are also counterbalancing effects like more carbon 
dioxide in the atmosphere. This creates the fertilization 
effect, which actually increases plant production, not reduce 
it. So you have offsetting effects and so it is very hard to 
know how this is going to play out over time. I think, for crop 
insurance purposes, what is most important is if climate change 
leads to abrupt short-term changes in climate. And then the 
question for us is, is our rating appropriate? Are we going to 
charge producers the right amount of money given the losses 
that they face? And probably the single most important variable 
for us in doing that is what we call our county reference 
yields. That is the yield that we use to determine the base 
rating for crop insurance. And so the important thing for us 
over time as the climate changes, is to make sure we have the 
best, the most timely, the most scientific methods in place to 
determine reference yields so we have the most appropriate 
rating. So I think there are things we can do to defend 
ourselves against climate change, not even knowing how it is 
going to come out in the longer term.
    Mrs. Boyda. Could you explain to me again, just for 
declining yields, in the three sentences that all go back home 
and say what we are planning to do with declining yields? Could 
one of you summarize that real distinctly?
    Dr. Collins. I will try.
    Mrs. Boyda. Thank you.
    Dr. Collins. At the moment, we are not proposing to do 
anything. We have just tabled two contracted products that 
would have dealt with declining yields, because they suffered 
from some, what we believe, some inequity and serious actuarial 
problems and they would have caused us to have to increase 
premium rates quite a bit. So what we want to do is focus on 
one of the methods we use right now. We have something called a 
60 percent t-yield plug and that is used when a producer 
experiences a year when the producer's yield is below 60 
percent of the county average. We allow the producer to take 60 
percent of the county average and put that into their long-term 
average that determines their premium rate and their coverage 
level. What we have found is, for producers whose yields are 
poor, generally, relative to the county, like if they are 
typically 70 or 80 percent of the county, that 60 percent yield 
plug works very, very well. It boosts their actual production 
history. But for producers whose yields are at or above the 
county average and they have a bad year, it doesn't work very 
well at all. So what we are proposing to do is to go back and 
look at the current yield plug and index it, that is, take 
account of a producer's yield relative to the county to 
determine a new yield plug for those producers whose average 
yield is better than the county over time. So that is not a 
sentence or two. I apologize for that. But the idea is to 
take------
    Mrs. Boyda. Obviously, you have never run for office.
    Dr. Collins. I can guarantee you that. The current yield is 
very simple. The current plug is very simple. It is just 60 
percent of the county t-yield that applies to everybody. What 
we want to do is adjust the plug based on the producer's 
productivity relative to the county.
    Mrs. Boyda. Thank you.
    Dr. Collins. That is one sentence.
    Mrs. Boyda. My time is up. Thank you.
    Mr. Etheridge. I thank the gentle lady. Mr. Scott from 
Georgia, for 5 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman. Two points 
that I would like to discuss and get your opinions on. One is 
your assessment of the seriousness of global warming. I mean, I 
have listened to your comments. There are two schools of 
thought. One is that we are in a natural time of global 
warming. But give me your honest opinion of the greenhouse 
effect, the greenhouse gas effect, the emissions or carbon 
dioxide in the air, the impact that this would have. Are we 
really, in your opinion, in a serious, serious time of global 
warming? We get mixed signals from this Administration and 
until recently, it has not been clear how serious this 
Administration is taking global warming. And as the Chief 
Economist of the Agriculture Department, it seems to me that 
you would probably be the best person that could give an 
adequate explanation of where this Administration is on its 
seriousness it is taking of global warming and again, as it 
impacts crop insurance.
    Dr. Collins. In response to that question, it is my 
personal experience that the Administration takes global 
climate change very seriously. The Federal Government spends 
between $4 billion and $5 billion a year on its climate change 
programs. We have two primary programs, the Climate Change 
Science Program, CCSP, and the Climate Change Technology 
Program, CCTP. Both of these programs focus on measurement of 
climate and technology to adapt to climate change. Every year, 
the Administration puts out a report. The title of it is called 
Our Changing Planet. This year's version is about to come out 
soon. I would encourage that you look at it, because it lays 
out what the Administration thinks about the science of climate 
change, and it is my opinion that the Administration accepts 
the findings of the Intergovernmental Panel on Climate Change, 
which is more than 2,000 climate scientists who have concluded 
that the Earth is warming and that it is likely due to human 
activity.
    I think the Administration does take it seriously and the 
question is, what are they doing about it? And that is where 
people are open to debate about what the proper prescription 
is, and the focus of the Administration has been on voluntary 
action and technology. I can't tell you, government-wide, all 
the programs that are underway, but I can speak to USDA's 
programs. We spend about $70 million a year on climate change. 
Our focus is on understanding how a changing climate affects 
ecosystems and how you can mitigate the effects of climate 
change.
    I also think that we have taken a focused effort to try and 
adapt our programs at USDA to reduce greenhouse gas emissions. 
We have, in fact, looked at all our conservation programs and 
amended them to try and encourage greenhouse gas offsets where 
we can. One simple example is, in the Conservation Reserve 
Program, we give bonus points to someone who wants to enroll 
land in the Conservation Reserve Program for the amount of 
greenhouse gas reductions that their enrollment will result in, 
and we have done things like that across all of our programs. 
So, I guess the short answer to this is that I personally think 
that we are taking it seriously. You might not agree with the 
path of response, but I think we have one.
    Mr. Scott. Let me ask you just the same way to my other 
point. Do you think that global warming has an impact on the 
declining yields? Particularly, in the past successive years, 
we have a pattern of declining yields, which results in the 
producers coverage declining, their premium rates rising, and 
given the fact that we are coming up with the 2007 Farm Bill, 
do you see us making or would you make any recommendations that 
we address that in the upcoming farm bill, the declining 
yields?
    Dr. Collins. First of all, I would say that I know of no 
scientific evidence that suggests that declining yields 
patterns in certain areas of the country in recent years are 
due to climate change. I do not know of a climate scientist who 
has said that and those who I have asked have said it is 
uncertain at this point. Therefore, I would not make a 
recommendation for the farm bill to do something specifically 
to address this.
    Mr. Scott. My time is past.
    Mr. Etheridge. Thank you. The gentleman's time has expired. 
The other gentleman from Georgia, Mr. Marshall, for 5 minutes.
    Mr. Marshall. Thank you, Mr. Chairman. I have had a number 
of pecan farmers in Georgia tell me that they think our crop 
insurance programs don't really fit their crop very well and it 
has to do with yield-based policies and problems with poor 
years. And just a minute ago, Dr. Collins, in talking about 
this, you said that the way it is structured is there is a 
county plug of 60 percent available to somebody who has a year 
that drops below and that 60 percent plug is one that is being 
used in order to avoid having their overall base go down too 
far. You are thinking about adjusting that by some scaled 
approach, having in mind the different production levels that 
farmers within that county enjoy. Suppose you have got counties 
that have had, as typically happens where pecans are concerned 
and we are going to have a problem with pecans this year in 
Georgia because of the freeze, but suppose you have an entire 
county experience several years of lower yields. What my guys 
tell me is that is a problem for them as far as their yield-
based insurance is concerned. Can you help describe what that 
problem is and what the possible solution might be?
    Dr. Collins. Yes. The problem when yields go down is two-
fold. You mentioned one of them and that is that the effective 
coverage goes down for the producer. If they are buying a 65 
percent policy and their so-called actual production history is 
declining, then you multiple the 65------
    Mr. Marshall. Right.
    Dr. Collins.--times their yield history and that is 
declining.
    Mr. Marshall. Right. They described this problem.
    Dr. Collins. And second, we risk classify producers based 
on their yield relative to the county reference yield and 
therefore, as their yield goes down relative to the county 
yield, their premiums go up. So not only does their coverage go 
down, but they are paying more for less coverage.
    Mr. Marshall. I would like you to assume that there is a 
countywide problem, though, so everybody is suffering from the 
same difficulty. Their base is going down and let us assume 
that goes on for several years. Is there any fix for the 
countywide problem?
    Dr. Collins. Not that I can think of, other than the 
adjustments that we put in over time to deal with this kind of 
thing. The one adjustment is the yield plug that I already 
mentioned. We have a second adjustment. The yield plug is the 
most used adjustment. There are others. Another one is a floor.
    Mr. Marshall. Well, the yield plug doesn't help as much if 
it is a countywide problem. It is a repeated countywide problem 
year to year.
    Dr. Collins. Well, if the county t-yield is going down--
now, the county yield is a 10 year average, so the yield plug 
is 60 percent of a 10 year average. So a couple of countywide 
yield declines are not going to pull that t-yield down very 
much. I am sorry. Go ahead.
    Mr. Marshall. I have only got 5 minutes here, so if I could 
jump in. It is related. Another thing that they say is that 
pecans, particularly, and there would be other crops that fit 
this mold, pecans in particular have a problem with damage 
being done, say, by a tornado, by heavy winds. The damage to 
yield plays out over a number of years. Maybe the first year 
there is no crop, but then in the second year there is going to 
be pretty marginal crop and gradually the tree is going to 
recover. But how does crop insurance work? Let us assume that 
what I just described is correct and I know there are 
differences of opinions about that.
    Dr. Collins. Right.
    Mr. Marshall. But assuming it is correct and Georgia pecan 
growers believe that it is, how does crop insurance cover folks 
who have that kind of long-term problem associated with a 
current disaster? They are going to experience lower yields 
year after year after year.
    Dr. Collins. You know, I am not sure. I am going to ask Mr. 
Gould. I am familiar with some of our tree policies where the 
entire tree is lost and we have provisions for what we call 
R&R, recovery and rehabilitation, where we actually cover the 
cost of replanting the tree and the foregone income until the 
tree is back into full production. Our Florida Fruit Tree 
Program works that way. I am not sure about pecans. I will ask 
Mr. Gould if he knows.
    Mr. Gould. Maybe. I am not sure I know anything much more 
except I would add that some of our tree policies are actually 
2 year policies to compensate for some of those concerns that 
you raised. I cannot tell you today if the pecan policy is one 
of them and will have to get back to you on that.
    Mr. Marshall. That would be great and I don't know, there 
may be other crops that are in a similar situation.
    Dr. Collins. Right, right.
    Mr. Marshall. Thank you.
    Mr. Etheridge. I thank the gentleman. The gentleman yields 
back. Excuse me. While you are doing that, if you would, please 
include two others on that because in North Carolina we got hit 
pretty hard this time, up in the mountains and other areas with 
our peach trees, with our vineyards and other stuff. If you 
will include us as a part of that and make sure I get a copy of 
that, I would appreciate it. Thank you, sir. Now I yield 5 
minutes to the gentle lady from South Dakota, Ms. Herseth 
Sandlin.
    Ms. Herseth Sandlin. Thank you, Mr. Chairman, and thanks to 
both of you for your testimony today. Dr. Collins, in the 
Administration's farm bill proposal, it proposes to reduce the 
Federal cost of the Crop Insurance Program by increasing the 
farmer-paid premiums. I am somewhat concerned that this may 
discourage participation in the program after years of 
increasing participation. Has the Department done any analysis 
on what the proposed premium increases might do to farmer 
participation in the program?
    Dr. Collins. We have done some, Ms. Herseth Sandlin. I 
would say that our overall analysis is to take all of these 
proposals as a package, and it is true that the reduction in 
the premium subsidy, which is five percentage points for 
policies that are 70 percent coverage or less, two percentage 
points for policies that are 75 percent or higher, could 
discourage some purchases. We think the main effect might be 
that producers would drop down a notch on coverage, so it might 
reduce coverage level more so than participation. Offsetting 
that would be the proposal for linkage, that if you are going 
to get price and income support, then you would have to buy 
crop insurance and we think that could add 17, 18 million acres 
to participation. So we have sort of looked at these together.
    Ms. Herseth Sandlin. Sorry. Could either of you update me 
on the status of the pilot programs or products coming out of 
RMA that have been approved, as it relates to producers, 
livestock producers and the coverage of their grass or 
pastureland, in terms of participation or those who are buying 
that new product? I think, for counties in South Dakota west of 
the Missouri River, they can participate in the pilot that 
deals with vegetation and the vegetative cover.
    Dr. Collins. Do you want to do that?
    Mr. Gould. Yes. We refer to that as our pasture, rangeland 
and forage product that just came out last fall. It is an 
interesting concept, in that we are actually using new and 
updated technology. Actually, it is a two policy program, and 
national in scope. We measure the vegetative index and that is 
done within grids. And also, then, we have a rainfall policy 
that is also measured in grids. And then all of that 
information is indexed and the producer buys policies that are 
in a timeframe that is important to him and at a level that is 
important to him for either the vegetative index or the 
rainfall index. The rainfall index has been the most popular, 
so far. And while the vegetative index has a lot of interest, 
it has less interest than the rainfall policy. We anticipated, 
being a pilot program, that we might expect 10 percent of the 
eligible acres to be enrolled and in fact, we had 17 percent of 
the eligible acres enrolled. So the response, as a first-year 
pilot project, was overwhelming and we are encouraged by the 
sign up we have had. A year from now, we will all know how it 
all worked out, but we will continue the pilot. In fact, we 
have had producers in areas outside of the pilot area express 
interest and wondered how soon we are going to expand the pilot 
area.
    Ms. Herseth Sandlin. Yes, I have heard the same inquiries 
and I think there was some disappointment among producers I 
represent, that they are not eligible for the rainfall pilot. I 
think that, like you said, there is some interest and I 
discussed with some of the producers in central South Dakota 
how the vegetative pilot would work. Are you in partnership 
with USGS and ARS's data center at all on this, in terms of 
Landsat 7 images and either for this pilot or have there been 
any discussions with the Department as it relates to the 
resources and assets of USGS as it relates to climate change, 
given the records that they have going back a number of decades 
and the ongoing analysis that could be done going forward?
    Mr. Gould. I honestly don't know the answer to that. I do 
know that, in developing a policy, we went back and looked at, 
I think I heard, some 30 years of data to develop the policy 
and index as to how the policy would work, but I don't know 
whose data we looked at or where it came from.
    Ms. Herseth Sandlin. Thank you both. Thank you, Mr. 
Chairman. If perhaps we could get maybe more regular updates to 
the Subcommittee about how these pilots are working and the 
considerations that the Department is reviewing to expand 
eligibility for others to participate, I would appreciate it. 
Thank you.
    Mr. Etheridge. I thank the gentle lady. Her time has 
expired. And if you would keep us on a regular update on that, 
that would be great. I would appreciate that. Now I yield 5 
minutes to Mr. Conaway to ask questions for the Ranking Member, 
Mr. Goodlatte.
    Mr. Conaway. Thank you, Mr. Chairman. I appreciate your 
indulgence. Mr. Goodlatte has a constituent who grows Asian 
pears and he recently suffered a loss as a result of freezing. 
Apparently, there is no crop insurance available for this 
particular crop and the deadline for signing up for NAP, the 
Noninsured Assistance Program, coverage came during the middle 
of his pear harvest. Is there flexibility in setting the NAP 
sign-up deadline or what can be done to help in this particular 
situation?
    Dr. Collins. Well, we don't run the NAP program. That is a 
Farm Service Agency program. I can't answer for sure on what 
they might say on that, but generally when we have a deadline 
for sign ups, it is for actuarial reasons; it is so that you 
commit to paying a fee or you commit to paying a premium before 
you know how much loss you have so that we are not buying a 
loss. That may be the basis for establishing the deadlines for 
that program. I don't know. We could check with the Farm 
Service Agency and see what flexibility is there, unless Mr. 
Gould has------
    Mr. Gould. No, I am not aware of their program, the details 
of it, so we will have to get the information from FSA and get 
back to you on that.
    Mr. Conaway. Okay, this is Mr. Goodlatte's question. I have 
precious few pears grown in the desert of west Texas, but yes, 
if you wouldn't mind getting back to Mr. Goodlatte on this 
issue.
    Mr. Marshall. Will the gentleman yield?
    Mr. Conaway. Yes.
    Mr. Marshall. Mr. Conaway? I don't know whether disaster 
benefits apply to a crop like this, but assuming that they do, 
as I understand it, the way the supplemental is written, the 
crops that are planted before the end of February would be 
eligible for disaster benefits.
    Mr. Conaway. Yes, this doesn't relate to the supplemental 
kind of disaster. This was just a regular ongoing problem. From 
the tone of the question, apparently the deadline is generally, 
for sign up each year, is generally in the middle of the 
harvest time. But anyway, if you could get back to Mr. 
Goodlatte on that, I am sure he would appreciate it. I yield 
back.
    Mr. Etheridge. I thank the gentleman. Let me thank both of 
you for your testimony today and if you would, I would like to 
now invite the second panel to the table. Thank you for coming 
and if you will, please get back to us with the material you 
had committed to get to us in writing. I appreciate it.
    Mr. Gould. We will do that.
    Dr. Collins. Thank you very much.
    Mr. Etheridge. And as the second panel comes, we are not 
going to really take a break. We are going to go straight into 
the second panel in an attempt to not lose any more time than 
we absolutely have to. Okay, let me thank you for being here 
and we will start with Mr. Robert Parkerson, President of the 
National Crop Insurance Services in Overland Park, Kansas. Next 
will be Mr. Steve Harms, Chairman of the American Association 
of Crop Insurers, from Johnston, Iowa; Ms. Kathy Fowler, 
President of the National Association of Crop Insurance Agents, 
Memphis, Texas; Mr. Steve Rutledge, President of the Farmers 
Mutual Hail Insurance Company, on behalf of the Crop Insurance 
Research Bureau in West Des Moines, Iowa. Let me ask you to 
summarize your statement in 5 minutes. Your full statement will 
be entered into the record. Mr. Parkerson, please begin when 
you are ready and if you will, each one of you follow 
accordingly and I won't interrupt you again. Mr. Parkerson.

  STATEMENT OF ROBERT W. PARKERSON, PRESIDENT, NATIONAL CROP 
             INSURANCE SERVICES, OVERLAND PARK, KS

    Mr. Parkerson. Thank you, Mr. Chairman. My name is Robert 
Parkerson. I serve as the President of the National Crop 
Insurance Services, NCIS, on whose behalf my testimony is 
presented today. I would like to thank the Subcommittee for the 
opportunity to present this testimony.
    Today, I would like to emphasize three topics of concern of 
the private sector, the first, maintaining an economically 
sound program, second, enhancing program integrity, and third, 
funding RMA adequately. We will also touch upon a few topics 
proposed by the Administration for the 2007 Farm Bill.
    First, maintaining an economically viable Crop Insurance 
Program requires two objectives. First, when weather conditions 
are favorable, resulting in lower-than-expected loss ratios, 
the private sector must be permitted to earn the profits that 
sustain its ability to make long-term commitments to the 
program, and there must be adequate and reasonably priced 
commercial reinsurance available in addition to the reinsurance 
provided through the SRA. Program profitability enables 
companies to build reserves to face the inevitable catastrophe 
losses that accompany agriculture. We need to remember, for 
example, the widespread droughts of 1988 and even 2002; 
flooding in 1993. The industry must have the resources to cope 
with these events. Although it is too early to predict what the 
losses may be in 2007, it is not starting out well; early 
freeze damage in California, the Mid-Atlantic and the parts of 
the Great Plains. If this adverse weather continues, all of us 
would be grateful for the reserves that were built.
    I now want to turn the importance of commercial reinsurance 
of the Federal Crop Insurance Program. Depending on the 
resources of each individual company, the availability of 
commercial reinsurance at adequate levels is essential to all 
companies. For these companies to survive in this program, they 
must be able to transfer a portion of their risk to commercial 
reinsurers. Commercial reinsurers will not accept risk if 
profit margins are too thin. Quite simply, they have other 
alternatives to invest their capital. We should not and cannot 
drive the commercial reinsurers out of this program. Therefore, 
I must now offer some concerns that the Administration's 
proposed farm bill has brought up.
     The proposal would drastically reduce reinsurer 
participation in the program. For example, there is now a 5 
percent premium paid to FCIC under the SRA for quota share of 
reinsurance. The Administration proposes to increase this to 22 
percent. That type of profit erosion is draconian and will 
result in driving commercial reinsurers out of the crop 
insurance market. The Administration also proposes a two 
percentage point reduction in administration and operating 
subsidy, the A&O subsidy that has been steadily declining over 
the last decade. Reducing the subsidy, while stimulating 
increased quota share costs by over 440 percent, which the 22 
percent represents, invites serious and adverse consequences.
    Program integrity: Let me talk about that a moment on 
behalf of the industry. We believe that the Federal Crop 
Insurance Program operates with a high degree of integrity. 
Yet, with taxpayer dollars and the private sector resources at 
risk, vigilance is a must. To this end, NCIS last year held a 
program integrity conference. This conference centered on the 
crop insurance industry's ability to reduce fraud, waste and 
abuse and how best to handle these issues in a growing and 
complex program. Once again, a program integrity conference 
will be held this year, May 21 and 22 in Overland Park, Kansas.
    Our third concern, Congress needs to provide RMA with ample 
funding to participate as an equal partner in the risk 
management training and education programs that the private 
sector sponsors. NCIS annually sponsors various national 
conferences on program issues, and we also sponsor schools to 
train loss adjusters. Our national conferences are well 
attended by both company representatives and RMA personnel, who 
often make major presentations at these schools. Loss 
adjustment schools are well attended by the company employees 
and are taught by our industry's most experienced personnel. An 
adequate operating budget for RMA to send its experts to our 
conferences and schools is a necessity. When actively 
participating in industry-sponsored programs, RMA offers 
valuable contributions.
    In closing, crop insurance is an effective risk management 
tool for growers to protect themselves. As an industry, we take 
seriously our responsibility to deliver the Federal Crop 
Insurance Program. Maintaining an economically sound program, 
enhancing program integrity and funding RMA adequately are 
paramount to making the Crop Insurance Program work for the 
farmers and ranchers who rely on it to protect their livelihood 
and to protect the country's food supply. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Parkerson follows:]
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        STATEMENT OF STEVEN C. HARMS, CHAIRMAN, AMERICAN
          ASSOCIATION OF CROP INSURERS; PRESIDENT AND
CHAIRMAN, BOARD OF DIRECTORS, RAIN AND HAIL, L.L.C., JOHNSTON, 
                               IA

    Mr. Harms. Good morning, Mr. Chairman, Ranking Member 
Moran, and Members of the Subcommittee. I am Steve Harms, 
President of Rain and Hail, L.L.C., headquartered in Johnston, 
Iowa, and market the Crop Insurance Program in all 50 of the 
United States. My testimony today is presented in my capacity 
as Chairman of the American Association of Crop Insurers. Thank 
you for allowing me to testify today and I request that my 
written statement be submitted for the record.
    Before I summarize my testimony, I would like to point out 
that, historically, the Crop Insurance Program is not part of 
the farm bill. The last two significant reforms of the program 
took place in 1994 and 2000, not in the farm bill. The Federal 
Crop Insurance Act is a separate statute that need not be 
reauthorized in the bill. I respectfully request that the 
Committee not pursue changes to the Crop Insurance Program as 
it considers the 2007 Farm Bill.
     My testimony will make the following three points about 
the Federal Crop Insurance Program: Number one, it is working; 
Number two, it can be improved; and Number three, the program 
can be harmed. The program is working and the modern Federal 
Crop Insurance Program is a huge success. Providing protection 
from risks that are beyond a farmer's control has been the 
basic and fundamental goal of the Federal Crop Insurance 
Program from its very inception. For the 2006 year, the program 
provided about $50 billion of protection, a record level of 
coverage at that time, which is up from only $11 billion in 
1993. For the 2007 year, projections indicate that farm risk 
protection will likely exceed $60 billion. The modern Federal 
Crop Insurance Program is an indispensable risk management 
tool. The program has grown more complex, including more policy 
choices and more stringent regulations, on its way to becoming 
an efficient and effective risk management tool. Since we are 
in a new era of production agriculture, where every available 
acre will need to satisfy our food and energy demands, more 
farmers will need the Crop Insurance Program than ever before.
     The modern Federal Crop Insurance Program is an 
indispensable financing tool. Without crop insurance, many 
farmers would be unable to obtain financing. Crop insurance 
makes the process of farmers obtaining annual operating loans 
much easier, simpler and efficient. In the case of farmers who 
have purchased crop insurance, banks usually require less 
collateral because they consider these farmers to be better 
protected. Many younger farmers with less collateral will be 
unable to obtain the financing without crop insurance. The 
modern Crop Insurance Program is an indispensable marketing 
tool. Crop insurance allows producers to market in advance of 
production, as well as disaster assistance when the crop county 
loss ratio exceeds a trigger level to farmers who have received 
an indemnity payment.
     Another opportunity to improve the program is in updating 
the provisions of existing legislation which are no longer 
relevant given the economic realities. In this regard, AACI 
believes Section 508(e)(3), known as the Premium Reduction 
Plan, or PRP, should be deleted. The program can be harmed. 
Proposals that would take the Crop Insurance Program in the 
wrong direction should be rejected. In this regard, the 
following USDA proposals especially should be rejected, which 
are increasing net book quota share from the current 5 percent 
to 22 percent and providing only 2 percent of premium back to 
the companies; cuts to the farmer subsidy to deliver the 
program, such as reducing the administrative and operating 
expenses by two percentage points for all policies other than 
CAT policies; a mandatory purchase requirement for farmers who 
participate in commodity programs; and last but not least, cuts 
to the premium subsidies that reduce participation.
    The press often makes the mistake of reporting underwriting 
gains as profits, thus conveying the false impression that the 
industry is making huge profits. Both A&O reimbursements and 
underwriting gains are gross revenue earned by approved crop 
insurance providers under the terms and conditions of the USDA 
developed and approved Standard Reinsurance Agreement that each 
company must agree to and sign in order to be eligible for the 
program. They are not profits.
    In closing, I would like to thank you for this opportunity 
to present AACI's views about the Crop Insurance Program and I 
look forward to further discussion with the Members today.
    [The prepared statement of Mr. Harms follows:]
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 STATEMENT OF KATHY FOWLER, PRESIDENT, NATIONAL ASSOCIATION OF 
               CROP INSURANCE AGENTS, MEMPHIS, TX

    Ms. Fowler. Chairman Etheridge, good morning. Good morning, 
Ranking Member Moran. I am Kathy Fowler. I am here on behalf of 
NACIA, National Association of Crop Insurance Agents. I would 
like to take this opportunity to thank you and consider it a 
real privilege to be here.
    Actually, I am an agent, myself, located in a small 
community in the lower Texas panhandle, population 2,500. I 
come here today with a whole different perspective from the 
other members on the panel. I represent an organization that is 
solely supported and represents the interests of crop insurance 
agents across the Nation. Actually, we are small business folks 
operating in the ag community where the crops are grown. We 
have a lot of involvement with community projects, little 
league games, support FFA projects/4-H projects. We become very 
involved in support with the local kids by purchasing these 
projects, like stock shows. So therefore we have a lot of 
communication and a lot of interaction with producers. We start 
with the children at a very young age, along various avenues 
for the communication.
    Agents are very dedicated in their work. Actually, at my 
agency, we put about 75,000 miles a year on vehicles. My 
husband seems to think that I have a love affair with a laptop, 
watching the Weather Channel or the radar screen. Agents are on 
the frontline. We are out there, we are the first phone call, 
so it is imperative that we respond and unfortunately, mother 
nature does not always react to business hours Monday through 
Friday or 8 a.m. to 5 p.m. So when that producer calls, and I 
live in west Texas and we have a sandstorm, that has wiped out 
your entire crop, the phone rings the first thing the next 
morning. ``Hey, what are my options in order to stay within the 
policy guidelines? I think I have lost my crop. Can I replant? 
Do I have to replant? Is there a late plant provision? Is there 
a replant payment? Just exactly where am I at?'' And lo and 
behold, I have several real life experiences, but one of them 
is the pastor calls and says, ``Hey when can we stop the sand 
from blowing? You know, it is filling up the church?'' So we 
have to be really reactive and really responsive.
    And this program is huge. It is very complex. There are a 
lot of different things out there. We have come a long ways to 
really pattern this program for the individual needs of the 
producer. It is exceptionally difficult to deliver and very 
different from traditional insurance. If you go out and you 
purchase a homeowners policy or an auto policy, you set the 
parameters of the policy, pay the premium and you are good to 
go. You come around for an annual renewal. Unless you have made 
a trade on an auto or purchased a new home, a lot of times 
there is very, very little interaction or communication with 
your agent. You pay the bill and you continue your insurance 
policy. What we are looking at today with farmers, it is 
imperative that you review that process every year. There are 
program changes; there are policy changes. We recalculate a 
farmer's yield every year. We were looking at virtually very 
little dryland production in my area last year, so those yields 
have gone down. Price selections change. If you see the price 
selections on the grain crops, they have gone up substantially. 
So therefore, if your yield has gone down, price selection is 
up, you may be okay. If you are planting a different crop, you 
may need to take a look at some different coverage, move up a 
level. And we spend a lot of time educating the lender, that 
way the lender, as he understands what the program is there to 
provide and we meet his expectations.
    In my testimony, I stated that there are 21 different plans 
of insurance. Throughout an individual crop year, there are 23 
sales closing dates or deadlines, so that means if that 
producer wants to take out coverage, he has to be within that 
deadline period. As proposals move forward, the permanent 
disaster, the supplemental coverage, I truly encourage you to 
utilize the expertise of the crop insurance agent. The 
infrastructure is already set. We have quite an investment in 
the technology. We have a proven track record to deliver this 
product in a timely manner to meet the requirements of the 
producer and the lender. And many agents started in this 
business when it went private in 1980. That is 26 years of 
expertise and knowledge. To the producer, this is a people 
business. We are here to have communication with that producer 
so that we can help him make a decision on what risk management 
products meet his needs the best, and that starts all the way 
from my staff to the equipment dealer, the fertilizer salesman, 
the lender, and actually the producer, your constituent.
    I am very proud to be a part of this delivery system that 
offers a safety net for farmers and I truly believe in what I 
do. I want to thank you for your continued support.
    [The prepared statement of Ms. Fowler follows:]
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        STATEMENT OF STEVEN C. RUTLEDGE, CHAIRMAN, CROP
 INSURANCE RESEARCH BUREAU, INC.,; PRESIDENT AND CEO, FARMERS 
   MUTUAL HAIL INSURANCE COMPANY OF IOWA, WEST DES MOINES, IA

    Mr. Rutledge. Mr. Chairman and Members of the Committee, my 
name is Steve Rutledge. I am President and CEO of Farmers 
Mutual Hail Insurance Company of Iowa. I also currently serve 
as Chairman of the Crop Insurance Research Bureau, or CIRB. 
CIRB is a national trade association composed of insurance 
companies, reinsurance companies and brokers involved in the 
crop insurance business. I appear before you today on behalf of 
CIRB and thank you for the opportunity. Since I am the last 
witness, there may be a little bit of repetition, so I would 
ask you to bear with me in that regard.
    The Crop Insurance Program that exists today is the 
centerpiece of our agricultural safety net. Approximately 80 
percent of our Nation's farmers recognize the value of the 
program and invest premium dollars to participate. The benefits 
to the producers are created by shifting the risk to the 
government and in no small part, to private insurers and 
reinsurers. As we enter the 2007 crop season, the possibility 
of paying a very large price for assuming that risk has never 
been greater. Many crop prices are near historic highs and 
these increases track through to the Crop Insurance Program. 
The liability assumed by the public-private partnership in 2007 
will be immense. Although the past 3 years have been a 
profitable period for SRA holders, all of these profits, and 
then some, could be erased in the blink of an eye, given the 
level of risk that exists for this year.
    Two weeks ago, CIRB members visited Capitol Hill and the 
most common theme expressed during those meetings was that--
excuse me--although some needs have yet to be met, overall, the 
program is providing great value to our Nation's farmers. There 
was, however, a desire to better understand the impact of 
specific proposals and a concern about the perception that SRA 
holders are making excessive profits. Any discussion of profits 
must begin with the understanding that what RMA and others 
commonly refer to as underwriting gains, it does not translate 
directly to profit for SRA holders. Underwriting gains are 
based on the assumption that a company's expenses to deliver 
the program are equal to the expense reimbursement provided by 
the SRA. Currently, the expense reimbursement averages about 
20\1/2\ percent. Most companies' actual expenses are 
considerably higher and the gap between the two must be filled 
from underwriting gains before any true profit can be produced. 
Possibly because of the perception I just described, USDA has 
proposed that RMA assume 22 percent of the industry's 
underwriting gain or loss.
     The reinsurance provisions of the SRA provide a very good 
first line of defense against a catastrophic loss, but it is 
just the beginning of an adequate reinsurance program. 
Virtually all SRA holders buy a significant amount of 
commercial reinsurance to protect our financial stability. The 
proposed quota share would make crop insurance less attractive 
to reinsurers and some would redeploy their capital. The result 
is that an absolutely essential piece of the risk management 
process would be damaged. In addition to the havoc less 
reinsurance capacity would create for the SRA holders, we too 
would suffer financially. RMA would assume 22 percent of the 
company's net premium and losses, but little will be done to 
make up the gap between the expense reimbursement and the 
actual expenses that I described previously. And since the 
opportunity to make up that difference from underwriting gains 
has been eliminated, companies are guaranteed a loss on every 
dollar taken by that quota share.
    Another proposal calls for a further reduction in the 
expense reimbursement paid to SRA holders. As you know, the SRA 
was renegotiated in 2005 and cuts to the expense reimbursement 
were implemented that year, with additional cuts implemented 
last year. At some point, efficiency must give way to poorer 
service to producers. I think we are at that point and any 
further cuts will only increase the potential that one or more, 
probably of the smaller SRA holders, will choose to exit the 
program.
    Few, if any, insurance products are as complex as the Crop 
Insurance Program. Crop Insurance Program cost is driven partly 
by this complexity, but to a larger degree by the level of 
success of the program. Certainly the cost of the program has 
grown over the years, but so has the amount of crop value that 
is being protected. Suggestions that money from the Crop 
Insurance Program should be diverted to help fund other 
projects is possibly shortsighted. The Crop Insurance Program 
needs stability above all else. By assuring adequate funding of 
the program, its future and that of American agriculture will 
be secured. Thank you for your time and attention.
    [The prepared statement of Mr. Rutledge follows:]
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    Mr. Etheridge. Thank you. The chair will now recognize the 
Members for 5 minutes and recognize myself first for 5 minutes.
    The GAO recently issued a report and in that report they 
talked about climate change and its potential impact with 
regard to Federal insurance programs and it highlights its 
findings that many of the major private insurers are 
incorporating some elements of climate change in their risk 
management practices. Is this occurring in the crop insurance 
industry, and are companies trying to anticipate problems 
resulting from climate change? And I would ask each one of you 
to comment on that as it relates to your segment, as you know 
it.
    Mr. Parkerson. Mr. Chairman, I think we have a little 
experience in that report because we had been called by them a 
couple of times to participate in some of the programs, and we 
would basically mirror what Dr. Collins has told you and that 
is that this is based on a 10 year experience. They also have a 
catastrophe portion in the rating that they make and at this 
point in time, we think that, in the discussions we have had, 
part of this is being mixed with the property casualty 
business. There is a lot of damage, as you well know, in areas 
with the hurricanes. This has all been brought out and it is 
extremely true. When you build around the Gulf or on the 
beaches of Florida or California and those houses get blown 
down, they cost------
    Mr. Etheridge. So you are saying hurricanes and things like 
that don't affect crops?
    Mr. Parkerson. No, what I am saying is that I think that 
what we are doing now is being able to adequately adjust to it 
at this point.
    Mr. Etheridge. So you are saying the answer is no?
    Mr. Parkerson. That is right.
    Mr. Harms. I would agree with Mr. Parkerson, that currently 
we are not. There is nothing that we can really do to 
anticipate looking ahead, for what may happen. The information 
I have read, it does not bode well for agriculture in many 
areas.
    Mr. Etheridge. Okay.
    Mr. Harms. Which puts even more necessity to our quota 
share, to hold as much of that premium as we can and bill the 
bank for those years that we know are going to be coming, that 
losses, considerable losses------
    Mr. Etheridge. So your answer is no, too?
    Mr. Harms. Correct.
    Ms. Fowler. Yes.
    Mr. Etheridge. Is the same true all the way down, no?
    Mr. Rutledge. Pretty much. The reinsurance industry employs 
a lot of modeling agencies to try to model these types of 
effects, but the duration of the time that we have had to look 
at them hasn't been adequate to reach any conclusions.
    Mr. Etheridge. Okay. Mr. Parkerson supports the 
Administration's proposal to lower the loss ratio, according to 
his testimony, to 1.0. But the others of you, what are your 
thoughts on that?
    Mr. Harms. We would agree with that and we think the 
program has been operating less than that for the past number 
of years and we think that is a move in the right direction.
    Mr. Etheridge. Okay.
    Ms. Fowler. Go ahead.
    Mr. Rutledge. Yes, I would agree.
    Mr. Etheridge. Okay. To Mr. Harms and Ms. Fowler, you all 
mentioned premium reduction plans as a problem. Can you 
elaborate on how these plans impact the industry and 
particularly your segment of it? Could you expand on that, 
please?
    Mr. Harms. Yes. The premium reduction plan is one that we 
have got a lot of concerns about. Number one, it is based on 
potential efficiency from the companies' accounting report that 
is sent in to RMA from 2005 to 2006. A lot of variables occur 
within that, such as loss adjustment expense, what kind of 
agents' commissions the companies have to pay to see if, in 
fact, there is any efficiency between those 2 years. Our 
feeling is, with the Federal program, that it should not matter 
to the insured which company they write with as far as any type 
of a reduction in their premium. Out of the 16 companies, I 
think there were nine of us that did apply to be eligible for a 
PRP in 2007.
    Mr. Etheridge. Okay.
    Ms. Fowler. From the agent's standpoint, delivery 
standpoint, not against a premium reduction for producers, but 
it should be an equal opportunity for all producers within that 
crop. We don't want to see reduced service to the smaller 
farmers and currently, the way it is set up it would encourage 
cherry picking. The other thing too, is that it needs to be 
irrespective of carriers.
    Mr. Etheridge. Okay. If the panel will indulge me on one 
more final piece here. I would like to just have your comment 
on this. Let us imagine a farmer had bought a policy for 65 
percent of coverage, multi-peril, and he had 500 acres of corn 
and the price of it was $3. And this year the same farmer buys 
the same policy, has no change in his APH, but has a price 
selection of $4, because we are now looking that this might 
happen. He is going to pay a higher premium for his policy and 
consequently the crop insurance company that sells him the 
policy would get a higher administrative and operating cost on 
that policy, and that would be a reimbursement, of course. It 
would be a higher reimbursement piece for the government. What 
additional costs would that company bear in administering the 
second higher cost policy?
    Mr. Harms. That is correct. I think if somebody could 
guarantee farmers that they will continue to have $4 corn and 
$8 soybeans, I think the industry would be very willing to work 
with the Subcommittee and RMA in looking at ways that we could 
reduce the cost of the program. But when you look back when we 
had corn that was $2.50 and soybeans at $5, the actual A&O was 
probably less than what the companies had as far as expenses.
    Mr. Etheridge. But wouldn't you say that farmer is paying 
the high premium and not getting anything out of it. That is my 
question.
    Ms. Fowler. Actually, that producer has a higher level of 
coverage at this point, because he is looking at his acres 
times the yield times the price selection. So therefore, even 
though his yield did not change, his coverage has initially 
gone up. In case he was to have a loss, then he would be paid 
at the higher price. And agents typically are on an annual 
renewal basis and by that those premiums and those 
compensations move up and down with that price selection, so we 
have to plan for the long term.
    Mr. Rutledge. In your example, $4 corn, higher premium, 
higher A&O reimbursement, a lot of that reimbursement goes 
right out our door on a percentage basis. The extra dollars, we 
don't see. The farmer has increased coverage, as Kathy was 
saying. Actually, our biggest fear is that we could have 
significant underwriting losses simply from a price decline 
rather than yield loss: $4 corn in February you don't see very 
often. That would be the worry.
    Mr. Etheridge. We may need to follow that one up. My time 
has expired and I will recognize the Ranking Member for 5 
minutes.
    Mr. Moran. Mr. Chairman, thank you very much. Just a 
follow-up to Mr. Etheridge's question about increasing 
commodity prices means increasing premiums. That has been, 
until recently, one of the more common complaints that farmers 
are letting their Congressmen know, is my premiums are much 
more expensive this year. Is there anyone in the crop insurance 
industry that is receiving an advantage from higher prices, or 
is that increased premium all required because of the increased 
risk, the higher indemnity payments that would be paid if there 
is a loss? Does the increased premium accurately reflect the 
increased risk due to higher commodity prices?
    Mr. Harms. Well, as you know, the rates are not set by the 
companies. They are set by RMA. So we have to assume that those 
rates hopefully will be adequate to cover that additional risk 
that comes with $4 corn and $8 soybeans. There is more 
volatility there. The farmers are paying additional premiums. 
They can reduce their coverage to bring back the premiums to 
their 2006 level. That is an option that they can pursue and 
they could have pursued if they felt their 2007 premium was 
more than they wanted to pay.
    Mr. Moran. Is that a one-time election, the farmer makes 
that choice?
    Mr. Harms. Correct. It has to be done by that sales closing 
date for spring crops; that was March 15.
    Ms. Fowler. That is the very point that I made, that you 
should go back and renew that farmer's coverage every year and 
make sure he understands in case he needs to make changes.
    Mr. Rutledge. Assuming it is revenue coverage, the biggest 
advantage for the producer would be that he could go ahead and 
sell his grain at that high price, knowing that he is protected 
at the end of the year if he does lose his crop, so it is a 
significant value to the producer. Even though he pays a little 
bit more, he has got a much higher price he can sell his crop 
at.
    Mr. Moran. Well, I assume every banker is going to require 
that to be the case as well.
    Mr. Rutledge. Right.
    Mr. Moran. Mr. Rutledge, you indicated a phrase, level of 
risk this year. It caught my attention. Is there something 
unique about this point in time, or is the risk of 2007 no 
different than the risk of 2001 or 2012?
    Mr. Rutledge. No, it is different. In fact, we are even 
looking for different mechanisms to try and protect some of the 
risk. I don't think, in the history of the program, the base 
price set in the spring for corn and beans, for example, has 
ever been $4 or above. This year it is. For soybeans it is over 
$8. Typically, if you look at a seasonal chart of grain prices, 
February, when we determine the spring base price, and October, 
when we determine the harvest price, are the low points of the 
year. Now we have got February as a very high price and $2.80 
corn is probably average over a period of years. If we end up 
$2.80 corn this year, with no yield loss, the companies will 
have an underwriting loss just from that price decrease.
    Mr. Moran. And let me make sure I understand, because I 
assume a central point of the industry would be that you can't 
take away our retained earnings, the risks are great, and what 
you are reminding me is that those increased risks due to 
higher commodity prices are not covered solely by increased 
premiums. You have got to carry forward retained earnings in 
order to cover those losses should they occur.
    Mr. Rutledge. Correct. If we would have another 1988 or 
1993, when 1988 was the drought and 1993 was the flood, and 
some other years, I don't know what the losses would be, 
because we didn't have revenue products in those years and now 
we do and they are going to greatly increase the extent of the 
losses when we have another year like that. And with these 
types of prices, it is a dangerous year.
    Mr. Moran. Have the number of companies, crop insurance 
companies, increased or decreased in the market?
    Mr. Rutledge. When I first got in the business, there were 
probably between 50 and 60 companies involved in the Federal 
Crop Insurance Program. Now there are 16--is the number that 
has been quoted.
    Mr. Moran. We had a couple of entrants, new entrants into 
the market last year or the year before. Is there a trend 
there, one way or the other?
    Mr. Rutledge. We had a couple of mergers and acquisitions 
at the same time. You know, one may come out, one may go. It 
has been steady for the last 3 or 4 years, I would say. Is that 
correct?
    Mr. Parkerson. That is correct, yes.
    Mr. Moran. My time has almost expired. I have 12 seconds to 
tell you that I spent my time yesterday in five Kansas 
counties, eight different wheat fields, and there are 
significant losses already evidenced by 3 days, as a 
consequence of 3 days in April of temperatures in the teens and 
lots of crop insurance issues about what do we do now? It is 
easy to see the damage. I had the agronomists with me. I had 
the regional RMA personnel with me. All of us were asked the 
question by the farmer, what now? And there are some crop 
insurance issues, but there is some real issues about what a 
farmer should now plant, plow up, and I would just echo the 
concerns that if the freeze damage I saw yesterday is any 
indication of what is to come, there are significant risks in 
your business this year. Thank you very much, Mr. Chairman.
    Mr. Etheridge. I thank the gentleman. I yield 5 minutes to 
the gentle lady from Kansas, Mrs. Boyda.
    Mrs. Boyda. I will yield.
    Mr. Etheridge. The gentleman from Virginia, the Ranking 
Member of the Committee.
    Mr. Goodlatte. Well, thank you, Mr. Chairman, and I thank 
you for holding this hearing. I have an opening statement that 
I will just submit for the record and would like to thank all 
of these witnesses as they help us find our way through a very 
important tool for farmers, but also one that is exceedingly 
complex. When we try to find solutions to make it work better 
for farmers and work for more farmers, it gets even more 
complex.
    Let me ask you about something that the gentleman from 
Kansas started asking you about and didn't follow up. We will 
start with Mr. Harms but I will ask the others to join in. How 
comfortable are your companies with the premiums established by 
RMA? Do they sufficiently cover the risk you are taking?
    Mr. Harms. Yes, we are very comfortable with them. I think 
the results speak for themselves. The last number of years, we 
have been able to generate a loss ratio that has been 
considerably below the target loss ratio. So at this stage of 
the game, we are comfortable that they are probably as good as 
rates as we can be using.
    Mr. Goodlatte. Do you analyze the premiums of these 
policies yourself?
    Mr. Harms. Absolutely. Yes.
    Mr. Goodlatte. Mr. Parkerson?
    Mr. Parkerson. Yes, yes, we do. On behalf of the industry, 
we take a look at them.
    Mr. Goodlatte. And what is your attitude about the rates 
that they set?
    Mr. Parkerson. Our belief is that RMA is working hard and 
as indicated, they have taken on in the last couple of years a 
strong knowledge and have got their data pretty well together 
and I think those rating systems that they have seem to be 
working well.
    Mr. Goodlatte. Ms. Fowler?
    Ms. Fowler. Yes, we tend to look at the ratio between the 
coverage and the premium and actually, the coverage has 
increased and the premium has gone down according to the ratio 
procedure there.
    Mr. Goodlatte. So you analyze the policies yourself?
    Ms. Fowler. Yes.
    Mr. Goodlatte. Okay. And do you tell the USDA when you 
believe the premiums do not accurately reflect the risk?
    Ms. Fowler. Sure.
    Mr. Parkerson. Yes, we do.
    Mr. Goodlatte. What kind of response to do you get?
    Mr. Parkerson. Do you want me? We have definitely had 
meetings and on behalf of the industry, we have an actuarial 
department at NCIS and we take a good, hard look at the data 
and information. We go over and have meetings with them. On 
behalf of the industry, we meet with our Board of Directors and 
we have an actuarial statistical committee that reviews these 
policies and the forms that are there, and we don't hesitate. 
If we feel that there is something wrong, we go there.
    Mr. Goodlatte. But do you get a good response back?
    Mr. Parkerson. We do in overall purposes. I will be very 
candid. I think their hands are somewhat tied. Sometimes when 
we pointed out a shortfall in a policy or a rate, it takes them 
some time to turn, if you will, the train around because of the 
regulatory issues that are involved. But yes, they do take it 
to heart and yes, they do talk.
    Mr. Goodlatte. Well, let me ask you about that. When it 
takes them time to turn the train around------
    Mr. Parkerson. Yes?
    Mr. Goodlatte.--does it get turned around in that growing 
season, in that cycle?
    Mr. Parkerson. No, it cannot.
    Mr. Goodlatte. So you are stuck.
    Mr. Parkerson. We are basically stuck if we find a problem 
or an issue, somewhat stuck with that shortfall through the 
year, but then work on trying to get it corrected and changed.
    Mr. Goodlatte. Mr. Rutledge, does your organization review 
these issues?
    Mr. Rutledge. To the same extent most every other company 
does and in general the rates are as adequate as RMA knows how 
to make them. There may be some options. There are coverage 
options that are available, but there is just not enough data 
to know for sure. But yes, in general they are as good as they 
can make them, I think.
    Mr. Goodlatte. Ms. Fowler, let me ask you. In your 
testimony, you say that if a permanent disaster program is 
created, it should be designed in a way that includes crop 
insurance to be delivered through the currently established 
infrastructure. I wonder if you have any specific comments on 
how a crop insurance disaster program would work.
    Ms. Fowler. I guess what my reference really was to the 
fact that we have the infrastructure to deliver that. We have 
the data. We have the yields compiled, which are true, actual 
yields of that producer. And what I was referring to is our 
ability for the infrastructure, our technology, our computer 
systems, the interface that we have with GPS and all of those 
different types of things. We have the ability to turn it 
around and get it delivered on whatever regulations or 
compliance issues that you give us.
    Mr. Goodlatte. But you don't have any vision on how to 
implement something, like what has been proposed, that we would 
have a permanent disaster program that would require crop 
insurance and how those two things would work together or if 
they would indeed work together?
    Ms. Fowler. I guess, very well, they could work together. I 
have not seen any real details of either one, a permanent 
disaster. I think you could tweak this along with the program 
that we already have, since we do have a proven track record 
that it does work.
    Mr. Goodlatte. Great. Thank you. Thank you, Mr. Chairman.
    Mr. Etheridge. Thank you. The gentleman yields back. The 
gentleman from Georgia, Mr. Scott, for 5 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman. First, Ms. 
Fowler, I found your testimony to be very enlightening and 
intriguing. I would like to ask you to respond to some of the 
things you said in your testimony, in your stated testimony, 
that kind of concerned me and I found intriguing. You expressed 
great concern about the Crop Insurance Program vis-a-vis the 
farm bill. You made statements like crippling a program that is 
serving its intended purpose would not be wise and would be 
extremely detrimental to our Nation's agricultural producers. 
You went on to say now is not the time to damage the system 
that has worked so well and that the Crop Insurance Program has 
not been a part of the overall farm bill reauthorization 
process, and then do not view crop insurance as simply a minor 
piece of the farm bill puzzle. That seems to me that you are 
registering some anxieties here about the future of the Crop 
Insurance Program vis-a-vis the farm bill. I wonder if you 
might expound on that a bit, to make your position clear. Do 
you feel some threats out there as we tinker with the farm 
bill, for the Crop Insurance Program?
    Ms. Fowler. Yes, very much so. The crop insurance piece has 
always been a separate piece from the farm bill, other than 
tweaking in different areas. If you are talking about reducing 
premium subsidies, farmers are going to roll back. I mean, they 
are going to reduce their coverage. Then that is going to 
offset as far as we are looking at supplemental coverage or 
permanent disaster or something of that nature. I think we need 
to offer farmers the stability that we currently have. They 
have made long-term projections, whether it be in land 
purchases or equipment purchases. So I think we need to make 
sure that any time you start making a tweak, that it is awfully 
hard to get your arms around this huge, complex program, and it 
may sound good on paper, but all of a sudden, when you apply 
its reality, it makes quite a significant difference for the 
producer himself.
    Mr. Scott. So you don't want to see anything done on the 
2007 Farm Bill and the Crop Insurance Program, as it is? No 
changes, no nothing.
    Ms. Fowler. There is always room to better this program and 
to make changes, but typically, we are not a part of the farm 
bill process.
    Mr. Scott. Yes. Okay. Now, Mr. Parkerson, your concern 
about adequate funding for RMA and I think you mentioned that 
there were two areas. Could you explain to us why and how the 
current data processing system is inadequate? And I think the 
other area you mentioned where we need additional funding would 
be in the training area. Could you elaborate on that?
    Mr. Parkerson. Certainly.
    Mr. Scott. And there is a level of funding that we are 
currently doing. You are asking for something beyond that?
    Mr. Parkerson. What we are asking for in our testimony, 
what we meant and are trying to get across here is that, for 
example, I mentioned that we sponsor training programs and we 
have meetings across the country if we run into problems and we 
have asked RMA to participate in. According to my staff and 
myself, I have been asking them to participate in a particular 
training phase or understanding a loss procedure and ask for 
these people to meet us at meetings in the locales and have 
been told that they don't have the wherewithal to join us in 
those meetings. And if that is the case, then we are asking 
that you take a look at that, because their input is key to 
what we all do. If we don't understand a regulation or we don't 
understand a handbook and the procedure on how to address a 
particular crop, then we need that help and that does come up, 
because we are reading this thing maybe one way and somebody 
else reading it in a different manner.
    Mr. Scott. And the data processing?
    Mr. Parkerson. The data processing, I will tell you this, 
that they are going through some major changes in the computer 
business and we are very interested and want to know what is 
going on. It is key. These companies spend millions of dollars 
on their computers to be able to report and talk to each other 
back and forth every day. If we don't understand what they are 
doing and how they are doing it or if they fall short, then 
that makes us fall short, which could in turn reflect on 
whether a farmer is going to get paid his indemnity.
    Mr. Scott. How much money are we talking about? When you 
say adequate funding, how much?
    Mr. Parkerson. I can't give you that figure at this point. 
We have talked about it at different times and I would be happy 
to give you an idea, if you would like for me to.
    Mr. Scott. That would be helpful.
    Mr. Parkerson. Okay.
    Mr. Etheridge. The gentleman's time has expired. The 
gentleman from Texas, Mr. Neugebauer, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. I think you heard 
Chairman Peterson talk a little bit about something he and I 
have been having some discussions about and that is the fact 
that we need to somehow get crop insurance to the level that it 
is necessary that we don't have to be going through this 
political process that we are going through right now for ad 
hoc disaster programs. While I wasn't here when the 2002 Farm 
Bill was put in place, many folks thought that some of the 
changes that had been made over the years to the Crop Insurance 
Program was going to eliminate that and obviously that proved 
not to be true.
    And I heard you say, Mr. Harms, that you don't think that 
we ought to be talking about crop insurance at the same time we 
talk about the farm bill. While I am not supporting taking any 
money out of the farm program, I do think it is an appropriate 
time to be having some discussion about improving crop 
insurance and with that, as many of you know and I think I have 
had some discussions with you, I have introduced a bill that 
gives the flexibility to basically do somewhat what the current 
disaster programs do. When the actual yield is below the county 
yield, that triggers a GRP or GRIP policy that the producer is 
able to put on top of their multi-peril policy, thereby giving 
the producers one additional coverage. And I think, in some 
ways, that kind of helps address some of the problems with 
declining yields, because we are able to provide an opportunity 
to put additional coverage on top. I think that also provides 
our producers some flexibility on how to manage their risks and 
I think that is something desperately needed in the marketplace 
today, because as we all know, agriculture is big business now 
and the clients that you insure now aren't those small farmers, 
they are large operations.
    With that, I would just like to hear from the panel. Is 
this a viable product and is this something that is needed in 
the marketplace today?
    Mr. Harms. Yes, we think if a disaster component is going 
to make it into the farm bill, then crop insurance wants to be 
involved in the process. The American Association of Crop 
Insurers has put together a task force. We are actively working 
to put together a proposal to begin sharing with the 
Subcommittee here very shortly. So we think there is a place 
for whatever you want to call it, a gap type of coverage to 
take care of that deductible on there and we think crop 
insurance can make a real difference in supplying that type of 
coverage. So we are working on it and we look forward to 
getting it to the Subcommittee very soon.
    Mr. Neugebauer. Ms. Fowler?
    Ms. Fowler. As agents, we are very eager and very 
interested to deliver this type of a product, the policy or 
policies, to that producer and be the one stop shop, which 
would be much less inconvenient for that producer.
    Mr. Neugebauer. Mr. Rutledge?
    Mr. Rutledge. RMA's supplemental deductible program is 
pretty similar to your bill. That may be able to be maneuvered 
into a type of disaster program and I don't know enough of the 
details about it, but I think if there is a permanent disaster 
program, we would like to be involved.
    Mr. Neugebauer. Mr. Parkerson?
    Mr. Parkerson. I would echo the same thing. We would like 
to be involved. I do think that it is going to take a lot of 
hard work and some real thought to putting this type of program 
together. But if it is available, I think the companies and 
these organizations are very capable of helping you deliver 
that type of product, but it is going to take some real work.
    Mr. Neugebauer. Well when you look back and we are having 
my bill re-scored as we speak, but even when we had it scored 
when we introduced it last year, it cost a lot less money for 
crop insurance than it has on what we spend on disaster 
programs over the last few years, and we can get it to the 
producer in a timely manner. The problem we have today is we 
have producers out there that have actually had consecutive 
losses and they are still waiting to see how the political 
process is going to unfold here and whether if and when we are 
going to have that.
    And so I think it is good public policy and I think 
American taxpayers understand insurance. I think what makes 
disaster difficult is a lot of people don't quite understand 
the disaster philosophy and why we do disaster for some weather 
instances and why we don't do it for others, and so I would 
encourage you. I think, as we move into the environment we are 
in, in agriculture right now, I think if we do not improve the 
Crop Insurance Program, it won't do us any good to have a 
safety net necessarily for commodities, because if you don't 
have any commodities, it is very difficult to participate--for 
the commodity programs to provide you that safety net.
    And so I really believe that we really need to be looking 
at these simultaneously. I do not want to take any money out of 
farm programs, but I think it makes good economic sense and 
fiscal sense to look at improving this with the addition of 
this. These are two products that you already sell, so we don't 
have to have a test demonstration period. This is something 
that we could get on the ground, really, in the next crop year 
if we will hurry. So with that, I yield back.
    Mr. Etheridge. I thank the gentleman. His time has expired. 
The Ranking Member now for closing questions and comments.
    Mr. Moran. Mr. Chairman, thank you. I will forego a closing 
statement, but I have a couple of questions I would like to 
ask. First, I would like to recognize Mr. Neugebauer and 
indicate that I believe his persistence will be rewarded on 
this topic, that it will happen at some point, as the Chairman 
said. And I am sorry I was not here for the testimony of Dr. 
Keith Collins and the Administrator. I continue to, for really 
the last 5 and 6 years, push RMA to develop a crop insurance 
product that would meet the needs of farmers in declining yield 
circumstances, multi-year disasters, and my impression is that 
once again FCIC, although they reviewed a couple of proposals, 
have taken no action, tabled the effort and I intend to pursue 
that further, Mr. Chairman, with the appropriate folks.
    I simply wanted to ask a follow-up question to the issue 
of, really, a permanent disaster program. Mr. Harms, you in 
particular indicated, please don't deal with crop insurance in 
the farm bill. My guess is we are headed in that direction, in 
part because of the interest in a permanent disaster program. 
The proposals by the corn growers and the Administration all 
lend themselves to a discussion. My kind of initial question 
is, why not in the farm bill? What do you see as the 
disadvantage to dealing with these issues and in particular, 
any advice any of you have as we look at the issue of permanent 
disaster?
    Mr. Harms. I think, prior to the disaster component being 
expressed and worked on out here, we think having crop 
insurance outside the farm bill probably makes sense. That is 
how it has been in the past. But if there is going to be a 
supplemental coverage on top of the MPCI Program, then, yes, we 
need to be involved in the farm bill and we need to be involved 
in working with that, working with the program, that crop 
insurance can be an integral part of that type of coverage. So 
with the additional disaster, yes, crop insurance should be 
added.
    Mr. Moran. Anyone have any final thoughts in directing me 
in regard to permanent disaster? Good, we will do it our way, 
then.
    Mr. Harms. Again, that is what scares me, I think. The 
American Association of Crop Insurers------
    Mr. Etheridge. Speak now or forever hold your peace.
    Mr. Moran. And Mr. Parkerson, you are more politically 
astute than to say that. I appreciate your comments and 
appreciate your time today and I am glad to join you. 
Incidentally, in various locations yesterday in Kansas, 
farmers, if given the opportunity for disaster, ad hoc disaster 
assistance payments and the choice between 2005, 2006 and 2007, 
some of my farmers in some locations will be choosing 2007, 
which is a real surprise to me, after year after year of 
drought, that the freeze damage is greater than the losses due 
to lack of moisture.
    Thank you, Mr. Chairman, for holding this hearing and I 
appreciate the chance to participate today.
    Mr. Etheridge. I thank the gentleman and let me just add to 
what he has just said. I think, when we find out how expensive 
the damage is going to be, really, across the country, 
especially in those areas along the Southern Belt, the 
Southeast and others that had not anticipated the really bad 
weather we have had this year, we normally think of droughts 
and floods and all of a sudden, the late season freezes may do 
more damage than any of us had ever anticipated at this point.
    Let me thank each of you for coming, for your testimony, 
for your time. We appreciate that. And under the rules of the 
Committee, the record of today's hearing will remain open for 
10 days to receive additional material and supplementary 
written responses from witnesses to any questions posed by a 
Member of the panel.
    This hearing on the Subcommittee on General Farm 
Commodities and Risk Management is adjourned.
    [Whereupon, at 12:06 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
      
Steve Harms,
Chairman,
American Association of Crop Insurers,
Johnston, IA.
Questions Submitted By Hon. Bob Etheridge, a Representative in Congress 
        From North Carolina
    Question 1. The Administration, the National Corn Growers and the 
American Farm Bureau Federation have all proposed changing the current 
price-based counter cyclical program with a revenue-based counter 
cyclical program. As offerors of very similar crop revenue insurance, 
what are your thoughts about the concept of moving to a revenue 
counter-cyclical program?
    Answer. Revenue-based versus price-based is more complex, as it 
adds the required element of current year yield. Crop insurance is 
designed to address this, as it offers individual farm based revenue 
coverage. The revenue coverage proposals offered by the Administration, 
corn growers and AFBF are proposed on a national, state or regional 
approach, all of which will involve basis risk. Thus, they will only 
work to the extent that an individual farmer's revenue correlates with 
national, state or regional revenue. Corn growers in Iowa, Illinois and 
Indiana would likely correlate well with national revenue, but corn 
growers in Kansas, South Dakota or Texas likely would not.

    Question 2. How interested are your companies in obtaining access 
to the data mining efforts? Willing enough to help with the cost?
    Answer. We are very supportive and interested in the RMA data 
mining effort. We'd prefer to get the data sooner in the crop insurance 
cycle so that we have the benefit of the information while conducting 
our quality control processes and reviews and so we can adequately and 
more timely respond with appropriate action. We believe this is a 
Federal effort and should be funded by RMA via its normal 
appropriations.
Questions Submitted By Hon. Bob Goodlatte, a Representative in Congress 
        From Virginia
    Question 1. Why do you reject the notion of a ``mandatory purchase 
requirement for farmers who participate in commodity programs''?
    Answer. We do not support mandatory purchase requirements because 
the stated purpose is to alleviate the need for ad hoc disaster 
payments. We strongly disagree that a mandatory purchase requirement 
will alleviate the need for ad hoc disaster payments. Moreover, the 
mandatory purchase requirement put in place by the 1994 crop insurance 
reform legislation remained for only 1 year before Congress removed it 
in the 1996 Farm Bill. The mandatory purchase requirement would require 
additional cross compliance between RMA and FSA. We don't think their 
systems can adequately handle this. Finally, we believe most of the 
acres not participating are small land owners who would prefer to self 
insure.

    Question 2. How comfortable are your companies with the premiums 
established by RMA? Do they sufficiently cover the risk you are taking? 
Do you analyze the premiums of these policies yourself? Do you tell 
USDA when you believe the premiums do not accurately reflect the risk 
of the policy? In circumstances where you have voiced concern about 
premiums, what has been RMA's response?
    Answer. We review the premiums annually set by RMA. By and large 
they are adequate. When we find problems, we inform RMA. Sometimes, 
they respond with changes, other times they do not. For example, as RMA 
rolled out GRIP, we found problems with the yields they set in some 
counties and felt they yields would lead to adverse selection. We 
informed RMA of these concerns and some of the yields were corrected 
the following year.
                                 ______
                                 
Steven C. Rutledge,
Chairman,
Crop Insurance Research Bureau, Inc.,
West Des Moines, IA.
Questions Submitted By Hon. Bob Etheridge, a Representative in Congress 
        From North Carolina
    Question 1. The Administration, the National Corn Growers and the 
American Farm Bureau Federation have all proposed changing the current 
price-based counter cyclical program with a revenue-based counter 
cyclical program. As offerors of very similar crop revenue insurance, 
what are your thoughts about the concept of moving to a revenue 
counter-cyclical program?
    Answer. I have read these proposals and although I do not have all 
the specifics, they do not seem to be that attractive nor do they seem 
to have much support. I can't tell how they would fit within the crop 
insurance program and may end up being a duplication of some parts of 
the crop insurance program.
    I'm afraid I just do not have adequate knowledge of the specifics 
of these proposals to give a very good answer on this one.

    Question 2. How interested are your companies in obtaining access 
to the data mining efforts? Willing enough to help with the cost?
    Answer. My company, and I believe the majority of the other 
companies, are very interested in obtaining the data mining 
information. RMA has proposed the SRA holders pay a fee of \1/2\ of 1 
percent of premium to help them update and maintain their systems. If 
this fee will help keep data mining available and the industry is not 
subject to various other cuts, then I don't think there would be an 
objection to this item. Data mining can be a very valuable tool if we 
are allowed access to all appropriate data.
Questions Submitted By Hon. Bob Goodlatte, a Representative in Congress 
        From Virginia
    Question 1. In your testimony, you note correctly that crop 
insurance liabilities will be large this year--in excess of $65 
billion. Much of this increase liability is due to the fact that the 
price election on corn was in excess of $4 per bushel. Even though 
liability is up, so are premiums. In your view, does the increase in 
premium sufficiently cover the risk at these price levels?
    Answer. The premium increase due to price increases should be 
proportional to the increase in liability and if the premium rates set 
by RMA are correct then theoretically, the companies should be 
receiving adequate premium for the risk. The problem is that we have 
never had such high base prices before.
    Typically, prices are low during Feb. when the base price is 
calculated, rise during the middle of the growing season due to various 
weather concerns that spook the markets and then fall and are on the 
low side again when the harvest price is calculated during October.
    This year that pattern has been broken with the base prices for 
corn and soybeans the highest in the history of the program. This 
anomaly adds a new risk component not previously contemplated simply 
due to the magnitude of potential price movement. I don't believe this 
uncertainty is included in the rating of the revenue products.

    Question 2. If a price decline of 30% occurs in corn and there is 
no loss of yield, do sufficient reserves exist in the industry to cover 
these underwriting losses? Is there any risk in your view that there 
are not sufficient reserves to cover large losses given the high price 
election for corn?
    Answer. A price decline, assuming no yield losses, of 30% in the 
corn and bean prices would cause most SRA holders to suffer 
underwriting losses but adequate reserves exist to cover these losses 
since they would not be of great magnitude. The worst case scenario 
would be poor yields causing prices to rise above the base price. In 
that instance SRA holders would pay losses of great magnitude. Reserves 
probably exist (including payments we would receive from our reinsurers 
to help cover the losses) to cover the losses. However, I believe in 
this type of scenario, there would be one or more companies which would 
suffer financial losses of such degree that they might not be able to 
continue or would at least have to reduce their writings going forward. 
It could easily be the largest loss ever suffered by the program.
    I do think there would be sufficient strength among the remaining 
companies to maintain adequate capacity to handle the needs of the 
program. However, we would all have to pay higher reinsurance costs and 
our margins would be reduced for some period of time.

                                 
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