[House Hearing, 111 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 ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 22, 2010

                               __________

                           Serial No. 111-58


          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,            FRANK D. LUCAS, Oklahoma, Ranking 
    Vice Chairman                    Minority Member
MIKE McINTYRE, North Carolina        BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California        SAM GRAVES, Missouri
DAVID SCOTT, Georgia                 MIKE ROGERS, Alabama
JIM MARSHALL, Georgia                STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN, South     RANDY NEUGEBAUER, Texas
Dakota                               K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas                 JEFF FORTENBERRY, Nebraska
JIM COSTA, California                JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana              ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota           DAVID P. ROE, Tennessee
STEVE KAGEN, Wisconsin               BLAINE LUETKEMEYER, Missouri
KURT SCHRADER, Oregon                GLENN THOMPSON, Pennsylvania
DEBORAH L. HALVORSON, Illinois       BILL CASSIDY, Louisiana
KATHLEEN A. DAHLKEMPER,              CYNTHIA M. LUMMIS, Wyoming
Pennsylvania                         THOMAS J. ROONEY, Florida
BOBBY BRIGHT, Alabama
BETSY MARKEY, Colorado
FRANK KRATOVIL, Jr., Maryland
MARK H. SCHAUER, Michigan
LARRY KISSELL, North Carolina
JOHN A. BOCCIERI, Ohio
SCOTT MURPHY, New York
WILLIAM L. OWENS, New York
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho

                                 ______

                           Professional Staff
                    Robert L. Larew, Chief of Staff
                     Andrew W. Baker, Chief Counsel
                 April Slayton, Communications Director
                 Nicole Scott, Minority Staff Director

                                 ______

      Subcommittee on General Farm Commodities and Risk Management

                   LEONARD L. BOSWELL, Iowa, Chairman

JIM MARSHALL, Georgia                JERRY MORAN, Kansas, Ranking 
BRAD ELLSWORTH, Indiana              Minority Member
TIMOTHY J. WALZ, Minnesota           TIMOTHY V. JOHNSON, Illinois
KURT SCHRADER, Oregon                SAM GRAVES, Missouri
STEPHANIE HERSETH SANDLIN, South     STEVE KING, Iowa
Dakota                               K. MICHAEL CONAWAY, Texas
BETSY MARKEY, Colorado               BLAINE LUETKEMEYER, Missouri
LARRY KISSELL, North Carolina        THOMAS J. ROONEY, Florida
DEBORAH L. HALVORSON, Illinois
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi

                Aleta Botts, Subcommittee Staff Director

                                  (ii)


                             C O N T E N T S

                              ----------                              
                                                                   Page
Boswell, Hon. Leonard L., a Representative in Congress from Iowa, 
  opening statement..............................................     1
    Prepared statement...........................................     3
Graves, Hon. Sam, a Representative in Congress from Missouri, 
  opening statement..............................................     3
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, 
  opening statement..............................................     4
Moran, Hon. Jerry, a Representative in Congress from Kansas, 
  prepared statement.............................................     6
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, prepared statement..................................     5

                               Witnesses

Murphy, William J. ``Bill'', Administrator, Risk Management 
  Agency, U.S. Department of Agriculture, Washington, D.C........     7
    Prepared statement...........................................     8
Rutledge, Steven C., President, CEO, and Chairman of the Board, 
  Farmers Mutual Hail Insurance Company of Iowa, West Des Moines, 
  IA; on behalf of Crop Insurance Research Bureau, Inc...........    31
    Prepared statement...........................................    33
Parkerson, Robert W., President, National Crop Insurance 
  Services, Inc., Overland Park, KS..............................    37
    Prepared statement...........................................    38
Frerichs, Stephen, President, AgVantage, LLC;; Legislative 
  Consultant, Rain and Hail, L.L.C., Alexandria, VA; on behalf of 
  American Association of Crop Insurers..........................    42
    Prepared statement...........................................    44
Deal, James D., Chairman of the Board, NAU Country Insurance 
  Company, Andover, MN...........................................    48
    Prepared statement...........................................    51
Dalton, John F., President, Midwest Insurance Associates LLC and 
  Agri-Land Insurance Agency, Council Bluffs, IA; on behalf of 
  Independent Insurance Agents & Brokers of America..............    63
    Prepared statement...........................................    65
Fowler, Kathy, President, National Association of Crop Insurance 
  Agents, Memphis, TX............................................    68
    Prepared statement...........................................    70
Roach, Jordan A., Vice Chairman, Crop Insurance Professionals 
  Association LLC, Fresno, CA....................................    72
    Prepared statement...........................................    74

                          Submitted Questions

Submitted questions..............................................    97


       HEARING TO REVIEW THE STATE OF THE CROP INSURANCE INDUSTRY

                              ----------                              


                        THURSDAY, JULY 22, 2010

                  House of Representatives,
 Subcommittee on General Farm Commodities and Risk 
                                        Management,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 9:30 a.m., in 
Room 1300, Longworth House Office Building, Hon. Leonard L. 
Boswell [Chairman of the Subcommittee] presiding.
    Members present: Representatives Boswell, Walz, Schrader, 
Herseth Sandlin, Kissell, Pomeroy, Peterson (ex officio), 
Costa, Moran, Graves, Conaway, and Lucas (ex officio).
    Staff present: Aleta Botts, Liz Friedlander, Craig Jagger, 
John Konya, Clark Ogilvie, James Ryder, April Slayton, Rebekah 
Solem, Tamara Hinton, Kevin Kramp, Nicole Scott, Pelham 
Straughn, Pete Thomson, Jamie Mitchell, and Sangina Wright.

OPENING STATEMENT OF HON. LEONARD L. BOSWELL, A REPRESENTATIVE 
                     IN CONGRESS FROM IOWA

    The Chairman. I would like to call the meeting to order.
    Welcome, everybody. I say in the beginning that my friend, 
Ranking Member, Jerry has had a death in the family and may 
show up late. I am not sure just yet.
    I also have my next door neighbor, Mr. Sam Graves, here. A 
state line divides us, I guess, but we have known each other a 
long time. We both like to talk about airplanes. In fact, we 
have already done it this morning, haven't we Sam?
    Mr. Graves. Yes, we have.
    The Chairman. Anyway we will come to order, and I would 
like to thank you for being here as we review the state of the 
crop insurance industry.
    I would like to thank the witnesses. Of course, when we 
have somebody from the home state here, we are always kind of 
pleased about that. We all look forward to these opportunities; 
and I want to give a welcome to the two Iowans who will be on 
the second panel, Mr. Rutledge and Mr. Dalton, for making the 
trip. Being from Iowa, the state with over 92,000 farms and 
over 30 million acres in production, we understand the 
challenges that farmers in that agriculture business face.
    You probably heard this too many times, but it has been 
quite an impact on me, so I will keep telling it. When I 
returned to Iowa after spending a period of time in the Army--I 
was drafted and thought I'd be gone a couple of years. I was 
gone a little over 20 years--I came back to do something I 
wanted to do very badly and that was to farm. My, my, how it 
had changed, big time.
    I already knew--I always knew that, at least the size of 
the operation that I was involved in, and all sizes, actually, 
there are a couple of things you have to have. It is so capital 
intensive, you have to have a good banker you can work with; 
and, of course, you have to have the farmer store to buy and 
sell your product. You just have to have both.
    Then we went through the farm crisis in the late 1970s, 
early 1980s. Down in our part of the country we had banks 
closing, and it was tough. It was a tough time, and a lot 
didn't survive it. A lot of the neighbors I had did not 
survive.
    I had moved into the Iowa Legislature, and I had--Sam, I 
had five banks in my Senate district that went down. It was 
like a death in the family when that happens in a community. 
Throughout all that something else emerged, and that was the 
realization that you had to have a third element that had not 
been pursued too much and that was a good insurance program 
with a good insurance agent to help you manage your risk. So I 
and many others utilized that and didn't want to go back to 
what we just went through.
    So I share that story because I understand the importance 
of the crop insurance industry, not just in our state but 
across the country. Last year alone, 265 million acres were 
enrolled in crop insurance. Sign-up and buy-up levels for crop 
insurance levels are at an all-time high, understandably so, 
proving that farmers appreciate having additional options to 
help them manage risk. However, certain regions and certain 
crops are under-represented. So, trying to look ahead, we need 
to see how we can make this program work for more producers.
    Initially, I have to say cutting funding for the program 
makes the task a lot more difficult. Budgets are tight, but 
tight budgets do not mean we must jeopardize the risk 
management tools that we have today, or put in question what 
improvements we can make in the future.
    We have been very concerned at the level of cuts proposed 
by RMA through the standard renegotiation agreement, the SRA 
process. While I believe the national deficit is one of the 
most pressing issues facing our nation, we must not pull the 
rug out from under our farmers and ranchers to address the 
issue.
    Over $5 billion taken out of the crop insurance program in 
the 2008 Farm Bill and now an additional $6 billion removed 
through this SRA, I ask is there enough left to ensure farmers 
have access to affordable coverage, while trying to expand the 
program for crops for which it currently is not a viable 
option.
    We must also acknowledge that the crop insurance industry 
is a business, and both the companies and agents need to make a 
profit in order to stay in the market and to stay in business. 
We can't begrudge them that. However, it is also the 
Committee's job to guarantee that every cent of taxpayer money 
spent in the program is spent wisely, and truly goes to provide 
a safety net for our producers.
    We are making strides to help the American farmer, and I 
look forward to hearing more about the crop insurance program 
from our witnesses today. So I thank you again. Your testimony 
will be an essential means to us for the Committee to move 
toward the 2012 Farm Bill.
    [The prepared statement of Mr. Boswell follows:]

  Prepared Statement of Hon. Leonard L. Boswell, a Representative in 
                           Congress from Iowa

    I would like to thank everyone for joining us here today as we 
review the state of the crop insurance industry. I would especially 
like to thank our witnesses. A very warm welcome to the two Iowans on 
the panel, Mr. Rutledge and Mr. Dalton, for making the trip to D.C. 
This Committee looks forward to hearing your valuable insight.
    Being from Iowa--a state with over 92,000 farms and over 30 million 
acres in production--I understand the challenges that farmers and those 
in the agriculture business face today.
    When I retired from the Army and returned home to Iowa and to farm, 
I quickly realized that farming had greatly changed during the 20 years 
I was away. Back then, I had always said that in order to farm, 
producers needed to have access to a bank and a place to sell their 
product. After surviving the farm crisis in the 1980's, I also realized 
the importance of a good crop insurance agent to help me to manage my 
risk. I worked with an agent in my area to ensure that I was never put 
in the position that I was in during the 1980's farm crisis again.
    I shared that story because I understand the importance of the crop 
insurance industry not only in my State of Iowa but across the country. 
Last year alone 265 million acres were enrolled in crop insurance.
    Sign-up and buy-up levels for crop insurance products are at an 
all-time high, proving that farmers appreciate having additional 
options to help them manage risk. However, certain regions and certain 
crops are under-represented. Looking ahead, we need to see how we can 
make this program work for more producers. Additionally, I have to say 
that cutting funding of the program makes that task much more 
difficult. Budgets are tight, but tight budgets do not mean we must 
jeopardize the risk management tools that we have today or put in 
question what improvements we can make in the future.
    I have been very concerned with the level of cuts proposed by the 
RMA through the Standard Renegotiation Agreement (SRA) process. While I 
believe the national deficit is one of the most pressing issues facing 
our nation, we must not pull the rug out from under our farmers and 
ranchers to address that issue.
    With over $5 billion taken out of the crop insurance program in the 
2008 Farm Bill and now an additional $6 billion removed through the 
SRA, I ask--is there enough left to ensure farmers have access to 
affordable coverage while trying to expand the program to crops for 
which it is currently not a viable option?
    We also must acknowledge that the crop insurance industry is a 
business, and both the companies and agents need to make a profit in 
order to stay in the market. We can't begrudge them that; however, it 
is also this Committee's job to guarantee that every cent of taxpayer 
money which is spent in the program is spent wisely and truly goes to 
provide a safety net for our producers.
    We are making great strides to help the American farmer and I look 
forward to hearing more about the crop insurance program from our 
witnesses today. Thank you again, your testimony will be an essential 
means for us as we continue to move towards the 2012 Farm Bill.
    I would now like to turn to my good friend, Sam Graves, for any 
opening statements he would like to make.

    The Chairman. I would like to turn to my friend and 
neighbor, Sam Graves, for any opening statements he would like 
to make.

   OPENING STATEMENT OF HON. SAM GRAVES, A REPRESENTATIVE IN 
                     CONGRESS FROM MISSOURI

    Mr. Graves. Thank you, Mr. Chairman. I want to thank you 
for calling this hearing to review the state of the crop 
insurance industry.
    Despite the creation of new commodities support and 
disaster assistance programs in the 2008 Farm Bill, agriculture 
producers in my district and in many other Congressional 
districts continue to rely on traditional farm programs and 
crop insurance to meet their risk management needs.
    Agriculture producers need options to take into account the 
various and unique characteristics of their individual 
operations. The crop insurance industry has often been a source 
of innovation in developing products to meet these needs. 
Unfortunately, the recently enacted SRA reduces the farm safety 
net by some $6 billion. I think many on this Committee would 
agree that the run-up in A&O in 2008 was a problem that needed 
to be addressed, but there were other strategies available that 
would not have so deeply impacted the farm safety net baseline.
    Mr. Chairman, I think you summed things up pretty well; 
and, with that, I, too, am looking forward to hearing the 
testimony today and look forward to hearing what the witnesses 
have to say.
    The Chairman. Well, thank you very much.
    I see we have been joined by Mr. Lucas from Oklahoma, the 
Ranking Member of the full Committee, and would recognize Frank 
for any statements you might want to make.

 OPENING STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN 
                     CONGRESS FROM OKLAHOMA

    Mr. Lucas. Thank you, Mr. Chairman. I appreciate that. And 
I want to thank Administrator Murphy and all the panelists for 
being here today.
    I do wonder why we are having a hearing a week after 
companies basically have had a take-it-or-leave-it scenario 
thrust before them. The airing of some of these concerns would 
have been much more productive if they were not happening after 
the fact.
    As the Department likes to point out, all 16 companies did 
sign the new SRA, but the signing of the agreement should not 
imply that the companies agree with the terms. If a company did 
not sign the document, the company would simply cease to exist, 
and thousands of people would be out of jobs.
    A number of troubling items have arisen out of this 
Standard Renegotiation Agreement, and I think this Committee 
needs to take a serious look at the precedent that this 
renegotiation has set, and whether Congress needs to set 
stronger parameters of what changes can be made in future 
agreements.
    As the Administrator will tell us, Congress gave the 
Department discretion to renegotiate this agreement, but I am 
not sure that these wholesale changes were envisioned when that 
discretion was given in the 2008 Farm Bill. As one of our 
witnesses points out today, this power of the purse is and 
should be reserved to Congress. This duty was usurped by the 
Department in this case.
    In the field hearing the Chairman held this spring, the 
importance of the crop insurance program to producers was 
reiterated time and time again. I worry that these huge cuts 
might imperil the delivery system that our producers depend 
upon.
    In the 2008 Farm Bill, Congress made cuts to the program 
totaling around $6 billion. I don't think anyone involved in 
those negotiations thought that less than 2 years later the 
Department would again cut such a massive sum of money out of a 
program our producers depend on with such intensity.
    I also worry that the Department, in response to a letter 
from one of our producer groups, said, ``USDA remains open and 
willing to engage with the relevant Congressional committees to 
achieve crop insurance reform in a way that addresses the 
baseline concerns.'' Simply put, the Department failed in that 
regard as a vast majority, if not all, of the cuts in the 
program have vanished from the baseline. Yes, they are gone 
from the baseline.
    In addition, I worry about some of the last-minute 
provisions to the agreement, including the hard cap on agent 
commissions, limiting the ability of companies to sue, and a 
change in the A&O formula that generally affects my great State 
of Oklahoma.
    I do, though, commend Administrator Murphy, though, as he 
has consistently been up front and engaging in this process. I 
appreciate the open lines of communication that he and his 
office have shown to the Members of this Committee. I believe 
you were given an almost impossible job, sir, and you performed 
it admirably, considering everything.
    With that, Mr. Chairman, I yield back.
    The Chairman. Thank you, Mr. Lucas; and I appreciate what 
you just said.
    Mr. Moran and I work very close together on trying to set 
these timetables, and your point is well taken about the 
timing. However, both Jerry and myself and probably you, since 
I know you pretty well, have been in contact with Mr. Murphy, 
so your point is well taken. I do remind us all that we do have 
some say in this before it is all said and done, so that is 
what we are trying to go through as we have this hearing today.
    With that, I would ask that the rest of the Members present 
would follow standard procedure and request that they submit 
their opening statements for the record so we can begin the 
testimony and have ample time for questions.
    [The prepared statements of Mr. Peterson and Mr. Moran 
follow:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota

    Thank you, Chairman Boswell, for holding this hearing today to take 
a look at where things stand in terms of the crop insurance industry.
    This hearing is particularly timely as the U.S. Department of 
Agriculture has just finished the process of renegotiating the Standard 
Reinsurance Agreement (SRA) with the companies that provide crop 
insurance coverage to farmers and ranchers. Many people have a lot of 
opinions about how that process was carried out and what the outcome 
will be for farmers.
    As a result of the SRA renegotiation, $4 billion will go to 
reducing the Federal deficit and $2 billion will go into improving risk 
management and conservation programs. As everyone knows, I am a strong 
supporter of reducing the Federal budget deficit because we are simply 
on an unsustainable path right now. And I want it to be noted that 
agriculture was first in line to contribute savings to the deficit, and 
the contribution of $4 billion was significant. If every other part of 
government followed this example and found a proportionate amount of 
savings in their programs, we could make some serious headway against 
the debt crisis we are facing in this country.
    In the 2008 Farm Bill, we asked USDA to renegotiate the SRA, and 
that's what they have done. Many of us did not expect that as a result 
of those negotiations, there would be $6 billion in savings. I 
understand that there are concerns about how such a large change in the 
SRA could impact the delivery of crop insurance to farmers. We have 
some time between now and when we write the 2012 Farm Bill, and if we 
see that the SRA is having an adverse effect on farmers, we could make 
some modifications at that time to address any problems that come up.
    Again, thank you Chairman Boswell for holding this timely hearing 
today, and I look forward to the testimony.
                                 ______
                                 
 Prepared Statement of Hon. Jerry Moran, a Representative in Congress 
                              from Kansas

    Thank you, Mr. Chairman, for holding this hearing. Given the recent 
events in the crop insurance industry, chiefly the signing of the 2011 
Standard Reinsurance Agreement (SRA), it is important that we hold this 
hearing. While I am disappointed that we did not hold this hearing 
before the SRA was completed, which would have enabled Members of the 
Committee to publicly put their concerns and objections on record 
before RMA arrived at the final agreement terms, I am glad we have that 
opportunity now. Congress must exercise its oversight authority and 
doing so now will give us an idea about what parts of the SRA we must 
closely monitor as it is implemented.
    Compared to the first draft of the SRA released by the Risk 
Management Agency (RMA) in December of 2009, I believe the final draft 
is much improved. However, I do not want this to be misconstrued as me 
giving the 2011 SRA my stamp of approval. In fact, I continue to have 
significant concerns about the substance of the agreement. I am worried 
not only how it could adversely impact service to the agricultural 
producer, but also how it will affect the vitality of the existing crop 
insurance industry.
    While I plan to discuss my concerns further during the question 
period, I would like to highlight some initial issues. First, despite 
promises from Secretary of Agriculture Tom Vilsack that he would work 
with the Committee to protect the budget baseline for the next Farm 
Bill, it appears there was no real attempt made by the Department to 
fulfill this promise. While the Department reduced its program cuts 
from $8.4 billion to $6 billion, it appears none of that funding will 
remain available to the Committee to assist it in writing the 2012 Farm 
Bill. Furthermore, the Department has set a dangerous precedent of 
taking funds from a commodity program to support two mandatory 
conservation programs in the Conservation Reserve Program (CRP) and the 
Conservation Stewardship Program (CSP). When the last farm bill was 
written, the Congressional Budget Office (CBO) made assumptions about 
the cost of these programs, and in regard to CRP, assumed the program 
would be operated at near capacity for the life of the farm bill. This 
included the reenrollment of new and expiring CRP acres. It is 
perplexing why the Department now thinks it necessary to find 
additional offsets to run the program as Congress intended. If this 
example is followed, every time a CRP general signup is held, the 
Department is going to look for another way to reduce the producer 
safety net. Let me be clear, this is not what Congress intended.
    Second, while Congress directed RMA to examine different methods of 
calculating the Administrative and Operating (A&O) subsidy, it did not 
direct RMA to restrict agent commissions. Agent commissions are an 
internal business decision of private companies. Often these agreements 
are made with independent agent contractors. RMA's decision to 
interfere with agent commissions is an unnecessary and unauthorized 
intrusion of government into a private business model. While crop 
insurance is a construct of the Federal Government, it was purposefully 
setup to operate through the use of a private delivery system. I worry 
that restrictions on agent commissions will eventually lead to a 
decrease in service to farmers and ranchers.
    Third, I have significant concerns that subparagraph III(a)(2)(K) 
of the 2011 SRA is an unauthorized restriction of the legal rights of 
not only companies who are participants in the SRA, but also agents who 
are not party to the agreement. I suspect that most courts would find 
such a provision to constitute a contract of adhesion and the 
provisions stricken upon legal challenge. It is troublesome that an 
Administration that advertises its commitment to transparency and 
equity would unilaterally try to cut off the legal rights of insurance 
companies and agents. It is especially troublesome that this provision 
was added at the last minute with little open debate or negotiation. 
The addition of such a provision begs the question: ``What is the 
Department trying to hide?''
    Finally, I am concerned about the overall shifting of risk in this 
SRA from the private insurance and reinsurance industry to the 
government and ultimately the taxpayer. If RMA is concerned that 
profits in the crop insurance industry were getting excessive, why not 
move the program toward a more market oriented model. For example, 
rather than the government taking a greater share of the more 
profitable policies from the companies through realignment of the 
commercial funds, why not simply transfer a greater share of the 
riskier policies to the companies, while allowing the companies to 
retain the more profitable polices. This would enable the companies 
greater upside potential, while also allowing the companies, through 
reinsurance, to spread risk across the industry.
    I hope these topics will be addressed by RMA in its testimony and I 
look forward to further discussion throughout the hearing today.

    The Chairman. I would like to welcome the first panel 
which, of course, is, as you see, Mr. Murphy, Administrator, 
Risk Management Agency, U.S. Department of Agriculture.
    Mr. Murphy, welcome and please begin.

 STATEMENT OF WILLIAM J. ``BILL'' MURPHY, ADMINISTRATOR, RISK 
             MANAGEMENT AGENCY, U.S. DEPARTMENT OF
                 AGRICULTURE, WASHINGTON, D.C.

    Mr. Murphy. Chairman Boswell, Congressman Graves, Members 
of the Subcommittee, as Administrator of the Risk Management 
Agency I am pleased to meet with you today to discuss progress, 
challenges, and successes of the Federal Crop Insurance 
Program, and in particular the recently negotiated Standard 
Reinsurance Agreement.
    Secretary Vilsack asked me to administer the Federal Crop 
Insurance Program in a manner that provides effective risk 
management services necessary for American farmers and 
ranchers, and one that offers such services to producers in all 
geographical areas, regardless of the size of their operation.
    Further, the Secretary and I are aware that in today's 
economy it is important that the program be cost effective and 
give a fair value for the taxpayers' dollar.
    The crop insurance program has grown in coverage and in 
value to producers over the last decade. In 1999, just 73 
percent of insured acres for the ten major commodities had buy-
up coverage. Today, that has risen to 92 percent. Not only are 
coverage levels increasing, but the type of coverage farmers 
are purchasing is shifting to the more complex, comprehensive 
revenue coverages.
    Many banks now require crop insurance coverage before 
making operating loans. Federal crop insurance has become an 
indispensable fact in the life of the American farmers.
    Negotiations for the 2011 SRA began in 2009, and were 
completed on July 13th, 2010, when the USDA announced that all 
16 of the approved crop insurance companies had signed the new 
SRA. During the negotiation, RMA held many meetings with the 
companies to hear their concerns, their suggestions and to 
exchange ideas. Elements of many of the provisions in the final 
agreement were based on recommendations from the companies 
toward these negotiations.
    RMA and the companies negotiated in good faith and with 
respectful dialogue. The resulting agreement provides a 
reasonable rate of return to the companies for delivering the 
program, and will achieve $6 billion in savings over the next 
10 years.
    The new SRA will have no adverse impact on farmers' premium 
costs. In fact, certain farmers are likely to see a reduced 
insurance cost with the performance-based discount program 
resulting from the savings generated by this agreement.
    The new SRA allows Administrative and Operating expense 
subsidies to fluctuate within a range, but removes the 
potential for the type of excess windfalls experienced during 
the 2007 to 2009 price bubble.
    The new SRA also for the first time provides the companies 
and their agents with financial protection from declines in the 
A&O subsidy should crop prices fall sharply.
    RMA also took steps in the new agreement to limit 
compensation to crop insurance agents. Companies have been 
unable to contain a disturbing escalation in agent commissions. 
In 2009, companies reported to RMA that the average agent 
commission in the Corn Belt States--Iowa, Illinois, Indiana, 
Minnesota, and Nebraska--was 18.6 percent, a premium, whereas 
the A&O subsidy paid to the companies was only 17.1 percent.
    Companies have been increasingly relying on expected 
underwriting gains which may or may not be realized to pay 
generous compensation arrangement to agents, while trying to 
meet their other program delivery costs. RMA is particularly 
sensitive to this issue because of the failure of American 
Growers due to similar circumstances in 2002, which cost 
taxpayers millions of dollars, disrupted program delivery, and 
still today is requiring government resources to close out this 
book of business.
    To help ensure that does not reoccur, the new agreement 
limits company expenditures on base agent commissions to 80 
percent of the A&O subsidy at the state level. This is the so-
called ``soft cap.''
    In addition, if companies are in an underwriting profit, 
they may share this profit with agents, but total compensation 
will be limited to 100 percent of the annual subsidy at the 
state level. This is known as the ``hard cap.''
    RMA believes that the amount companies can pay for their 
agents under the new SRA is reasonable and adequate to maintain 
producer servicing levels we see today. I, along with members 
of the Federal Crop Insurance Corporation Board of Directors, 
all the RMA staff across the country, recognize that the 
program is dependant on a reliable delivery system. The 
approved insurance companies who deliver this program with 
their network of agents and RMA rely heavily on each other to 
operate the program efficiently and effectively to meet the 
needs of Americans producers. At the same time, we are aware of 
our responsibility to be good stewards of taxpayer money. RMA 
is pleased to have a new and solid SRA in place.
    Again, thank you for the opportunity to participate in this 
important hearing. I look forward to responding to any 
questions.
    [The prepared statement of Mr. Murphy follows:]

 Prepared Statement of William J. ``Bill'' Murphy, Administrator, Risk 
  Management Agency, U.S. Department of Agriculture, Washington, D.C.

    Chairman Boswell, Ranking Member Moran, and Members of the 
Subcommittee, as Administrator of the Risk Management Agency (RMA), I 
am pleased to meet with you today to discuss the latest developments in 
RMA, the progress and challenges of the Federal Crop Insurance Program, 
and, in particular, to provide an update on the recently negotiated 
Standard Reinsurance Agreement (SRA) and its benefits to the 
agricultural community and the American taxpayer. My staff and I work 
daily to validate the utility of current insurance products--making 
certain we have the best protection possible for all of America's 
farmers and ranchers. We work to ensure outreach to small and limited 
resource farmers, to promote equity in risk sharing and to guard 
against fraud, waste and abuse within the program. In our role as 
regulators, we must also ensure the continued integrity and actuarial 
soundness of the Federal Crop Insurance Program.
    Secretary Vilsack asked me to administer the Federal Crop Insurance 
Program in a manner that provides effective risk management services 
necessary for American farmers and ranchers; and that offers such 
services and opportunities to participate in the program to farmers and 
ranchers in all geographical areas regardless of the size of their 
operation. The Secretary and I are aware that in today's economy it is 
important that the program be cost effective and give a fair value for 
the taxpayers' dollar.
    The crop insurance program has grown in coverage and in value to 
producers over the last decade. In 1999, just 73 percent of insured 
acres for the ten staple crops had buy up coverage, compared to 92 
percent in 2009. Not only are coverage levels increasing, but the type 
of coverage farmers are purchasing is shifting to the more 
comprehensive revenue coverage. Many banks require crop insurance 
coverage in order to make operating loans to crop producers. Federal 
crop insurance has become a fact of life for many farmers--and one in 
which American farmers would find it difficult to continue providing 
America and the world with an abundant supply of food, fiber and fuel 
without the program.
    This growth has been accomplished in an actuarially sound manner as 
required by Congress, and the program is working well. Over the last 2 
decades, premiums (producer premiums added to premium subsidies) have 
been sufficient to cover the indemnities paid to producers plus a 
reasonable reserve, as directed by the Federal Crop Insurance Act.

The 2011 Standard Reinsurance Agreement
    The Food, Conservation, and Energy Act of 2008 (2008 Farm Bill) 
allowed the renegotiation of the Standard Reinsurance Agreement (SRA), 
which is the agreement between USDA and the approved private insurance 
companies who deliver the program through a network of insurance 
agents. Negotiations began late in 2009, and on July 13, 2010, USDA 
announced that all of the approved crop insurance companies had signed 
the new SRA. At the beginning of the negotiations, Secretary Vilsack 
and I established six objectives for the new SRA that would build on 
the strengths of the program. The objectives were designed to align 
with RMA's primary mission to help producers manage the significant 
risks associated with agriculture. We maintained our focus on those 
objectives throughout the process and they have served us and America's 
farmers well. They are:

    (1) Maintain producer access to critical risk management tools;

    (2) Align the Administrative and Operating (A&O) subsidy paid to 
        insurance companies closer to actual delivery costs;

    (3) Provide a reasonable rate of return to insurance companies;

    (4) Protect producers from higher costs while equalizing 
        reinsurance performance across states to more effectively reach 
        under-served producers, commodities, and areas;

    (5) Simplify provisions to make the SRA more understandable and 
        transparent; and

    (6) Enhance program integrity.

    During the negotiations RMA held many meetings with the companies 
to hear their concerns and suggestions. Elements of several provisions 
in the final agreement were suggested by the companies during the 
negotiation. RMA and the companies negotiated in good faith and with 
respectful dialogue resulting in an agreement that provides a 
reasonable rate of return to the companies for delivering the program, 
and will achieve $6 billion in savings over the next 10 years. Two-
thirds of the savings from the new SRA, $4 billion, will go toward 
paying down the Federal deficit. The $4 billion in budget savings USDA 
achieved is one of the first and most significant steps that a Federal 
agency has achieved in reducing mandatory spending from the long term 
Federal deficit. The President has laid out an aggressive plan for 
reducing the deficit and we are pleased to take a leadership role in 
that effort.
    The remaining \1/3\ will support high priority risk management and 
conservation programs. This $2 billion invested in farm programs will 
be used, in part, to improve and expand several RMA risk management 
products. In fact, the Pasture, Rangeland, and Forage (PRF) program has 
already been expanded as a result of the savings obtained through the 
SRA. Under the Rainfall Index (RI)-PRF plan of insurance, RMA will 
expand coverage for the 2011 crop year to specific counties in 
Colorado, and all counties in the states of California, Florida, 
Georgia, New York, North Dakota, Oklahoma, Pennsylvania, South 
Carolina, and Texas, bringing the total number of states where the 
program is available to 16. The Vegetation Index (VI)-PRF will be 
expanded to the balance of counties in Idaho, Oregon, and South Dakota, 
and all counties in the states of Arizona, New Mexico, and Utah for 
2011, bringing the state total where VI-PRF is available to nine.
    RMA has also received requests for further expansion of PRF in 
Nevada, Arkansas, Maryland, and Minnesota. RMA will take the expansion 
request for the 2012 crop year to the Federal Crop Insurance 
Corporation Board of Directors later this year for their consideration 
and potential approval.
    As a result of these savings, RMA also plans to provide a 
performance based discount or refund, which will reduce the cost of 
crop insurance for certain producers. Additionally, USDA has used this 
opportunity to increase Conservation Reserve Program (CRP) acreage to 
the maximum authorized level; investing in new and amended Conservation 
Reserve Enhancement Program initiatives; and investing in CRP 
monitoring.
    The new SRA will have no adverse impact on farmers' premium costs. 
In fact, some farmers may even see reduced insurance costs with a 
performance-based discount or refund that result from the savings 
generated by this agreement.

SRA Structure
    The 2011 SRA was structured to reflect the realities of today's 
agriculture economy. Since government payments to crop insurance 
companies are tied to crop prices and price volatility, the 
unprecedented spike in commodity prices in recent years caused 
government payments to companies to more than double, from $1.8 billion 
in 2006 to $3.8 billion in 2009. The new SRA allows A&O payments to 
fluctuate within a range that removes the extremes. This will prevent 
windfall profits created by price spikes, like those we have seen in 
recent years, but will also ensure an adequate A&O subsidy is provided 
to companies. The new agreement provides a maximum A&O amount of $1.3 
billion in 2011, and increases it yearly with inflation to $1.37 
billion in 2015. This is almost 40 percent more than the $935 million 
the crop insurance companies received in A&O payments in 2006 (the last 
year before the price spikes) and 35 percent less than the $2 billion 
the industry received in 2008 (the height of the price spikes). 
Companies will be protected against extremely low crop prices by a 
minimum A&O reimbursement. This provision will ensure that the crop 
insurance companies receive at minimum about $1 billion in A&O 
payments, or slightly more than what it received in 2006 to deliver the 
program. This added protection will ensure that the companies have 
enough money to deliver the program, even if prices or price 
volatilities fall sharply.

Agents' Compensation
    To ensure the viability and integrity of the crop insurance 
delivery program, RMA took steps in the new agreement to limit 
compensation to crop insurance agents. Even in the face of cuts in A&O 
imposed by Congress, companies were unable to contain the escalation in 
agent commissions. A recent analysis showed that about 20 percent of 
A&O is needed to pay expenses related to loss adjustment, information 
technology, employees, and other operations (excluding agent 
commissions), yet many companies were paying agents far above the 
entire A&O subsidy amount in certain parts of the country. In 2009, 
average agent commission rates in the Corn Belt States (Iowa, Illinois, 
Indiana, Minnesota and Nebraska) were 18.6 percent of premium and the 
A&O paid to the companies was 17.1 percent. Therefore, these companies 
were relying on underwriting gains (which may or may not be realized) 
to pay for costs other than agent commissions. Companies were also 
moving A&O payments and bidding up agent commissions in the Corn Belt, 
which generally includes the most profitable states.
    The new SRA includes a cap on agent commissions to ensure that 
companies have sufficient funds to pay the other operating expenses in 
years in which there may not be an underwriting gain. As the regulator 
for the Federal Crop Insurance Program, RMA saw a clear need to ensure 
that companies have sufficient funds to pay operating expenses 
(including agent commissions) without resorting to the reliance on 
uncertain underwriting gains.
    History has shown us that this step is necessary. In 2002, the 
largest crop insurance company in the program, American Growers 
Insurance Company, failed in large part because of high commissions 
paid to retain and acquire agents. American Growers' expenses exceeded 
the amount of A&O received so they were forced to rely on underwriting 
gains to remain solvent. Since 2002 was a moderately bad crop year, 
many crop insurance companies did not receive underwriting gains. 
American Growers actually ended the year with a small underwriting 
gain. However, its failure to receive an underwriting gain large enough 
to cover its commitments caused the company to collapse. This major 
failure caused widespread confusion and uncertainty in the crop 
insurance program, and the remnants of this failure still are being 
felt by the program today.
    Eight years later, in 2010, companies are still relying on large 
underwriting gains to operate the program and have been fortunate to 
have seen an unprecedented run of profitable underwriting years. The 
real possibility of even a modest loss year, such as 2002, however, 
creates a situation where several companies could be at risk for 
failure and thus jeopardize the entire delivery system.
    The new agreement limits companies' expenditures on base agent 
commissions to 80 percent (soft cap) of the A&O subsidy at a state 
level. Companies may still use profit sharing, but total agent 
compensation will be limited to 100 percent (hard cap) of the A&O 
subsidy at a state level to ensure fair and equitable competition among 
all companies in all states.
    While the second draft proposal included only a ``soft cap'' on 
agent commissions equal to 80% of the A&O subsidy, the final agreement 
added a ``hard cap'' on total agent compensation at 100% of A&O subsidy 
on a state basis. This was done after considering concerns expressed by 
many companies and others that a soft cap alone would create equity 
issues between the states and provide an incentive for some companies 
to only write business in the most profitable states. Companies writing 
in these most profitable states would attract agents by claiming a 
potential for more consistent and higher rates of return and, 
consequently, greater availability of funding to provide for agent 
profit sharing. Providing a hard cap on profit sharing will limit the 
potential for companies to engage in such market-disrupting activities. 
Federal crop insurance is a nationwide program and the SRA should 
ensure that the companies and their agents have the incentives to 
provide service to all producers.
    Even with the hard cap, the expected amount of compensation 
potentially available to agents will be about $1.3 billion annually, 
given the expected A&O subsidy and average expected underwriting gain 
amounts provided by the agreement. On average, for the 2011 to 2015 
life of the SRA, agent commissions will be limited to about $1.1 
billion annually, while profit sharing will be limited annually to 
about $270 million. On average, the 100 percent cap allows around \1/3\ 
of total underwriting gains to be shared with agents, as determined by 
the companies.
    RMA analysis shows that the cap will primarily affect the Corn Belt 
states where companies generally have been paying average agent 
commissions above the total A&O subsidy. All other states have seen 
average commissions paid below the total A&O subsidy and are not likely 
to be affected.
    For this year--2010--under the current SRA, agent commissions are 
already expected to decrease due to lower commodity prices and price 
volatilities not due to the new SRA. For example, Iowa agent 
commissions are expected to fall from about $140 million in 2009 to 
about $110 million in 2010, under the current SRA. The new SRA hard cap 
will be placed at about $105 million in 2011. Therefore, the provisions 
of the new SRA will result in an average 5.7 percent decline from 2010 
in dollar terms in Iowa.
    However, this is 72% greater than the dollars Iowa agents received 
in 2006, even though the number of policies serviced is virtually 
unchanged. In effect, expected 2011 agent compensation reflects the 
equivalent of compounded annual income increases of 12% over this 5 
year period, an impressive record that can be matched by very few 
others in the recent, sluggish economy. In an environment where the 
number of Iowa policies is stagnant, therefore, RMA believes 
compensation to agents through the new SRA is more than reasonable for 
2011 and, with the built-in inflation adjustment factor, the 
compensation cap is guaranteed to increase with expected inflation.

Risk Sharing
    The previous agreement's risk sharing terms were structured in such 
a way that some states in the Corn Belt experienced much greater 
profitability for companies and agents than in other states. Analysis 
by Milliman, Inc. also indicates that the industry as a whole has been 
making far above a reasonable rate of return. This analysis shows that 
over the last 21 years a reasonable rate of return for the companies 
averaged 12.7 percent, while the companies actually received an average 
rate of return of 17.0 percent. The new agreement provides an expected 
return to companies of about 14.5 percent, almost two percentage points 
above the reasonable rate of return.
    The new SRA rebalances the risk sharing terms to better equalize 
expected returns throughout the different states, including terms that 
are more profitable for states outside the Corn Belt. The new SRA also 
maintains the Assigned Risk Fund, which provides companies with stop 
loss protection at a state level.
    The new agreement sets the Net Book Quota Share at 6.5 percent, 
with 1.5 percentage points of underwriting gain to be distributed to 
those companies that sell and service policyholders in 17 underserved 
or less-served states (Group 3 states). This provides an additional 
financial incentive for companies to continue doing business in these 
underserved or less-served states.
    Together, the changes we have made in the new SRA, through 
negotiations with the private companies, will create a more sustainable 
Federal Crop Insurance Program, and the expansion of key risk 
management and conservation programs will improve the safety net for 
America's farmers and ranchers. The new SRA represents a fair deal for 
farmers and the government, the companies, the agents, and the 
taxpayers.

Status of the Federal Crop Insurance Program
    The Federal Crop Insurance Program is helping the men and women who 
produce America's agricultural products to manage risk in an inherently 
risky business. For crop year 2009 with 1.2 million policies on 265 
million acres, the program provided coverage for $79.6 billion in crop 
value. Of the $8.9 billion in total premium, USDA subsidized $5.4 
billion for farmers, and paid out over $5 billion in claims for lost or 
damaged crops. In addition, RMA awarded $8.6 million in Partnership 
Agreements to assist small and underserved producers across the 
country.
    Producers generally have a choice of crop or livestock policies, 
with coverage they can tailor to best fit their risk management needs. 
In many cases, producers can buy insurance coverage for a yield loss, 
or revenue protection to provide coverage for a decline in yield or 
price. Today, most producers ``buy up'' to higher levels of coverage 
ranging up to 85 percent (smallest deductible), although a low level of 
catastrophic coverage (CAT) is still available for a nominal fee with 
the premium fully subsidized. Indemnity payments are usually made 
within 30 days after the producer signs the claim form.
    The crop insurance program has seen sustained growth as 
demonstrated by the increasing proportion of acres insured at buy up 
levels over the last decade (see Attachment 3). In 2009, 92 percent of 
insured acres for the ten staple crops had buy-up coverage, compared to 
just 73 percent in 1999. Not only are buy up levels increasing, but the 
type of coverage being purchased is shifting to the more comprehensive 
revenue coverage (see Attachment 4). In 2009, revenue coverage 
accounted for 57 percent of the insured acres, compared to just 27 
percent in 1999. In addition, the average coverage level (percent of 
the total crop covered) for buy up insurance has increased. In 2009, 
the average coverage level rose to a record-high of 73 percent. In 
1999, the average was 67 percent.

Program Integrity
    In conjunction with the improved quality control requirements in 
the new SRA, RMA Compliance has revised its work plans to reflect a 
more balanced approach between quality assurance and investigating 
program abuses. In a time of declining resources and increased 
responsibilities, effective internal controls provide a significant 
cost-benefit compared to identifying and prosecuting program abuse 
alone. RMA is currently reviewing company operations and internal 
controls to determine the success of their efforts to address crop 
insurance program vulnerability concerns.
    RMA continues to make significant progress in preempting fraud, 
waste and abuse through the expanded use of data mining. We have 
preempted millions of dollars' worth of projected payments, and RMA 
continues to use data mining to identify anomalous producer, adjuster, 
and agent program results. With the assistance of the Farm Service 
Agency (FSA) offices, RMA and companies conduct growing season spot 
checks to ensure that claims for losses are legitimate. These spot 
checks based on data mining have resulted in a significant reduction in 
anomalous claims for those situations.
    We are improving the timing and quality of our sanctions requests 
as well. RMA continues to work with USDA's Office of General Counsel 
(OGC) to limit the number of cases declined due to insufficient 
evidence. This improvement is attributable to Compliance personnel 
becoming more proficient at identifying evidence and establishing cases 
that will pass legal sufficiency requirements. The Administrative 
Sanctions regulations that were identified by the Government 
Accountability Office (GAO) as requiring publication were published and 
were effective on January 20, 2009. Although RMA was using the 
statutory authority to impose sanctions before the regulations were 
published, RMA agreed with GAO that the publication should be 
prioritized to ensure that program participants and other interested 
parties were given appropriate constructive notice of the rules.
    RMA is continually seeking new and more effective ways to work with 
the other regulatory bodies and government agencies as well as 
insurance companies, agents and producers to ensure the integrity of 
the Federal Crop Insurance Program. RMA compliance reviews continue to 
reveal that there are only a small number of producers who have been 
involved in fraud or illicit activity. While no level of criminal or 
abusive behavior is acceptable, RMA continues to believe the number of 
persons involved in criminal activity is relatively small.
    While RMA, FSA and the insurance providers have preempted tens of 
millions of dollars of improper payments through quality controls, data 
mining, and other measures, RMA is constantly identifying ways to 
balance competing needs to make our products less susceptible to fraud 
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 waste, fraud and abuse.
    In the recent past, there have been some concerns expressed about 
unresolved Office of Inspector General (OIG) Audit recommendations. In 
particular, RMA was cited as having 70 OIG audit recommendations 
pending for a year or more after agencies agreed to implement them. 
However, according to RMA's records, there are only 14 audit 
recommendations that now meet this criterion. RMA believes that both 
OIG and GAO audits have resulted in program improvements over the years 
and continues to commit significant resources to resolving and 
implementing audit recommendations that can reasonably be expected to 
achieve greater efficiency or effectiveness for the program and the 
taxpayer.

Organics
    In January 2010, RMA submitted a report to Congress entitled 
Organic Crops and the Federal Crop Insurance Program, as required by 
the 2008 Farm Bill. The report included information on the numbers and 
varieties of organic crops insured; the status of the development of 
new insurance approaches to organic crops and the progress of 
implementing organic initiatives required by the 2008 Farm Bill. The 
2008 Farm Bill also required that RMA contract for research into 
whether or not sufficient data exists upon which RMA could determine a 
price election for organic crops; if such data does exist to pursue 
further development of a pricing methodology using that data; and that 
RMA contract for research into underwriting, risk and loss experience 
of organic crops as compared with the same crops produced in the same 
counties during the same crop years using nonorganic methods. Three 
studies that resulted from this research, Organic Crops: Report on 
Research of Additional Price Elections; Organic Crops: Final 
Development of Additional Price Elections and Organic Crops: Revised 
Written Rating Report are expected to be released shortly.

Review of Rating Methodology
    RMA contracted with Sumaria Systems Inc. for a thorough actuarial 
review of the methodology and procedures used to determine the Actual 
Production History (yield) target rates and the rating process for the 
new Common Crop Insurance Policy Basic Provisions (often referred to as 
COMBO policy) under the Federal Crop Insurance Program. The draft 
report was received in November 2009 and was made available for public 
comment. A final version of the review is now available at http://
www.rma.usda.gov/pubs/2009/comprehensivereview.pdf on the RMA website.
    The review found that RMA's general premium rating methodology 
(based on historical losses) is appropriate and should continue to be 
used. However, the study identified several areas for potential 
improvement, the most significant of which is to determine if all 
historical losses should be given the same weight in determining 
premium rates. In addition, key aspects of today's crop insurance 
program along with crop production technology would also be considered 
and evaluated for potential effects on past experience. This would 
provide a basis for evaluating the degree to which past catastrophic 
events may affect the historical loss data used in establishing current 
premium rates, and as appropriate, allow for adjustments to those 
rates. This could potentially result in lower premium rates in several 
parts of the country, especially the Corn Belt. RMA is currently in the 
process of soliciting bids for this review of its historical loss data 
so that work can commence later this year. In the near term, premium 
rates for the most popular revenue products, Crop Revenue Coverage 
(CRC) and Revenue Assurance (RA), are expected to be generally lower 
for the 2010 crop year as a result of decreasing price volatilities.

New Common Crop Insurance Policy (COMBO Policy)
    The new Common Crop Insurance Policy, frequently referred to as the 
COMBO policy, is an initiative by RMA to combine and simplify the crop 
insurance program. RMA has combined CRC, RA, Income Protection (IP), 
and Indexed Income Protection (IIP) into a single uniform policy. RMA 
kept and combined the principle features of the five plans that 
producers bought most often and developed a single rating and pricing 
component so all insurance coverage is consistent in insurance 
protection and cost to producers. The new Basic Provisions are 
effective for the 2011 crop year for crops with a contract change date 
of April 30, 2010 or later (effective for most 2011 crops) and for the 
2012 crop year for crops with a 2011 crop year contract change date 
prior to April 30, 2010.

Comprehensive Information Management System
    The Comprehensive Information Management System, referred to as 
CIMS, is designed to provide approved users timely access to 2006 thru 
2010 RMA and Farm Service Agency (FSA) producer information and data. 
The system has improved operations between RMA and FSA and has the 
potential to continue improving information transfer. At this time, FSA 
employees have access to CIMS, which has led to a 56% reduction in 
entity differences for producers participating in the programs of the 
two agencies, including support for the SURE program. Crop insurance 
companies have made over 18 million CIMS inquiries or requests for 
information, reducing resources and costs to obtain electronically data 
similar to the hard copy information that normally resides at the FSA 
County office. Companies are also incorporating the use of Common Land 
Unit reporting into their systems to enhance reconciliation efforts for 
acreage reporting and other applications for administering programs for 
prevented planting and cause of loss verification. RMA also is actively 
participating in the USDA Acreage/Crop Reporting Streamlining 
initiative to establish common USDA producer commodity reporting 
standards to facilitate greater use of CIMS and Agency sharing and 
reconciliation of data, along with potential incorporation of data 
obtained through the use of precision-ag technology.

Information Technology Modernization
    RMA's Information Technology Modernization (ITM) program is a 
multi-year, phased-implementation reengineering initiative to support 
COMBO and new insurance programs and products, increase actuarial 
capabilities, and provide efficient policy and financial processing for 
producers and insurance companies. The first phase, successfully 
operational in April 2010, focused on actuarial processes, policy 
processing, premium calculations, and other functions needed to 
administer various 2011 crop year insurance offers, and implement the 
new COMBO policy. The next phases of the ITM program, corporate 
business reporting and financial accounting, are in development with 
final completion scheduled for the end of 2011.
    I, along with members of the Federal Crop Insurance Corporation 
Board of Directors, all the RMA staff across the country, recognize 
that the program is dependent on a reliable delivery system. The 
approved insurance companies, who deliver this program with their 
network of agents, and RMA, are mutually dependent on each other to 
operate the program efficiently and effectively to meet the needs of 
producers. We are very aware of our responsibility to be good stewards 
of taxpayer money. By creating a new standard reinsurance agreement 
that maintains excellent service to farmers and ranchers, provides 
incentives for companies to operate in underserved and less served 
areas, provides a reasonable return for the companies and removes 
windfall government payments that were an unintended consequence of the 
past SRA structure, RMA is pleased to have met the goals set at the 
beginning of this negotiation. Again, thank you for the opportunity to 
participate in this important hearing. I look forward to responding to 
your questions.
                              Attachments
Attachment 1
AIP Revenue from FCIC

[GRAPHIC] [TIFF OMITTED] T1158.001

Attachment 2
2009 Total Liability All Crops

[GRAPHIC] [TIFF OMITTED] T1158.002

Attachment 3
2009 Proportion of Planted Acres Insured
Crops Included: Barley. Grain Corn, Grain Sorghum, Peanuts, Pima 
        Cotton, Potatoes, Rice, Soybeans, Tobacco, Upland Cotton and 
        Wheat

        [GRAPHIC] [TIFF OMITTED] T1158.003
        
        NASS as of: 03/17/2010.
        Produced: 10JUN10:03: 10:50 p.m.
Attachment 4
Proportion of Insured Acres with Buy Up Coverage in the Federal Crop 
        Insurance Program

        [GRAPHIC] [TIFF OMITTED] T1158.004
        
Attachment 5
Acres by Plan Category

[GRAPHIC] [TIFF OMITTED] T1158.005

Attachment 6
FCIC Program Growth for Specialty Crops

[GRAPHIC] [TIFF OMITTED] T1158.006

Attachment 7
2008 Comparison of A&O to Agent Commissions by State Group

[GRAPHIC] [TIFF OMITTED] T1158.007

Attachment 8

       2008 Comparison of A&O to Agent Commissions by State Group
------------------------------------------------------------------------
            2008                Group 1        Group 2        Group 3
------------------------------------------------------------------------
                      A&O           20.2%          20.6%          20.8%
         Avg. Comm. Rates           19.3%          15.7%          14.1%
           Comm. % of A&O           95.5%          76.2%          67.8%
  Residual to cover costs            0.9%           4.9%           6.7%
------------------------------------------------------------------------

Attachment 9
2009 Comparison of A&O to Agent Commissions by State Group
[GRAPHIC] [TIFF OMITTED] T1158.008

Attachment 10

------------------------------------------------------------------------
            2009                Group 1        Group 2        Group 3
------------------------------------------------------------------------
                      A&O           17.1%          18.6%          18.6%
         Avg. Comm. Rates           18.6%          15.2%          13.2%
           Comm. % of A&O          108.8%          81.7%          71.0%
  Residual to cover costs           ^1.5%           3.4%           5.4%
------------------------------------------------------------------------

Attachment 11
Iowa

[GRAPHIC] [TIFF OMITTED] T1158.009

Attachment 12

                                        Iowa Agent Compensation Analysis
----------------------------------------------------------------------------------------------------------------
                                                                                 Agent Comp.
       Year             No. of       Premium ($)     A&O  (% of    A&O and CAT      (% of            Agent
                       policies                       premium)       LAE ($)       premium)     Compensation ($)
----------------------------------------------------------------------------------------------------------------
          2004         130,286      354,511,745         21.5%      76,087,416        17.9%        63,457,602
          2005         127,423      310,529,453         20.8%      64,719,502        17.2%        53,411,066
          2006         125,543      366,833,451         20.0%      73,507,061        16.7%        61,261,186
          2007         121,633      600,208,831         20.1%      120,463,261       20.9%       125,443,646
          2008         123,948      914,548,177         20.3%      185,687,109       19.6%       179,251,443
          2009         127,402      743,726,271         17.2%      127,663,700       18.9%       140,564,265
   2010 (est.)         127,402      622,151,163         17.2%      107,010,000       17.8%       110,742,907
2011 (est. for new                                                 105,122,000                   105,122,000
           SRA)
----------------------------------------------------------------------------------------------------------------

    The Chairman. Well, thank you very much.
    I am going to ask you a couple of questions. We have 
several here, so I will be short, and we may have a second or 
third round.
    I am aware of a letter that was sent to the Congress 
Members regarding the SRA. Secretary Vilsack, he argues that 
the commission caps are needed to protect crop insurance 
companies, and to ensure they remain solvent. So if that is a 
concern of the RMA, why would the not consider other protective 
measures for the companies? For example, include reserve 
requirements or solvency status of the companies? And I am 
curious why were agent caps not in the first or second draft of 
the SRA, if this was needed?
    Mr. Murphy. Okay. Yes, I understand the concerns with the 
caps. Like I said in my opening statement, we basically have 
two. There are other ways, and we certainly have employed new 
methods to ensure that the companies have financial standards 
since the failure of American Growers. But, still, whenever you 
are working with information supplied for taxes, or supplied to 
current insurance requirements at the state level, you are 
looking in the past. That does not prevent something from 
occurring in the current year, and that was our greatest 
concern.
    The soft cap basically was developed--and that is 80 
percent--the total compensation a company can pay is 80 percent 
of the projected A&O. That is all they can guarantee up front. 
We are seeing a disturbing trend in the increasing amount, and 
the only way the companies will be able to make this is relying 
on underwriting gains.
    This is exactly what happened to American Growers. In fact, 
in 2002, American Growers was the only AIP that had a profit. 
Yet they were the only company that went out of business. The 
reason that that happened is that they over-committed on agent 
commissions. We thought this was probably the only way we can 
ensure that this will not occur in the future.
    We have new companies coming on, there is going to be 
significant competition, and I just think the reliance on using 
agent commissions as a way to get market share is very 
problematic for the stability of those companies. I think it 
was very important to do the soft caps.
    When we get into the hard cap, another issue that came up 
is that we have reduced the A&O significantly in this program. 
There was a lot of concern over equity in the program, equity 
from a company standpoint. We all imagine that in the future, 
under this new SRA, the most profitable states will be the 
Midwest. And so there was concern that the companies would get 
in, feel the need to move up into those areas, expand their 
businesses, maybe leave areas with less profit in order to 
guarantee an ever-increasing profit share with the companies. 
In order to avoid that from happening, we put the hard cap in.
    I think there is also a question of equity to the agents. 
We are finding that agent commissions in Iowa are three times 
agent commissions in Texas.
    The Chairman. Explain that.
    Mr. Murphy. Agent commissions--this is a study from the 
GAO. If you take a look at the GAO report, they went out and 
took a look at agent commissions, and they found that there is 
a significant difference.
    I have had agents come up and talk to me within the last 
year from Iowa who said they have been offered commission 
schedules of 30 percent. And I know of agents in Texas whose 
commission schedules are ten percent. Yet, it requires the same 
amount of work. I think there is an equity issue here, also, 
for the program.
    Allowing these unabated agent commissions to continue also 
causes marketing problems. We have had a real problem over the 
last couple of years with rebating. This rebating has been 
occurring in Iowa and the other ``I'' States. I received many 
calls from insurance commissioners in those areas last year who 
were very concerned about the rebating; and they said, ``I 
realize it is a Federal program, but if these agents think they 
can rebate on crop insurance they will start doing this in 
other lines of insurance, and we will have a real problem 
here.'' There was much concern about that.
    Another big concern is entry of companies into the program. 
Having these high insurance commissions out there is a barrier 
for a company coming in and starting in the program, because 
they would have to immediately try to compete with these rates.
    In my talking with your staffs, with the companies 
themselves, with the commodity groups, one of the big issues is 
competition in the program. The feeling is we still have to 
have strong competition with a number of companies. I thought 
this also was a way to help address that.
    The Chairman. I appreciate that. We will come back to it, I 
think.
    You know, Mr. Murphy, I want to ask when this panel is 
finished, if you have time, if you could stay and listen at 
least to the next panel. I am not going to call you back to the 
table without having given you forewarning, but I still have 
some concerns.
    I have met a lot of agents out there, too, and I haven't 
heard that yet, so maybe you will need to share with me this 30 
percent figure. I have heard some high figures, but I haven't 
heard that. And we have talked about this, so I will stop. It 
just seems like we are trying to tell them how to conduct 
business to the point it is just stepping too far. So we will 
explore that some more, as we go along, but at this point I 
want to yield to my Ranking Member, my friend, Sam.
    Mr. Graves. Thank you, Mr. Chairman.
    Mr. Murphy, as far as the Corn Belt or the big states, what 
is the percentage of farmers that are participating in crop 
insurance, corn growers.
    Mr. Murphy. Some of the highest participation, in my 
testimony I have a map in the back that lays out by state 
participation, but the ``I'' States certainly have some of the 
highest participation, 85, 90 percent.
    Mr. Graves. Is it that high.
    Mr. Murphy. Oh, yes.
    Mr. Graves. Last month, the corn growers testified. They, 
obviously, emphasized the importance of crop insurance as a 
risk management tool. But they were arguing the loss ratio 
experience across crops and regions, that it should converge 
over time. And we have a pretty big gap right now in loss ratio 
for corn as compared to other programs. And I know there has 
been a study that endorsed the current rating systems, but I 
would like you to address that for just a little bit.
    Because it seems to me like we are going have to see some 
fundamental changes in that. When farmers are out there 
deciding if they are going to do it or not, that has to be a 
factor.
    Mr. Murphy. I have talked to growers from the ``I'' States 
that have--both corn and soybean growers--have raised this 
concern about the rate. Especially if you look at the history 
over the last 10 years, there have been incredible yields, new 
technology in seed, just a number of things. And when they look 
at the premium they are paying, which is substantial, even with 
the subsidies, they have a growing concern whether the program 
is working for them.
    But, it is dangerous only to look at the last 10 years. If 
we were having this conversation at the end of the 1980s, it 
would be totally different. The question would be, what is 
happening to corn production in this country? It is on the 
decline yield-wise. So in order to do insurance you cannot just 
look at the last 10 years. You have to look long term.
    Our experience in Iowa, Indiana, Illinois, is that you 
really have high severity of loss, but it doesn't occur that 
often, which is low frequency. When you look at other states, 
perhaps Texas, they have high frequency of loss, but they have 
low severity when they have them. And these play into the whole 
rating method. Because if you look at Iowa you have to look 
over long term, and you will find from the mid-1970s that those 
rates are accurate, and that is what the study found.
    Also, for Texas, if you look at it, they have frequent 
losses but low severity over time. Their loss ratios come up to 
the mandated $1 loss ratio that we are working on.
    And so you have those sort of things that are playing into 
it.
    We did have a study. We were very happy with the group that 
came in and did this. It involved some of the best ag 
economists in the country. We had an excellent actuary take a 
look at those. And, basically, they came back and said our 
rating method is sound and you can't look at just 10 years, you 
have to look long term.
    So, I think, over all, they did identify some things we 
need to take a look at. For instance, the losses, the two 
losses in the 1980s and 1993, is that expected to repeat over 
time and how should we treat that in a rating? We have a study 
about to be started on that very issue.
    I think we can take a look and expect some changes as a 
result of the rating. But we have to be careful and be sound as 
we look at regs, especially in the ``I'' States which 
contribute so much to the program.
    Mr. Graves. As far as participation goes--this is just for 
my information--in your heavily irrigated areas, what is the 
participation, just roughly.
    Mr. Murphy. I am very familiar with California. Prior to 
coming into D.C. In 2005, I was the regional director for the 
Davis region, which was located in California.
    Producers out there tend to take lower levels of coverage 
as a rule. They invest in their risk management through a 
number of other things such as irrigation. Many of them 
participate with private weather companies so they can invest 
in that. My experience has been what they will normally do is 
keep low levels of coverage. If they have a loss, they will 
start buying up higher levels until their financial stability 
returns. Then they will drop.
    I think that is also an issue with the rice growers in the 
South. What we have seen is that there has been heavy 
investment. They have the water systems and the way to get the 
water to the rice, and to them that is the major concern.
    I think that does impact the level of coverage farmers buy, 
but I think that is to be expected. There are different ways to 
address risk. We encourage that a farmer look at all different 
ways.
    Mr. Graves. Thanks, Mr. Chairman.
    The Chairman. Well, thank you, Mr. Graves.
    I now recognize the gentleman from Minnesota, Mr. Walz.
    Mr. Walz. Well, thank you, Mr. Chairman.
    And, Mr. Murphy, thank you for the work you do. Thank you 
for being concerned about the safety net for our producers as 
well as you are in a very tough position watching out for 
taxpayer dollars. So I appreciate you tackling this. It is a 
very difficult one. I think all of us up here see it, too, from 
the need to make sure that those products are out there 
protecting them, and also watching out for those agents who are 
working hard and doing what they need to do.
    I have just a couple of questions here. The one I wanted to 
get at, just slightly different here, on the current policy on 
the APHs and the transfer to new lands, an area of deep concern 
for me is new and beginning farmers and ranchers. And I am 
wondering if you could explain how the current policy of 
transfer impacts them.
    A secondary one--and maybe my colleague from South Dakota 
will talk about this. She has been a champion and a leader for 
many years on both these and sod buster in new land. So if you 
could address that on APHs.
    Mr. Murphy. Sure, Congressman.
    There have been concerns raised from both the aspect of a 
new farmer coming into our program, needing the risk 
management, and issues have developed, also some of the 
conservation groups have been wondering if crop insurance is 
somehow an incentive to break out new lands.
    Both of these come under what we call added land provisions 
of the program. You know, with the way farming is going with 
bigger farms, this is constantly happening. New farm land is 
being brought into an existing operation, so we have to have 
rules to address it.
    Now, land that has been farmed within the last 3 years, has 
different rules than the land that is being broken now, which I 
think makes sense when you give it some thought. If land has 
been farmed in the last 3 years and is coming to an existing 
operation, if it is less than 640 acres, the companies 
basically handle those requirements. Ensuring that it has 
similar potential as the current acreage. The management is 
shown on the existing acreage. You know that certain 
expectations can come from this, to look at the yields from the 
acreage that came on. And so they do that, and they make any 
adjustments.
    Anything over 640 acres has to go to the regional office, 
and the regional office basically works with the company and 
the farmer to come up with anything that needs to be done, as 
far as rating or guarantees or that sort of thing.
    We do not allow additions of greater than 2,000 acres to an 
existing unit. These are becoming more and more prevalent, as 
you can imagine, today. Where this becomes an issue with a 
farmer entering the program is that if he doesn't have any 
acreage he is basically using the county yield. He is competing 
with a farmer that has an APH, perhaps 6 to 10 years, a very 
good APH. And with that kind of protection, can that existing 
farmer outbid the beginning farmer? And, definitely, there is a 
potential for that occurring, so I think that is a potential 
issue.
    Mr. Walz. What is the solution, in your mind.
    Mr. Murphy. I would like sometime to discuss that sort of 
thing and maybe even bring in some other people who have been 
looking at these issues.
    Beginning farmers definitely are facing a challenge. You 
know, you get a new guy who has only 3 years of record, and he 
gets a loss. I mean, that is a tremendous impact.
    Mr. Walz. Well, I would look forward to working with you on 
that one. It is one of the concerns I have, and it is an area 
we have taken up that I think it is a concern and a growing 
concern as we age out in farm country.
    The last question I had, I wanted to come back to you and 
try and get this right. You pointed out American Growers 
failure in 2002. It is your assessment that high agent 
commissions were the sole failure in that company?
    Mr. Murphy. No, certainly not the sole, but it was a major 
contributor to it.
    Basically, the company was relying on a 10 to 15 percent 
underwriting gain in order to make up all----
    Mr. Walz. And you said you brought actuarial folks in to 
take a look at that?
    Mr. Murphy. Oh, yes, we have studied that body.
    Mr. Walz. That is the canary in the coal mine, that you 
think that model could replicate down the line.
    Mr. Murphy. Yes, I am concerned, and there are some other 
things.
    One of the things we did after the failure of that company 
is that we actually went ahead and paid all agent commissions 
that year. We were roundly criticized by the audit agencies and 
some Members of Congress for doing that, but we thought that 
was the best way to get the agent cooperation and get this 
business moved off to the companies, and they did a fantastic 
job of it.
    I am afraid if this happened again I don't know if I would 
be able to make that commitment. I am wondering what impact 
that will have on ability of that business, of growers being 
stuck out there with no coverage?
    Mr. Walz. Very good.
    I yield back. Thank you, Mr. Chairman.
    The Chairman. Thank you, Mr. Walz.
    I am having trouble keeping track of our panel here. I see 
Ms. Herseth Sandlin stepped out. I will now recognize the 
gentleman from Oregon.
    Mr. Schrader. Just a few simple questions, I guess.
    You have testified a little bit about the increased 
competition you hope to see in the marketplace. And with the 
renegotiated SRA, how many companies are in the--for my 
benefit, anyway, how many companies are in the mix right now, 
and how many more do you see coming in as a result of the 
renegotiation?
    Mr. Murphy. Currently, we have 16 companies. Our most 
recent entry was right in the middle of the negotiations. We 
had a new company come on. They actually got involved with 
spring sales for 2010. They will do the full year in 2011. It 
is very difficult to foresee how many companies are going to 
come in, in the future. We will have to see.
    It is interesting the companies that have been coming in, 
sort of different companies than traditional insurance 
companies. We have John Deere involved in the program. AEM has 
some involvement in the program. So it is interesting, the mix 
that we are seeing in it. But I don't think I can say how many 
we will have.
    Why companies leave, that is interesting as well. The last 
time we had a company leave was basically in the middle of the 
best year the industry ever had. Okay? And then we have a 
company come in when we are right in the middle of a 
negotiation of the SRA. So it is very difficult to see what 
draws companies in or draws companies out. It is a mix of 
factors, certainly not just the underwriting gain potential of 
the agreement.
    Mr. Schrader. What is reasonable agent compensation? This 
is a pretty Byzantine system, from my standpoint, that, 
obviously, there is a goal, that you consider some reasonable 
rate of return for an individual agent or for a company, 
frankly, both those.
    Mr. Murphy. The company we did a study with, Milliman--take 
a look at that. It is on our website. It has been part of the 
negotiations and a source of a lot of discussion.
    But why we are especially happy with this individual who 
did the study is he actually does this for the private 
insurance industry at the state level. He argues on behalf of 
the companies. He uses the same methodology for this study of 
what the companies could get.
    Basically, what his study came back with is that they 
should over--historically, it should have been--about 12.7 
percent would have been an adequate return. Historically, the 
companies have received about 17 percent. But although he was 
very careful to say, I am not saying that you should make it 
12.7. I am just saying if you look at different methodologies 
that is where it comes up to. You have to take other things 
into consideration.
    In the final agreement we ended up at 14.5 percent long 
term. Certainly there will be years when the companies make 
much more than that, and there will be years when they make 
much less. You are looking at an average over time.
    In today's economy, I think a 14.5 percent return is pretty 
good. I wish I was getting a 14.5 percent return.
    So, agents, it is trickier, definitely. We don't really 
have a lot of good data. Like I said, GAO did a study. You can 
look at it a number of different ways. I think it would be 
considered a mono-line in the normal insurance world. That sees 
ten percent, a little bit more than that, commission. 
Definitely, the agent has the more difficult role in our 
program.
    You know, I often tell the story that I have property in 
Pennsylvania: I live here in D.C; I insure cars; have rental 
insurance; my property up in PA; I have never met my agent. 
Yet, a crop insurance agent, is visiting with the insured two 
to three times. So, I think additional compensation is 
certainly justified.
    Why I am generally pleased with where we are today in the 
agreement is that, in 2010, under the current SRA, we are going 
to pay the companies about $1.3 billion in A&O. That basically 
is what will occur in 2007 without--or 2011 with the new SRA if 
there are not a lot of changes in price or volatility. So if 
the companies can operate today and the agents can operate 
today at the current amount, I don't see where there would be a 
major problem in the future.
    Mr. Schrader. Thank you very much. I yield back.
    The Chairman. Well, thank you.
    Well, on that very subject you just finished on we are 
going to have to discuss it some more. You just said a very 
significant statement that I was getting ready to say to you. 
You said it, so I want to appreciate that.
    A lot of agents for other things I insure for, I never see 
them. But my crop insurance agent, I not only see him, he would 
walk the fields. In some cases, I spend a lot of time with him.
    So it is very critical that you do the best you can, and it 
is capital intensive for that producer out there. And you want 
what you need, but you don't want something you don't need. And 
so they spend a lot of time.
    I am very sincere when I say the three elements that that 
producer has to have today is not only the capital intensive, 
the banker, he has to be able to work with, and they have a 
cash flow. They have to show they have this protection.
    And then of course they have to have a place to buy and 
sell product. And I think it is right up there, same level, 
they have to have a good insurance agent. In every community we 
have insurance agents, and they are very much a part of the 
community. And Mr. Graves and I, all of us, travel back and 
forth. We have a lot of contact. And I want to you appreciate 
that, too, and I think you do.
    I thought we were going to let you go, but I see Mr. 
Pomeroy has arrived, so better late than never. You were here 
for a while. Then you were called out. We are happy to 
recognize the gentleman.
    Mr. Pomeroy. Thank you, Mr. Chairman.
    Crop insurance has been an issue I have long been deeply 
interested in, and it is such a critical risk management 
element of North Dakota ag production that I did want to 
participate in the hearing. I am trying to have two meetings at 
once, and that never works all that well, so thank you very 
much.
    The Chairman. I am supposed to be in Armed Services right 
now, but, anyway, go ahead.
    Mr. Pomeroy. We have had some activity here with the crop 
insurance. This isn't your run of the mill, what is up with 
RMA. They have absolutely worked through the most substantial 
and substantive process relative to the SRA renegotiation that 
we could have imagined.
    I want to put a little history on the effort. Because if 
you just look at--let's take the crop insurance industry's 
perspective. If you look at the losses taken, are these changes 
made which will result in savings to the Federal Government; 
therefore, checks not written to private insurance companies 
and agents? There may be just enormous concern.
    But, on the other hand, we had a very, very dangerous 
stretch during the last farm bill where others wanted to take 
apart this program. In fact, it was to our great surprise that 
the Government Oversight Committee, without notice to the 
Agriculture Committee, held a hearing on crop insurance. They 
had a GAO report written by a disgruntled GAO employee, in my 
view, that didn't know very much about crop insurance, but had 
long held a view that there was unjust payment to the private 
sector within crop insurance. They wrote a report that was 
precisely what every enemy of farm programs wanted.
    We worked so long and hard to build a crop insurance 
program that was getting adequate coverage out to farmers, the 
1993 reforms, the ARPA legislation. And we saw the market 
response in terms of national spread of risk, at buy up levels, 
a tool that really is beginning to function like it never has 
in terms of meeting risk protection needs of farmers.
    And to have our city friends in another Committee without 
so much as giving us the dignity of acknowledging their 
investigation was a bit much. We had some very angry words with 
some of our city friends, including down on the House floor as 
the farm bill was being pushed forward. There was more than one 
occasion where we came within an eyelash of devastating, 
mindless cuts, imposed by those that don't know the first thing 
about risk management for farming.
    The lesson I drew from that is we needed to take a look at 
this program, sensitive to the concerns of the program's 
critics, and make an evaluation. Were they right? Were they 
wrong? If changes needed to be made, we are the architects that 
needed to make them. And I believe that basically the farm bill 
gave us the opportunity with the SRA to have that take place.
    I would contrast this SRA with the preceding SRA 
renegotiation in very important ways, most notably an element 
that you capture in your testimony, Mr. Murphy. RMA and the 
companies negotiated in good faith with respectful dialogue. 
You know, even that alone was missing in the last go-around.
    The target was handed down by OMB. It was not reached in 
consultation with the crop insurance companies, I will tell you 
that. Some green-eyeshade guy put a number on a page, and RMA 
was given the assignment of jamming it into the program.
    From the beginning, it wasn't as though I didn't have some 
substantial concern about the directions of RMA, but in meeting 
with you, Mr. Murphy, as well as Mr. Miller I felt that there 
was an earnest effort to proceed in a very rational, 
substantive way, using, among other things, the consulting 
assessment that we have done on the program.
    I believe that the end result, the SRA, will reflect the 
most substantial entitlement savings generated by anybody 
relative to addressing Federal budget deficit. We will be able 
to hold our heads high when we next go into a farm bill with a 
crop insurance program structured basically as the SRA has 
provided.
    I certainly don't want to minimize our private-sector 
partners looking at this kind of savings and feeling not all 
that great about it. That was a very substantial change. But I 
would tell them this was a case where change was going to be 
made, we were going to make it, others were going to make it, 
it was going to be made substantively, it was going to be made 
with a meat ax. I believe the process that came out represents 
a very serious and fair effort.
    The fact that we have universal participation in the SRA by 
the 16 companies that are our private-sector partners reflects, 
in the end, an acceptance of the product. I commend the 
industry for coming to the table, for providing the counsel, in 
the end for taking the tough medicine.
    You know, like a lot of things, this may not be everything 
people hope for, but it could have been a lot worse. I am quite 
confident that this will work, that our farmers at the end of 
the day, bottom line, will be able to continue to have quality 
risk-management products. So I thank you for leading this 
effort, Mr. Murphy. It is one I admire.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Mr. Murphy, we are going to stop here. I do invite you to 
stay and listen, if you possibly can. I am not going to call 
you back to the table, but I might call you. And I do want to 
close this. You have been very open, and I appreciate that. We 
want to do the same with you, and continue this dialogue, and 
we want to do the best we can for the responsibility that we 
all have. So thank you very much and appreciate your witness 
today.
    Mr. Murphy. Thank you, Mr. Chairman and the Committee.
    The Chairman. You bet.
    I would like to call the second panel to the table.
    Mr. Murphy, first change of the day, sit back down, please.
    Second panel will just hold momentarily. Mr. Peterson has 
joined us, and we would like to recognize him before we dismiss 
you--before we finally dismiss you.
    Mr. Chairman.
    Mr. Peterson. Thank you, Mr. Chairman. Thank you for your 
leadership.
    I wanted to pursue this what they call administrative 
PAYGO, I guess, and exactly how this is working. So, as far as 
you know, they are definitely going to take $2 billion of this 
and put some of it into rangeland and some into CRP, is that 
the case?
    Mr. Murphy. That is my understanding, Mr. Chairman.
    Mr. Peterson. So we will be able to get those programs up 
to where--the question is--I still don't understand. That stuff 
was in the farm bill. We found the money to pay for it. So I 
don't understand why the money is not there. Do you know why it 
is not there?
    Mr. Murphy. Unfortunately, I am not aware of the specifics. 
I have heard you raise this concern before. I believe you were 
going to have some conversations with folks, with OMB and the 
Administration. I think they would be better suited to address 
your concerns. I believe that is in the budgeting process, as 
you know, that I am not that strongly familiar with.
    Mr. Peterson. So nobody ever told you anything about this? 
Were there discussions about when you were finalizing----
    Mr. Murphy. No, no. Basically, my discussions were when 
they denoted some of the money for crop insurance work for 
expanding a PRF, asked us to take a look at what other 
expansions were on the books that could be done and how much 
money we would need for them. I took a look at that to develop 
a good performance discount, which hopefully we will be able to 
make public soon.
    But I am not aware of the specifics on why so much money 
was put into one. I believe it has something to do with 
mandatory--you can only take crop insurance savings that you 
would take out of crop insurance. It could only be used for 
other programs. You can't do it across the board, only certain 
things. That is the extent. Because some ideas came up to do 
some other things with the savings, and the decision was you 
couldn't legally do certain things.
    Mr. Peterson. So they could do it to restore mandatory 
money but not discretionary money?
    Mr. Murphy. Apparently. There may be more in-depth budget 
rules that apply, but I would not be aware of them.
    Mr. Peterson. It is still a mystery to me why we paid for 
32 million acres of CRP in the baseline and why there wasn't 
money to do that. And we haven't gotten any answers from 
anybody of what happened to that money. It disappeared 
someplace, I guess, but--so you didn't--you don't know anything 
about that.
    Mr. Murphy. No, no, no. Just basically what I told you 
before. So my understanding is that the decision was made a few 
years ago to do this. I think it evolved in anticipation of how 
much acreage would be enrolled in CRP.
    Mr. Peterson. Well, if they didn't have a sign-up, there 
wasn't going to be acres enrolled. It doesn't take a rocket 
scientist to figure that out.
    Mr. Murphy. I was very happy that some of the funding out 
of negotiation----
    Mr. Peterson. Well, we are glad they are getting these 
programs up to where they are supposed to be, but it is very 
troubling. We have the appropriators over--on our mandatory 
programs. Now we have OMB apparently doing something similar. 
And, we struggle to find the money to be able to do this stuff, 
and then somebody else diverts it.
    Well, if you ever find out anything, we haven't gotten any 
information back from OMB yet.
    Mr. Murphy. I would be happy to bring the questions back 
and your concern and see if they can get something up to you.
    Mr. Peterson. All right, thank you.
    Thank you very much, Mr. Chairman.
    The Chairman. Thank you.
    Mr. Murphy, we are going to excuse you again. Thank you 
again for your testimony and I hope you appreciate that a lot 
of us share the same concerns that you just heard from Chairman 
Peterson, and maybe you can shed some light on that.
    We would like to welcome the second panel to the table. 
Just as a matter of short introduction, we have Mr. Rutledge, 
President of Farmers Mutual Hail Insurance of Iowa, on behalf 
of Crop Insurance Research Bureau; Mr. Robert Parkerson, 
President of National Crop Insurance Services of Overland Park, 
Kansas; Mr. Steven Frerichs, the Legislative Consultant at Rain 
and Hail, on behalf of the American Association of Crop 
Insurers.
    I am going to skip over Mr. Deal and let Mr. Walz introduce 
him in just a moment.
    Mr. John Dalton, President of Midwest Insurance Associates, 
President, Agri-Land Insurance Agency, on behalf of Independent 
Insurance Agents & Brokers of America; Ms. Kathy Fowler, 
President of National Association of Crop Insurance Agents, 
Memphis, Texas; and Mr. Jordan Roach, Vice Chairman, Crop 
Insurance Professional Association of Fresno, California.
    Mr. Walz, would you like to introduce----
    Mr. Walz. Well, thank you, Mr. Chairman.
    It is an honor for me to introduce another Minnesotan, but 
I think somebody here probably needs less than me. Jim Deal has 
been involved in this crop insurance business for the past 50 
years, and was instrumental during the Carter Administration of 
moving this from a government-run program to the private 
sector. He has done everything from Manager of the Federal Crop 
Insurance Corporation, Executive Director of National 
Association of Crop Insurance Agents, CEO and Chairman of 
National Ag Underwriters, currently CEO and Chairman of NAU 
Country Insurance Company. But I think it is important to note, 
with all of us in this room, he was instrumental in providing 
the tools necessary to make rural America thrive, and is 
somebody who has been heavily engaged in resources from 
veterans' issues to others in building our strong communities.
    So it is a real honor for me to introduce Jim Deal, lives 
with his wife Pam in Ramsey, Minnesota, and countless 
grandchildren that are always there.
    So thank you.
    The Chairman. Thank you, Mr. Walz. I appreciate that.
    With that, we will begin with Mr. Rutledge who brings--
hello again--vast experience from an agent up through the 
industry. We appreciate having you here. Would you start, and 
share your testimony?

 STATEMENT OF STEVEN C. RUTLEDGE, PRESIDENT, CEO, AND CHAIRMAN 
               OF THE BOARD, FARMERS MUTUAL HAIL
 INSURANCE COMPANY OF IOWA, WEST DES MOINES, IA; ON BEHALF OF 
              CROP INSURANCE RESEARCH BUREAU, INC.

    Mr. Rutledge. Chairman Boswell, Mr. Graves, Chairman 
Peterson, Members of the Committee, good morning.
    My name is Steve Rutledge, and I am the President and CEO 
of Farmers Mutual Hail located in West Des Moines, Iowa. 
Farmers Mutual Hail has been in the business of offering risk 
management tools to agricultural producers for over 117 years. 
I believe we were the first company to successfully write crop 
insurance in the United States.
    In addition, I am also the past Chairman of CIRB, Crop 
Insurance Research Bureau. CIRB is a national trade association 
composed of insurance companies, reinsurance companies and 
brokers and others involved in the crop insurance business. I 
appear before you today on behalf of CIRB and thank you for the 
opportunity.
    As it turns out--and you just mentioned it, Mr. Chairman--
when we had the opportunity to speak a couple of weeks ago back 
home in Iowa I had asked if there were any specific issues that 
you might like me to address, and you suggested that I just say 
what I think, and so I will.
    At the time the 1980 Crop Insurance Act was passed, Farmers 
Mutual Hail was one of several who declined to participate and 
remained just a private crop hail insurance writer. That 
decision made 30 years ago seemed reasonable until the mid to 
late 1990s. During that time, private industry developed 
revenue insurance and government greatly increased subsidies to 
the producers. Those were excellent products, and we quickly 
realized that times had changed and we would no longer survive 
unless we chose to participate in the Federal Crop Insurance 
Program. So we joined the program in 1999.
    Since then, there have been three SRA negotiations, two 
farm bills, and each one reduced the industry's potential 
profit margin, while further increasing the workload. Like many 
others in the business, I feel like I have spent virtually all 
of those 11 years either trying to figure out how to survive 
and compete after the most recent round of cuts, or working to 
minimize the pain of the inevitable next round. In fact, much 
has changed just since I last testified before this Committee 
in the 2007.
    Given the cuts in the last farm bill and the new SRA, the 
industry has finally reached the point where many companies are 
considering leaving the business and are selling their 
ownerships to larger, more diversified and more well-
capitalized companies. It seems the days of crop-only insurance 
companies are rapidly passing, and that fact should probably 
worry us all. Since the last SRA was negotiated in 2005, nearly 
\2/3\ of the 16 companies which still remain in crop insurance 
have altered their original ownership and structure. Many 
agents are now also beginning to search for opportunities to 
sell or restructure their agencies, and many commercial 
reinsurers are questioning the viability of crop insurance in 
their business plans. It seems inevitable that more jobs will 
be lost and the face of the industry will change.
    The result of the changes made during the past couple of 
years, particularly for the Midwest, will likely be fewer 
companies, fewer agents, fewer reinsurers, and fewer jobs, all 
likely leading to a decline in the quality of service to the 
producers. And I don't think the industry is crying wolf here, 
because this time the sheep are already running away.
    Yes, we all signed the SRA, but, to paraphrase Secretary 
Clinton, how do you get tough with your regulator? Nonetheless, 
I imagine the industry and the program will survive, but we are 
diminished. We won't be as good as we could be.
    And this program has been extremely successful. The 
private-sector involvement in the crop insurance program has 
given our nation's farmers and ranchers, on whom this country 
so depends, the best possible tools to ensure their continued 
survival. Now it seems that we should turn our attention to the 
survival of the crop insurance industry.
    As we begin discussions on the next farm bill, it is my 
sincere hope that we can all work together to improve the 
health of the industry, thereby securing the integrity of the 
program. The Federal Crop Insurance Program is the envy of the 
agricultural world and is the core of our own country's 
agricultural safety net. How can we not protect the program 
that has served the country so well?
    Thank you for your time and attention.
    [The prepared statement of Mr. Rutledge follows:]

Prepared Statement of Steven C. Rutledge, President, CEO, and Chairman 
 of the Board, Farmers Mutual Hail Insurance Company of Iowa, West Des 
     Moines, IA; on Behalf of Crop Insurance Research Bureau, Inc.

    Chairman Boswell, Ranking Member Moran, Members of the Committee, 
good morning. My name is Steve Rutledge. I am President and CEO of 
Farmers Mutual Hail Insurance Company of Iowa located in West Des 
Moines, IA. Farmers Mutual Hail has been in the business of offering 
risk management tools to the agricultural producers of the Midwest for 
over 117 years, and today writes both private hail insurance and 
federally reinsured Multiple Peril coverage in 15 states. Additionally, 
I am the past Chairman of the Crop Insurance Research Bureau 
(``CIRB''), headquartered in Washington, D.C., and currently serve on 
the Executive Committee of that organization. CIRB is a national trade 
association composed of insurance companies that write Federal crop 
insurance as well as private crop-hail insurance, commercial 
reinsurance companies, reinsurance brokers, and other organizations 
with an interest in the crop insurance program. A list of CIRB members 
is attached to my testimony. I appear before you today on behalf of 
CIRB, and thank you for the opportunity to offer testimony to the 
Committee on its behalf.
    By way of background, CIRB members are, for the most part, small to 
medium-sized crop insurance companies. Our members write in nearly 
every state and provide billions of dollars in federally reinsured 
multiple peril crop insurance protection, or ``MPCI.'' These insurance 
company members bring to the Federal partnership a wealth of knowledge 
about the MPCI program and are committed to providing risk management 
support to the farmers and ranchers of this nation. Our membership also 
includes some of the most significant members of the private commercial 
reinsurance community in terms of their involvement in the crop 
insurance program. These members are vital to both crop hail and 
Federal crop insurance, and we are proud to be a leading voice within 
the industry for the reinsurance community.
    In my testimony I will attempt to illustrate the importance of the 
public-private partnership in the delivery of the Federal Crop 
Insurance Program, the necessity of continued support by private 
reinsurance companies in managing the program risk of Approved 
Insurance Providers or ``AIPs,'' and finally the expected impact of 
recent changes to the Federal Crop Insurance Program on those segments 
of the industry, as well as to the agents who comprise a significant 
part of the delivery system.

Perspective
    Much has changed since we last appeared before this Committee in 
2007. The spike in commodity prices that occurred during the 2008 
reinsurance year put the crop insurance program on tenuous grounds, 
with regulators becoming concerned that companies and agents were too 
profitable. Although both initially benefited from the increase in 
prices, the landscape has since changed. Crop prices have declined 
significantly, as have the rates charged to producers. The largest 
reductions in rates took effect in the 2010 reinsurance year, with 
additional cuts expected for the 2011 reinsurance year. This 
combination of price and rate decline will cause the Federal Crop 
Insurance Program premium to shrink from over $9.8 billion in 2008 to 
an estimated $7.0 to $7.5 billion in 2011. The savings in A&O paid to 
AIPs due to this decline has contributed greatly to the savings 
achieved by RMA.
    In this context, the industry took a substantial financial hit in 
the 2008 Farm Bill, with cuts totaling $6 billion over 10 years. While 
some of these cuts came in the form of timing shifts, their impact 
cannot be underestimated. Furthermore, as the industry worked to absorb 
and adjust to these reductions, the U.S. Department of Agriculture 
embarked on a renegotiation of the Standard Reinsurance Agreement, or 
``SRA.'' While I will go into more detail on that in a moment, the end 
result of the renegotiation was another $6 billion cut to the program 
that in part sought to address ``yesterday's'' problem.
    The reduction in funding does not mean that the crop insurance 
program has become less complex. Just the opposite is true. Regulatory 
compliance requirements of the program, especially with the advent of 
the 2011 SRA, have intensified thereby compelling AIPs to spend more of 
the fewer dollars available to assure conformity with the program. The 
financial cuts and added compliance costs come at a time when the 
industry is struggling to manage many large and complicated system 
changes, while at the same time managing an ever increasing number of 
pilot programs, plans, coverage levels, and additional training 
requirements. The additive nature of these stresses combine to put the 
industry at risk.
    It is important to emphasize that the Federal Crop Insurance 
Program as it exists today is the cornerstone of our agricultural 
safety net and the envy of the rest of the world as other nations 
attempt to replicate our success. The clearest illustration of the 
value of the program is that roughly 80% of our nation's farmers 
recognize the importance of the program by investing premium dollars in 
MPCI products. Subtract so called ``hobby farms'' and it is not 
inaccurate to say that virtually every farmer in this country buys 
MPCI. Crop insurance has played a vital role in maintaining the 
availability of credit for farmers who need ever larger loans to cover 
rapidly escalating input costs. Ag lenders have made it clear to their 
borrowers that without this income security, credit will not be 
forthcoming. This was true before the credit crunch; it is even more 
focused since the onset of the current crisis.
    The Federal Crop Insurance Program currently provides a level of 
security and flexibility for American agriculture that likely exceeds 
the expectations when the public-private partnership was first 
legislated into existence 30 years ago. The program, which initially 
offered only yield protection for mostly row crops, has expanded into a 
national insurance system that allows farmers and ranchers to manage 
both weather and price risks. Our success has been rooted in 
significant government investment and a robust private sector delivery 
and risk-sharing system. The products offered by crop insurance have 
proliferated so that companies and agents can tailor coverage to the 
individual farmer's needs. Additionally, crop insurance providers have 
introduced greater efficiency into the program, relying on greater 
volumes to repay costs and ultimately dipping into profits to preserve 
a viable system.
    Today, in addition to providing protection for yield losses, crop 
insurance companies also offer price protection with the revenue plans 
of coverage that comprise about 80% of the total insurance sold. The 
majority of these revenue products were initially developed by the 
private sector. This type of insurance coverage not only provides 
considerable protection for producers, but also provides yet another 
level of security for lenders, thus increasing the ability of farmers 
to access the operating loans necessary to get crops in the ground. 
Today's farmers are excellent business managers and everyday more and 
more recognize the value of proactive marketing. Revenue insurance 
plans have also greatly increased the motivation and flexibility of 
producers to develop professional plans to market their crops by 
reducing the risk involved in this process to a much more manageable 
level. Clearly, the contribution to the growth and improvement of 
today's crop insurance program by the private companies who cooperate 
with government to deliver the coverage has been substantial.
    We also believe that access to commercial reinsurance is a critical 
component of this public-private partnership. From the perspective of 
our members, private reinsurance provides an invaluable benefit to the 
program by enhancing the capacity of AIPs. Without this benefit, less 
well-capitalized companies could be forced to sharply reduce their 
volumes of business in order to maintain adequate levels of 
capitalization relative to premium. The availability of commercial 
reinsurance also enhances competition, reducing the risk to the 
government that could arise if only a few insurers were able and 
willing to deliver the program. Not only does commercial reinsurance 
make it possible for new companies to enter the market, but also it 
allows for AIPs to gain experience in new markets without risking 
significant portions of their own capital. Against this backdrop, it is 
counterintuitive that USDA has chosen, once again, to transfer more 
risk to the taxpayers and away from AIPs and their reinsurers in the 
new SRA.
    We believe that a strong, viable crop insurance program is critical 
to the future of American agriculture. I doubt that our younger farmers 
who have struggled to acquire the resources necessary to begin a 
successful operation could even contemplate a career in farming without 
the Federal Crop Insurance Program, and I believe we all agree that we 
need more youth in agriculture. Simply put, the value of the Federal 
Crop Insurance Program to American agriculture cannot be overstated.

2011 Standard Reinsurance Agreement
    The 2008 Farm Bill authorized USDA, through the Risk Management 
Agency, to renegotiate the Standard Reinsurance Agreement for the 2011 
reinsurance year, which began on July 1. We have just completed that 
task, and all 16 Approved Insurance Providers have signed the 2011 SRA. 
While we appreciate the willingness of RMA to consider the views of the 
industry throughout the months-long process, we remain concerned about 
the implications of the final product for the future of crop insurance.
    Generally, we believe that the roughly $6 billion in cuts to the 
program will jeopardize the viability of several AIPs and agents in 
their ability to provide critical risk management support to producers. 
In addition, we were also troubled during the process by the 
introduction of various changes in the three different drafts of the 
agreement that did not appear to result from the negotiations. But, to 
paraphrase Secretary of State Hillary Clinton, ``how do you get tough 
with your regulator?''
    For example, we question the provision that was included for the 
first time in the third draft of the SRA that penalized AIPs who sued 
the Department of Agriculture, even if the suit was not filed directly 
by the AIP. While the provision was converted into a covenant not to 
sue through negotiation, we question the late addition of the issue and 
the insistence that agents be included in the covenant, especially 
given that agents are not a party to the SRA contract.
    We also note that the issue of capping compensation to agents was 
not introduced until the second draft and even more worrisome, the 
introduction of an even more stringent ``hard cap'' on commissions was 
not included until the third draft, which was presented to the industry 
as ``final'' thus affording industry no opportunity to discuss this 
issue. We believe that had there been genuine concern regarding company 
insolvency, which seems to relate to the 2002 year, this should have 
been addressed in the 2005 SRA or in an earlier draft of the 2011 
rewrite.
    We are also disappointed that RMA chose not to phase in the changes 
to the gain/loss formula in the Group 1 states. Doing so would have 
provided AIPs with the financial flexibility and additional time needed 
to geographically expand their operations, a strategy which RMA seems 
to provide incentive for in the new SRA. Further, since the rationale 
for reducing potential underwriting gains in Group 1 states was 
predicated partly on the premise that these states were more prone to 
infrequent but very catastrophic events, the decision to greatly 
increase risk to AIPs in these states compared to all others seems a 
bit contradictory and also disappointing. RMA's approach instead 
hinders the opportunity for AIPs to adjust their business plans to 
account for the changes in the new SRA, in particular the likelihood 
that their commercial reinsurance costs will increase for business 
written in Group 1 states due to the reduced profit margins and 
increased risk.
    Along those lines and given our substantial reinsurance membership, 
we also emphasize that this SRA could have significant ramifications 
for the private reinsurance market as it shifts risk away from the 
market and to the government. For instance, under the new SRA, quota 
share reinsurers may see reduced profit-sharing opportunities and will 
therefore have less of an incentive to participate in the market. The 
reinsurance community is well prepared to manage risk within crop 
insurance but with this SRA, as previously mentioned, RMA is 
effectively removing risk from a market that has worked successfully 
for years and instead placing a burden on the American taxpayer.

Moving Forward
    The 2008 Farm Bill and the 2011 SRA have exacted their toll on crop 
insurance. The industry is now holding its breath as Congress begins to 
consider the 2012 Farm Bill. As we start that process, we must 
emphasize that crop insurance has already borne the brunt of the fiscal 
pressures facing Washington multiple times. We have found ourselves 
under the scalpel, and we fear that further mandated reductions that 
may be considered in the 2012 legislation will place the program in an 
even more precarious position.
    We remain confident that a viable farm safety net starts and ends 
with a successful crop insurance program. We understand that a number 
of proposals that affect crop insurance have been floated for the farm 
bill rewrite. We will review each of them carefully. From the recent 
hearings held here in Washington and across the country, however, one 
key area of agreement is obvious: the Federal Crop Insurance Program is 
an essential tool for American farmers.
    The crop insurance industry has continued to perform reasonably 
well over the past several years. To that extent, the industry may well 
be a victim of its own success. In reality, though, it has been the 
unprecedented run of profitable years, occasioned by generally 
favorable weather patterns, that has allowed the industry to survive 
without a major upheaval of the marketplace. Nonetheless, many AIPs 
were forced to make operational changes during this period, including 
selling to larger, more well-capitalized companies in order to secure 
their survival. Since the last SRA went into effect in 2005, less than 
\1/3\ of the AIPs have maintained their original ownership and 
organizational structure.
    With the changes that I have discussed, however, USDA has gone too 
far. Virtually every AIP has had discussions regarding new sales, 
mergers, or acquisitions. In addition, many agents have already 
expressed the desire to move some of their work back to the AIPs or are 
attempting to negotiate the outright sale of their agencies. The new 
reality is that AIPs and agents seriously question the future in the 
crop insurance business and many are choosing to search for a way out. 
Jobs will be lost, service to producers will suffer, and the face of 
the industry will change. Those who remain simply hope that their faith 
in the eventual recognition of the value of the private sector in crop 
insurance has not been misplaced.
    We look forward to working with you in the coming months and years 
as you continue to fashion our farm policy. We thank you for the 
opportunity to testify, and we stand ready to answer any questions you 
may have.

                               Exhibit A
CIRB Full Members
   ADM Crop Risk Services

   American Agricultural Insurance Company

     Arkansas Farm Bureau

     Idaho Farm Bureau Insurance

     Indiana Farm Bureau Insurance

     North Carolina Farm Bureau Insurance

     Oklahoma Farm Bureau Insurance Company

     Virginia Farm Bureau Mutual Insurance Company

   ARMtech Insurance Services

   BMS Intermediaries, Inc.

   COUNTRY Insurance & Financial Services

   Farmers Mutual Hail Insurance Company of Iowa

   Guy Carpenter & Company, LLC

   James River Insurance Company

   Partner Re Insurance Company of the U.S.

   Totsch Enterprises

   Western Agricultural Insurance Company
CIRB Associate Members
   Aon Re

   Endurance Reinsurance Corporation of America

   MAPFRE Re Insurance Corporation

   Max Re Europe Limited

   Munich Reinsurance Company

   National Association of Mutual Insurance Companies

   State Farm Fire & Casualty Insurance Company

   Sirius International

   Swiss Reinsurance

    The Chairman. Thank you for your testimony.
    We will move on and hear from all of the panelists, and 
then we will go back for questions.
    At this time, I recognize Mr. Parkerson, President of 
National Crop Insurance Services, Overland Park, Kansas. 
Welcome.

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

    Mr. Parkerson. Thank you, Mr. Chairman.
    Mr. Chairman, Mr. Moran, and Members of the Committee, 
thank you for inviting the National Crop Insurance Services to 
today's hearing.
    NCIS is a nonprofit trade association consisting of all 16 
SRA holders. In 2009, the insured Federal crop and hail 
liability of our members totaled $150 billion. Starting over a 
year ago, NCIS coordinated the industry's participation in the 
SRA negotiation. The companies carried out their activity 
transparently and in good faith. We sought a new agreement that 
would be ensuring effective service to the producers, 
safeguarding taxpayers' interest, and providing the companies 
an opportunity to earn a reasonable return. Unfortunately, this 
final agreement may have put some of those objectives at risk.
    The first SRA draft released in December set an ominous 
tone to the negotiations. With $8.4 billion in cuts, the 
Administration staked out an extreme position well beyond, we 
believe, their targeted cuts. They knew from the outset that 
the companies would have no choice but to accept the final 
outcome.
    This outcome remains fraught with problems. For example, 
the overall cap on A&O reduced the effect on price spikes on 
A&O payments, as we all required and hoped for. But the reality 
is A&O is cutting in on top of the farm bill. These cuts are 
large. The agents' compensation is capped.
    Those changes were made without adequate study of delivery 
costs at a request by GAO. The hard cap on agent income was 
first revealed in the final SRA without any opportunity to 
comment. The A&O provisions will cause competitive issues and 
operational problems, as noted in my written statement.
    Had the new SRA been in effect in 2009, A&O and 
underwriting gains would have been 25 percent lower in the 
Group 1 states and six percent lower in other states. We fail 
to see how such cuts could stabilize the industry and raise 
incentives to improve service, as the Administration has 
claimed.
    Looking ahead, we find little security in the development 
of the past 2 years and the prospects that lay before us. 
Regulatory burdens continue to rise, including IT, data 
reporting, quality control, and training.
    One of the stacks of paper before me is the procedures for 
2005, the smaller one. The higher stack is the new SRA and its 
requirements. Clearly, the workload is not declining.
    In short, Mr. Chairman, the companies must do more. They 
will be under a strain to do it, as they are going to get paid 
less and get paid less often.
    The SRA raises issues also for Congress. We ask this 
Committee to help us ensure that the SRA receives recognition 
for this deficit reduction, hopefully preventing any further 
reduction in production agriculture.
    Congress also should be considering the SRA process. 
Companies have very little leverage to negotiate any equal 
partnership with RMA. The final SRA introduced a new process, 
non-negotiable concepts without industry comment, including the 
agent's hard cap and the requirement to forego legal recourse. 
We are concerned that a multi-billion dollar change in the 
legislative program can be made through unilateral discretion.
    The crop insurance companies are committed to the public-
private partnership. Together, we have built a program that now 
provides $80 billion in protection, up $31 billion from a 
decade ago. Insurance is now available for over 100 crops and 
most livestock types. It is unthinkable today that the farmer 
could plan, secure credit, invest in forward market, as they 
do, without individual crop insurance coverage tailored to each 
producer's unique need.
    With your help, we will strive to keep this enormously 
successful program as the producer's best defense against 
future risks that are inherent in farming.
    Thank you, Mr. Chairman. That completes my oral statement.
    [The prepared statement of Mr. Parkerson follows:]

  Prepared Statement of Robert W. Parkerson, President, National Crop 
              Insurance Services, Inc., Overland Park, KS

    Mr. Chairman, Mr. Ranking Member and other Members of the 
Subcommittee, thank you for inviting the National Crop Insurance 
Services to appear at today's hearing to discuss the Standard 
Reinsurance Agreement (SRA) and its implications for the future of the 
crop insurance industry. I will briefly describe the role of NCIS and 
the approved insurance providers (the companies) in the negotiations of 
the 2011 SRA, identify some key issues of agreement and controversy, 
and conclude with an assessment of why the new SRA, combined with other 
factors, raise serious concerns for the crop insurance industry as it 
moves ahead, striving to provide the best in risk management service to 
America's agricultural producers.

The Function of NCIS in the Crop Insurance Industry
    NCIS is a not-for-profit trade association whose members include 
every crop insurance company that participates in the Federal Crop 
Insurance Program. NCIS and its predecessor organizations have provided 
members support in their crop insurance businesses since 1915. NCIS has 
worked actively with the Risk Management Agency (RMA) as an approved 
contractor and with the Board of the Federal Crop Insurance Corporation 
(FCIC) as an expert reviewer.
    NCIS is also a licensed advisory organization and statistical agent 
for private Crop-Hail insurance in forty-nine of the fifty states, and 
it assists the crop insurance industry in meeting the regulatory 
requirements of these states. This is accomplished by filing the 
appropriate policy forms and statistical information with state 
insurance departments. Further, NCIS serves as a liaison with 
individual state insurance departments through active participation 
with the National Association of Insurance Commissioners (NAIC).
    In 2009, NCIS member companies wrote nearly $9 billion in Federal 
multiple peril crop insurance and related revenue products premium and 
$620 million in private Crop-Hail insurance products premium. The 
potential liability between both programs was approximately $105 
billion. NCIS member companies service policies that encompass all 
farmers participating in the Federal and private programs, including 
limited resource and socially disadvantaged farmers. In partnership 
with the Federal Government, our participating member companies 
comprise the safety net that equitably provides the preeminent risk 
management program to America's farmers.

Role of NCIS and the Companies in the SRA Negotiations
    NCIS began preparations for the new SRA early in 2008 by engaging 
company leaders on the future of the industry. By early 2009, after 
being advised by the Administration that the 2005 SRA was unlikely to 
be renewed for the 2011 reinsurance year, NCIS and all 16 companies 
that deliver the Federal Crop Insurance Program to America's farmers 
met and initiated a specific plan for negotiating the new SRA. NCIS 
organized five working groups, chaired by and consisting of 
representatives from all 16 crop insurance companies. The working 
groups addressed five subject areas: financial provisions, the Plan of 
Operations, information technology and data, quality standards and 
controls and education and training. The working groups met beginning 
last spring, reviewing the performance of the 2005 SRA and developing 
recommendations for the 2011 SRA.
    In September 2009, RMA notified Congress that the 2005 SRA would 
not be renewed. In October 2009, in response to RMA's request for SRA 
proposals from the industry, NCIS submitted formal recommendations for 
the 2011 SRA on behalf of its member companies and reflecting the 
efforts of the working groups. Since December 2009 when RMA released 
the first SRA draft until mid-July 2010, when the 2011 SRA went into 
effect, NCIS and the companies held frequent meetings with RMA and 
provided substantial written comments to RMA on the first and second 
drafts. NCIS also organized a technical, legal review of the final SRA 
conducted by NCIS and company attorneys. Throughout the process, NCIS 
was very aware of antitrust issues and worked closely with USDA's 
Office of General Counsel, RMA leadership, industry leadership and 
third party legal counsel to ensure the negotiations were conducted 
properly. On behalf of the industry, we thank Members of Congress for 
including language in the 2008 Farm Bill that ensured the companies 
could confer with one another and with RMA in developing the new SRA.
    NCIS and its member companies organized and carried out their 
activities with the primary objective of negotiating transparently and 
in good faith. Among our objectives was a new agreement that ensures 
effective service to producers, safeguards taxpayers' interests, and 
provides an opportunity for the insurance companies to earn a 
reasonable return relative to other lines of insurance, accounting for 
their relative risks. Unfortunately, the final agreement may put all 
these objectives at risk.

The Negotiations: Substantive Issues but a Predetermined Outcome
    The first draft of the SRA released in December 2009 set an ominous 
tone for the negotiations. The first draft was a significant overreach 
by the Administration. The Administration proposed an unprecedented and 
potentially very damaging reduction of $8.4 billion over 10 years in 
program funding. They proposed an inflexible formula for calculating 
administrative and operating (A&O) expense payments to the companies 
that would have used a proxy measure of premiums based on fixed 
``reference prices.'' These reference prices were sharply below policy 
prices and would never change. The first draft replaced the Assigned 
Risk Fund with a ``Residual Fund'' that would have enabled companies 
writing bad business to shift their risks to other companies. The first 
draft's reinsurance terms created separate gain and loss provisions for 
four different groups of states; groupings that had little apparent 
rationalization. The reinsurance terms sharply reduced potential gains 
while also reducing potential losses, in effect shifting risk to 
taxpayers and crowding out private reinsurance. Moreover, the 
Administration proposed increasing the net book quota share--its tax on 
underwriting gains--from 5% to 10%. Crop insurance companies are in the 
business of taking on and managing risks, but the Administration wanted 
to take over risks and the potential for gains as well, moving away 
from the Federal Crop Insurance Act's reliance on private industry and 
exposing the taxpayer to greater losses in bad years.
    I will not belabor the industry's position at the beginning of the 
process, beyond saying that the Administration's first-draft overreach 
was so great that subsequent concessions by them would still leave the 
companies at a serious disadvantage. Clearly, the 2011 SRA was a 
budget-driven process that took full advantage of the companies' short-
term inability to exit the program. Congress authorized a negotiation 
in the 2008 Farm Bill presumably with the idea that it be open and 
balanced. But, the Administration had a budget cutting target and 
simply staked out an extreme position to the right of it, knowing full 
well that, in the end, the companies had no choice but to accept the 
final outcome.
    In the second and third drafts of the 2011 SRA, the gap between the 
Administration's proposals and the companies' proposals narrowed. The 
reference price concept was thrown out, the Residual Fund concept was 
dropped, the number of state groups for reinsurance terms was reduced 
from four to two (the first group includes the Corn Belt states of 
Iowa, Illinois, Indiana, Minnesota, and Nebraska and the second 
comprises all other states), and the reinsurance terms were improved 
for the companies. There were a number of concepts that companies and 
the Administration could agree upon. Both sides wanted to address the 
concern that A&O payments could unnecessarily shoot up when there are 
market price spikes, such as occurred in 2008. Both sides agreed that 
reinsurance gain and loss provisions should be made more profitable for 
the lowest return states and reduced for the highest return states. 
This ``rebalancing'' of returns would help companies cover costs and 
hopefully earn a small underwriting profit in the low return states.
    Unfortunately, the final 2011 SRA fails to achieve a fair balance 
among these shared concepts. The final draft has been signed by the 16 
companies, but that hardly means the companies think things are 
satisfactory. Here are a few of the glaring issues with the 2011 SRA:

   The size of the overall funding cut remains unsupported and 
        represents a decided risk to the companies. The Administration 
        premised its budget-cutting objective on two RMA-funded studies 
        (contracted to Milliman, Inc.) on the companies' rate of return 
        on equity. The flaws in this approach are legion. First, the 
        Administration never provided an explanation of how the 
        Milliman results were utilized to determine the final gain and 
        loss provisions for reinsurance. Second, the Milliman studies 
        are rebuttable on numerous grounds. Milliman estimated the 
        equity of crop insurance firms using a model that did not take 
        account actual firm equity and crop insurance regulatory 
        requirements for equity, thus producing unverifiable estimates 
        of industry equity; they failed to consider reinsurance and 
        actual A&O costs; and they did not include a long enough period 
        of time to adequately account for the potential for 
        catastrophic loss. The Administration repeatedly defended its 
        proposals in public based on the returns to companies since 
        2006, a period that included an unusually rare spike in crop 
        prices and the two lowest loss ratio years in the history of 
        the program dating to 1981. Arguing for steep budget cuts based 
        on unusual circumstances clearly is not a sound actuarial basis 
        for determining expected future returns and establishing sound 
        policy. The Administration appears to be betting that the 
        program's good performance in recent years will continue. The 
        insurance companies have to go along for the ride, but they may 
        have no seat belt on.

   The A&O cap used by the Administration in the final SRA is 
        preferable to the use of fixed reference prices; however, RMA's 
        change in approach does not mask the reality that the A&O cuts 
        remain large coming on top of the A&O funding reductions of the 
        2008 Farm Bill. RMA's own assessment shows A&O cuts of $220 
        million per year during 2011-2015. These A&O cuts are being 
        imposed oblivious to the payment delays that will occur in 
        2012. As a result of a 2008 Farm Bill budget mechanism, 
        companies will have to wait up to 9 months to receive payments 
        from RMA to fund their businesses. Operating costs must be paid 
        and companies will have to borrow in difficult credit markets 
        to meet payrolls. Moreover the new A&O reductions were 
        determined before RMA has completed its study of agent costs of 
        delivery. RMA agreed with recent GAO findings that a study of 
        agent business costs was necessary to fully understand total 
        delivery expenses and to judge the appropriate level of 
        delivery payments to companies and agents. In this case, there 
        were insufficient facts to influence a predetermined budget 
        cut.

   The 2011 SRA implements soft and hard caps on the companies' 
        compensation of agents. These caps were not proposed by NCIS in 
        its initial recommendations to RMA last October and were not 
        proposed in any comments submitted to RMA on the SRA drafts. 
        The soft cap, which restricts agent compensation to 80% of the 
        A&O a company receives in a state, first appeared in the second 
        draft SRA. However, the hard cap, which restricts agent 
        compensation plus profit sharing to 100% of the A&O a company 
        receives in a state, was presented in the final SRA--without 
        the opportunity to comment by the companies. These A&O 
        provisions are fraught with competitive issues and 
        administrative problems.

     A major problem is that RMA will not know the overall 
            limit on A&O payments until the year is over. Companies 
            must pay their agents for their work before the year is 
            over. How will companies know what 80% of their A&O 
            payments are when they won't know what their total payments 
            will be until the year is over?

     Another critical issue is the definition of 
            compensation. NCIS has agreed to work with RMA to define 
            agent compensation in a clear way so that companies will be 
            able to implement the caps without being out of compliance. 
            It is obvious at this point that the caps on agent 
            compensation could easily be violated quite unintentionally 
            by companies that are assiduously trying to stay within the 
            caps. Penalties for noncompliance may be severe. We 
            recommend that Congress keep abreast of this issue and help 
            ensure that RMA shows forbearance for unintentional 
            violations.

     Finally, many of our member companies have raised 
            concerns over the impact of the caps on agents. They fear 
            that agents may shift from one company to another to chase 
            the prospect of better profit sharing. They fear that the 
            compensation caps could lead to consolidation and reduced 
            service, especially for smaller farm operations that have 
            lower premium volume. We recommend that Congress monitor 
            closely the structural changes that may take place among 
            agents and companies as a result of the change in A&O 
            payments and agent commission caps.

   The final gain/loss provisions and A&O reductions combined 
        are expected to reduce returns well below historical levels in 
        the Corn Belt states. In addition, the changes in prospective 
        net returns in other states do not reflect their loss 
        experiences. The Administration rejected the industry's 
        recommendation that higher return states that were not put into 
        Group 1 (Corn Belt) be given less favorable reinsurance terms 
        than the underserved states. Preliminary NCIS analysis 
        indicates that had the 2011 SRA been in effect for 2009, the 
        Group 1 states would have had a combined reduction in A&O 
        payments and underwriting gains of nearly 25%. The remaining 
        states, while seeing an increase in underwriting gains, would 
        still have faced a collective decline of around 6% in A&O 
        payments and underwriting gains combined. It is unclear how 
        such a decline in returns is going to increase incentives for 
        companies to operate and improve service in low return states, 
        as the Administration claims.

    In addition to the problems just identified with the key financial 
terms of the 2011 SRA, the SRA imposes a range of administrative 
requirements on the companies. Many people do not realize that the SRA 
encompasses hundreds of pages of IT, data reporting (such as common 
land units and FSA data reconciliation), training and quality control 
requirements (such as large claim reviews). These regulatory burdens 
continue to escalate. For example, the Crop Insurance Handbook for the 
2011 SRA, which specifies the requirements to write crop insurance, is 
now 834 pages long, compared with 525 for the 2005 SRA. Appendix III of 
the 2011 SRA, which specifies information and reporting requirements, 
is 826 pages, compared with 205 pages for the 2005 SRA. In addition to 
these SRA requirements, FCIC continues to approve new products and 
revise and expand existing products, all of which demand increased 
servicing by the companies. For example, between 2000 and 2009, there 
have been 37 introductions of new crop or insurance plans.

The 2011 SRA: A Yellow Flag That Augurs for Policy Caution Over the 
        Next Several Years
    As the industry looks ahead, we can find little security in the 
developments of the past 2 years and the economic prospects before us. 
Congress and others need to know that the combination of the $6.4 
billion in 2008 Farm Bill reductions, the $6 billion in SRA reductions, 
the delay in payments to companies in 2012 and the increase in workload 
and investments needed to adequately deliver this program and meet its 
regulatory requirements are going to strain this industry, even with 
normal weather over the next several years. The companies must do more 
and are going to get paid less, and get paid less frequently, to do it.
    The 2011 SRA outcome raises several issues relevant to future 
actions by Congress. First, the Federal Crop Insurance Program, the 
safety net for American farmers and ranchers, has now contributed 
greatly towards deficit reduction. We believe we have done so for this 
industry as well as for production agriculture in general. We ask that 
this Committee work to ensure that these funding cuts receive 
appropriate recognition and prevent further cuts for production 
agriculture, such as in the 2012 Farm Bill.
    Second, while the industry would hope to be able to move forward 
with no further financial shocks, we emphasize that, unlike private 
property casualty companies, crop insurance companies do not set 
premium rates and cannot compete using rate changes. Nor are the 
companies able to adjust rates to recoup losses in previous years. 
Premium rate changes can have major impacts on industry profitability, 
and the companies are handicapped by not knowing what will happen with 
respect to premium rates. Historically, the companies have not been 
part of the rate setting process.
    Third, Congress should assess the concept of a periodically 
negotiated SRA. The companies have little leverage to conduct such a 
negotiation as an equal partner with RMA. RMA conducted the 
negotiations in a mutually respectful fashion but with far less than 
full transparency. Requests for key data and analyses were not 
satisfied. Even today, as we testify, we do not have the details of the 
baseline USDA used to score the 2011 SRA. In the final SRA draft, which 
was not negotiable, RMA introduced major new concepts that had not 
received public or industry comment. These concepts included the hard 
cap on agent commissions and the requirement that companies forgo legal 
recourse in the event that the Administration has acted illegally with 
its A&O provisions. Finally, should multi-billion dollar changes in 
legislated programs be made through unilateral discretionary actions?
    The crop insurance companies are committed to the public-private 
partnership. We are committed to the efficient functioning of 
competition and markets. We believe the private sector, not the 
government, is the best way to provide the individual risk management 
information and tools that are indispensable for farmers today. We 
believe that is the way farmers want the program to operate. We believe 
this program can be expanded and improved to provide even better 
protection for farmers and ranchers. We ask that Congress pay careful 
attention to the impacts of the 2008 Farm Bill and the 2011 SRA and 
work with the crop insurance industry to strengthen this valued 
program.
    Thank you Mr. Chairman, that completes my statement.

    The Chairman. Thank you.
    We will move on to Mr. Stephen Frerichs, Legislative 
Consultant, Rain and Hail, on behalf of the American 
Association of Crop Insurers from Alexandria, Virginia. Please 
proceed.

   STATEMENT OF STEPHEN FRERICHS, PRESIDENT, AgVantage, LLC; 
         LEGISLATIVE CONSULTANT, RAIN AND HAIL, L.L.C.,
   ALEXANDRIA, VA; ON BEHALF OF AMERICAN ASSOCIATION OF CROP 
                            INSURERS

    Mr. Frerichs. Thank you, Chairman Boswell.
    Chairman Boswell, Ranking Member Moran, and Members of the 
Committee, thank you for holding this hearing today. I believe 
this is the first opportunity that the crop insurance industry 
has had to comment before Congress on the process and content 
of the SRA.
    I am Stephen Frerichs, a member of Rain and Hail's crop 
insurance team, and I am speaking today on behalf of the 
American Association of Crop Insurers. Rain and Hail is a 
member of AACI.
    I am going to make five points today. My written testimony 
makes additional points.
    My first point, signing the SRA does not imply a consensus 
agreement, nor success for the industry, a point that Ranking 
Member Lucas made.
    USDA says on its website a successful conclusion of the SRA 
negotiation has occurred, in part because all companies signed. 
However, we want you to know that companies did not have a 
choice. There is absolutely no latitude in this partnership: 
Sign and you are in business, at least for the short term; 
don't sign, and you are out of business immediately. To suggest 
that the 2011 agreement is a success because crop insurance 
companies signed is misleading.
    Never before has any Administration made this level of 
reductions in an SRA. We believe the reduction greatly exceeds 
the intent of Congress. The power of the purse is and should be 
reserved to Congress. Therefore, we recommend the renegotiation 
authority be reviewed. Perhaps it should be repealed or, at a 
minimum, modified to include safeguards, especially for 
maintaining the integrity of the agriculture budget baseline.
    My second point, $12 billion in cuts is significant and 
will impact the industry.
    Mr. Chairman, I am not hear today to cry the sky is 
falling, but I will make a prediction similar to Mr. Rutledge. 
You can't cut over $12 billion out of a program and not expect 
to see changes. The industry will consolidate, both at the 
company and at the agency level. Clearly, no one will survive 
without making significant changes to their business 
operations. These changes may impact farmer service and 
availability.
    My third point, the financial impact from the cuts is not 
uniform across the states. States in so-called Group 1 will be 
by far hit the hardest. Group 1 states include Iowa, Illinois, 
Indiana, Minnesota, and Nebraska.
    Appendix tables 1 and 2 in my written testimony illustrate 
the enormous disparities of the cuts under the agreement. Over 
80 percent of the expected 2011 cut is taken by these five 
states. These states represented about 34 percent of the 
program premium.
    Additionally, the combined impact of the A&O cap and the 
commission cap will be felt hardest in State Group 1. Our 
initial estimate for 2011 is that the A&O proration will be 83 
percent. That means the maximum agency payment rate for revenue 
policies on average will be in the 11.8 to 12.6 percent range. 
As you know, over 80 percent of the business is now in revenue 
policy. For State Group 1, this compares to average 
compensation in the 23 percent range in 2009 for those states. 
Can you imagine taking a 50 percent cut in pay?
    Mr. Chairman, the bottom line is that five states take the 
brunt of these cuts, disproportionately so.
    My fourth point, last minute changes. RMA released three 
drafts for comment over a 7 month period. Each draft contained 
new and befuddling provisions. The third and final draft was no 
different. We object to compensation caps that result in no 
savings and do little to protect a company's financial 
stability.
    We object strongly to Section III(a)(2)(K) appearing for 
the first time in the final agreement. It is one thing to ask 
companies who are party to the agreement to waive legal rights; 
it is quite another concept to force companies to ask agents 
who are not part of the agreement to waive their rights.
    We entered this process in good faith. We were up front 
about our doubts regarding USDA's legal authority. Rather than 
responding to our doubts, USDA decided to strip our rights.
    My fifth and final point, is the need for stability and 
contract sanctity. Crop insurance companies, as is the case for 
any company in today's economy, need an extended period of 
stability. In short, the companies need contract sanctity. In 
the authorization language, Congress limited the Administration 
to one renegotiation of the SRA every 5 years. We urge Congress 
to abide by that same time interval.
    As Chairman Peterson has said, with these cuts, agriculture 
is the first sector to do its part towards deficit reduction. 
With the 2008 Farm Bill and the 2011 SRA cuts, the crop 
insurance program has been reduced by over $12 billion. These 
cuts to the program are deep and significant. Collectively, 
they will have an impact on rural businesses and jobs. 
Therefore, we urge Congress to fully recognize these reductions 
and leave the crop insurance program out of any initiatives to 
cut Federal spending for 5 years.
    On a personal note, Mr. Moran, I would like to offer my 
condolences to you on the loss of your mother. My mother passed 
away over 10 years ago, and I think I have some understanding 
of what you are going through.
    [The prepared statement of Mr. Frerichs follows:]

   Prepared Statement of Stephen Frerichs, President, AgVantage, LLC;
   Legislative Consultant, Rain and Hail, L.L.C., Alexandria, VA; on 
            Behalf of American Association of Crop Insurers

    Good morning, Mr. Chairman, and Members of the House Agriculture 
Subcommittee on General Farm Commodities and Risk Management. My name 
is Stephen Frerichs and I am a member of the Rain and Hail L.L.C. 
national crop insurance team. Rain and Hail is an employee owned 
company and one of the U.S. Department of Agriculture (USDA) Risk 
Management Agency's (RMA) largest Approved Insurance Providers (AIP), 
writing nearly $2 billion of policies in 49 states. Furthermore, Rain 
and Hail has marketed and serviced Federal crop insurance policies 
throughout the history of the public-private partnership, which was 
authorized by the Federal Crop Insurance Act of 1980.
     Today, I am testifying as a representative of the American 
Association of Crop Insurers (AACI), a trade association with 
membership from all areas of the Federal crop insurance private sector 
delivery industry. On behalf of the Board of Directors and members of 
AACI, I want to thank you for scheduling this hearing. With development 
of the 2011 Standard Reinsurance Agreement (SRA), as authorized by 
Congress and managed by RMA, now complete, AACI appreciates the 
opportunity to comment on both the development process as well as the 
final product.

Signing the SRA Does Not Imply a Consensus Agreement
    As USDA commented on several occasions, all of the AIPs signed the 
2011 SRA. However, we want Members of this Subcommittee and Congress 
generally to fully recognize companies did not have a choice. Why? 
Because the companies are crop insurance companies built for the 
purpose of delivering the program to the nation's farmers. Not signing 
the SRA means the companies are immediately out of the crop insurance 
business, eliminating all income and jobs related to crop insurance 
line of business and reducing the value of those assets significantly. 
Therefore, the idea promoted by USDA that by signing the agreement 
companies willingly agreed to the SRA changes is not accurate. There is 
absolutely no latitude in this partnership. Sign and you're in 
business, at least for the short term. Don't sign and you're out of 
business immediately.
    Mr. Chairman and Members of the Subcommittee, millions and millions 
of dollars and years and years of time have been devoted to organizing 
and building crop insurance companies in order to be an effective and 
efficient partner with USDA in the public-private partnership. This 
partnership has been so successful in offering to the nation's farmers 
a top quality risk management program that it is the envy of the world, 
which other nations are seeking to copy. It is a misrepresentation of 
the simple facts of the partnership for anyone to suggest that the 2011 
SRA, which unilaterally makes $6 billion of cuts in the program after 
Congress already made over $6 billion in cuts in the 2008 Farm Bill, is 
acceptable because the crop insurance companies have signed.
     It will take time to document the consequences of the necessary 
crop insurance company adjustments and changes made necessary by the 
terms and conditions, both financial and regulatory, incorporated in 
the 2011 SRA by RMA. In the process of implementing the 2011 SRA, we 
want this Subcommittee and Congress generally to know the paramount 
goal of the crop insurance companies will be to continue service to the 
nation's farmers, to the maximum extent possible. It will take some 
time to know whether all companies who sign the agreement can withstand 
the dual challenges of a lower income and more regulations instituted 
by the 2011 SRA.

Financial Terms Take Another $6 Billion Cut
    Despite repeated pleas for caution from across the agriculture 
sector as well as Members of Congress, including some who serve on this 
Subcommittee, RMA was unyielding in its quest to cut an additional $6 
billion from the crop insurance program over the next 10 years. As a 
result, many farmers who depend on crop insurance to help manage the 
risks associated with their farming enterprises could suffer changes in 
service as companies and agencies contract or consolidate as they 
respond naturally to a reduction in income.
    The additional $6 billion in cuts are being imposed by the 
Administration before the full implementation of the more than $6 
billion in cuts imposed by the 2008 Farm Bill. Furthermore, this second 
$6 billion cut will be imposed during a period of time when RMA is 
implementing major administrative changes to the management of the 
program. The RMA should have completed these administrative changes and 
fully implemented the cuts mandated by the 2008 Farm Bill before 
placing additional financial and regulatory pressure on the delivery 
system. Instead, the Administration is abandoning caution and moving 
ahead with a second round of huge reductions in financial support and 
implementation of concepts not provided for review in the months and 
months of negotiations on the 2011 SRA.
    Another alarming aspect of these cuts is that they are based on a 
remarkable string of good weather and consistently high yields over the 
past several years. A long term view of weather trends would indicate 
that we are past due for a weather disaster that would cause large 
losses by the crop insurers. All of the RMA examples used to justify 
their cuts do not include the last year of a major drought in the Corn 
Belt, 1988. Most of their examples show a trend of program cost going 
almost straight up, a trend that cannot be sustained. However, 
curiously, these trend lines stop at 2008, a year of record high 
commodity prices and before the $6 billion of farm bill cuts have been 
implemented. They do not reflect the sharp downturn in prices since 
2008. By cutting the funding of the private sector delivery system so 
severely based on the best yield and price data ever, the RMA may 
seriously undermine the ability of the companies to sustain one or more 
significant loss years.
    Never before in SRA negotiations has any Administration made 
anything that even approached this level of reductions in the financial 
terms of the agreement. We believe the reduction greatly exceeds the 
intent of Congress in granting the renegotiation authority. The ``power 
of the purse'' is and should be reserved to the Congress. In our view, 
the Administration exceeded its legislative mandate. Therefore, we 
recommend the renegotiation authority be carefully reviewed by Congress 
as to whether it should be repealed altogether or whether it can be 
modified to include appropriate safeguards, especially for maintaining 
the integrity of the agriculture budget baseline.

Financial Impact Not Uniform Across States
    The distribution of the financial impact of the 2011 SRA is by no 
means uniform. States in the so-called ``Group 1'' will be by far the 
hardest hit. Group 1 states include Iowa, Illinois, Indiana, Minnesota 
and Nebraska.  Appendix Tables 1 and 2 illustrate the enormous 
disparity of the cuts under this agreement. As you can see from 
Appendix Table 1, over 80 percent of the expected 2011 cut is taken by 
the five states in State Group 1. These states represented only 34 
percent of the program premium in 2009. Both the Underwriting Gain and 
A&O Cap fall heaviest on these five states. State Group 3 actually ends 
up a net ``winner'' as the Quota Share incentive payment is expected to 
overcome the A&O Cap impact in these 17 states.
    Additionally, the combined impact of the A&O Cap and the commission 
cap will be felt hardest in State Group 1. Appendix Table 2 details the 
impact of the A&O Cap on expected A&O payment rates. The A&O cap kicks 
in when A&O payments on buy-up policies exceed $1.221 billion. A&O on 
buy-up policies is then pro-rated so that it cannot exceed $1.221 
billion. If A&O is pro-rated, the A&O payment rate is factored down by 
the pro-rated amount. Further, a new 80 percent compensation cap (80 
percent of A&O payment rate) now applies to agency agreements on a 
state average basis. If a company has an underwriting gain (net of 
reinsurance costs) then the company can pay up to 100 percent of the 
A&O payment rate. However, initial compensation levels will have to be 
at the 80 percent compensation cap because a company will not know if 
it will incur an underwriting gain until the year is over.
    Our initial estimate for 2011 is that the A&O pro-ration will be 83 
percent. That means the maximum agency payment rate, on average, for 
Actual Production History policies will be in the area of 14 to 14.9 
percent under the 80 percent compensation cap and for Revenue policies, 
on average, it will be in the 11.8 to 12.6 percent range. For State 
Group 1, this compares to average compensation (commission plus profit 
share) in the 23 percent range (all policies combined) in 2009. 
Obviously, this is a significant cut by any stretch of the imagination. 
On the other hand, State Group 3, where average compensation in 2009 is 
in the 14 percent range, may see only a marginal impact if the pro-rata 
estimate for 2011 bears out.
    Mr. Chairman, the bottom-line is that five states take the brunt of 
these cuts--Iowa, Illinois, Indiana, Minnesota and Nebraska. We submit 
that is unfair and a mistake that will unduly burden these five states.

Last Minute Changes With No Industry Input
    The companies are alarmed about the number of new changes that were 
unilaterally inserted into the final draft of the SRA without prior 
consultation with the industry and no chance to comment. While RMA 
conducted a number of meetings with companies and their trade 
associations throughout the negotiating period of time, they appear to 
have been orchestrated primarily to facilitate the objective of 
imposing a predetermined level of cuts and certain policy changes on 
the program at the industry's expense.
    For example, RMA repeatedly cited its goal of improving service for 
producers and the Secretary of Agriculture has focused on programs to 
help smaller farmers, but the final draft of the SRA goes in a 
completely opposite direction. Many of our companies expressed concerns 
about putting undue limitations on agent commissions, and then the 
final draft abruptly changed from an individual policy commission limit 
to a compensation limit per state. Instead of rejecting a bad idea, 
they made it more perverse. Now it is possible for some agents to be 
reimbursed more than others in a state, but with a state-wide cap it 
becomes a zero-sum game. Companies will be able to pay some agents more 
than the percentage limit if overall in the state they stay within the 
limit. Agents will be incentivized to drop their smaller clients and 
produce a portfolio of larger policies with which they can negotiate a 
larger commission. This provision could leave smaller agents to face 
greatly reduced commissions and smaller producers hoping that someone 
will be interested in servicing their policies. AACI objects to this 
perverse method of dealing with agents' commissions that jeopardizes 
service to small and medium-sized producers.
    More generally, this agreement includes precedent setting 
requirements that have not been even contemplated in previous SRAs and, 
equally important, are unheard of in normal, private insurance 
agreements. RMA's argument that these particular provisions are 
necessary to protect the financial soundness of the companies is 
puzzling. The annual Plan of Operation (PO) requirement provides RMA 
considerable latitude in its company financial oversight 
responsibility. A company's capital adequacy provisions can be adjusted 
annually by RMA in the required PO submissions, which must be approved 
by RMA prior to the company engaging in activities for the new 
reinsurance year.

Stripping Companies of Fundamental Legal Rights in Order To Protect the 
        RMA's Own Weak Legal Position
    On another front, we object to the last minute insertion of Section 
III(a)(2)(K) in the final agreement, even in its revised form of a 
covenant to not sue. Obviously, this Section is an attempt to protect 
the FCIC from litigation that they fear because the industry earlier 
brought to FCIC's attention that they did not have the authority to 
make some of the cuts they were proposing in the SRA. Rather than 
provide an adequate response to the third-party legal opinion submitted 
to them, RMA imposed a provision to strip the companies and the agents 
of their legal rights. Companies and agencies should not be forced to 
agree to this gross overreaching and unprecedented regulation that 
takes away private rights.

The Current Trend of Huge Cuts Will Destroy Many Rural Enterprises, 
        Cost Thousands of Jobs and Undermine our Stable and Abundant 
        Food Supply
    The current pattern of using the crop insurance program as a bank 
to fund other priorities, as demonstrated by the 2008 Farm Bill cuts of 
$6 billion and the SRA cuts of an additional $6 billion, cannot 
continue. Continuing to cut Federal support for the crop insurance 
program will mean destruction of the primary risk protection program 
for commercial American farmers. This outcome would be a terrible 
development for the nation's farmers, rural economies and the national 
economy, specifically including the consumer-taxpayer, since all 
taxpayers are consumers.
    In fact, farmers from around the nation testifying at the recently 
completed House Agriculture Committee's 2012 Farm Bill hearings 
indicated they want to, at a minimum, continue the current level of 
crop insurance program benefits and would like to have the benefits 
improved for all crops around the nation. It would be ironic, indeed, 
if our government were to destroy a successful crop insurance program 
at the very moment U.S. farmers want to expand it and other nations all 
over the world are trying to replicate it and make it a part of their 
farm safety net.
    Without an effective risk management program like the current 
Federal Crop Insurance Program, many farmers would not be able to 
withstand the weather-related risks of producing crops, and they would 
not be able to secure adequate financing, especially in the tighter 
credit environment of today, to properly finance the capital intensive 
production of crops that agriculture has become today. These farmers 
would not be farming. When farmers don't farm, the nation's economy not 
only loses farm jobs, it also loses jobs in sectors directly related to 
the production of crops, including a wide array of production input 
products and services. Moreover, subsequently lost revenue and 
commercial activities from production agriculture input sales and 
services as well as related services, together with the related lost 
tax revenue, adversely impact jobs in indirect sectors, including auto 
and home building industries.
    Moreover, when farmers don't farm, it destabilizes America's stable 
supply of low cost food for all of the nation's consumers. Reduced 
supplies of agricultural commodities raise food costs, which today 
represent, on average, only about 9-10 percent of disposable income in 
the U.S. Higher food prices increase the cost of food to all consumer-
taxpayers as well as for the government's food assistance programs, 
meaning more funding would be needed for the Supplemental Nutrition 
Assistance Program (SNAP) and all other related programs.

Time for Intellectually Honest Program Accounting and Analysis
    RMA constantly invokes the Milliman studies it commissioned on 
``reasonable'' and ``historical'' rates of return as the analytical 
basis for its decision to make additional cuts in crop insurance 
company income. From our understanding of fair and balanced research 
methodology, we conclude these studies are flawed because of key 
assumptions imposed by RMA.
     The ``reasonable'' rate of return study produced a result that is 
biased to the high side because it does not accurately account for the 
true level of risk associated with production agriculture. This bias 
was introduced to the analysis through the RMA requirement that the 
study not include the disaster experience of 1988 and other disasters 
in the earlier 1980s. Milliman, to its credit, makes note of that fact. 
In all economic settings, higher levels of risk demand and earn higher 
rates of return. We wonder if the risk factor in the study was 
intentionally biased downward by excluding a high loss year to show a 
lower rate of ``reasonable'' return.
    The ``historical'' rate of return study also produced a result that 
is biased to the high side because it does not accurately account for 
the true costs associated with delivering the modern Federal Crop 
Insurance Program, especially given the required capital amounts, 
compliance rules and massive set of regulations. This bias was 
introduced to the analysis through the RMA requirement that the study 
make the assumption that total cost of delivery exactly equals the A&O 
payment amount, a totally arbitrary assumption, with the result of 
biasing cost of delivery to the low side. Several industry studies over 
the last 10 to 15 years have all shown total cost of delivery to exceed 
A&O payments by four to six percent of premium. RMA has not 
commissioned a study to analyze the true and total cost of delivering 
the modern crop insurance program. Although, RMA recently indicated it 
would conduct the study in the next year or so.
    Collectively, these RMA assumptions have created a biased public 
view of the rate of return to crop insurance companies over time. If 
RMA is truly interested in the financial health of the companies, as it 
has publicly stated and given as justification for key new 2011 SRA 
regulations, specifically including the agent payment cap, it is time 
to produce an intellectually honest analysis of the profitability of 
delivering the program. We urge this Subcommittee to make such a study 
the highest priority.

Need for Stability, Clear Vision and Confidence
    It has taken not only years, but decades to have the Federal Crop 
Insurance Program attain the current levels of participation and 
benefit for our nation's farmers. Only in America could this public-
private partnership have been so successful. While certainly there is 
opportunity to continue improving the program, today it stands second 
to none as a world-class agriculture risk protection and management 
tool.
    A lot of people have contributed to the development and evolution 
of the modern crop insurance program, however, no effort has been 
greater than that made by Congress and Members of this Subcommittee. On 
behalf of the AACI membership and the farmers we serve, I want to take 
this opportunity to thank you for your support of a quality risk 
protection and management program. Given the natural and global market 
elements they work and live with every day that are beyond their 
control, our farmers deserve the certainty and predictability of the 
risk management program you have provided.
    But an important and critical point must be made here and that is 
private sector ingenuity, creativity and capital have contributed 
significantly to the building of the crop insurance program in 
operation today, especially the farmer service component. We believe 
private sector participation is an irreplaceable factor in assuring 
maximum farmer satisfaction with the program.
    However, crop insurance companies, as is the case for companies in 
other sectors of the nation's economy today, need an extended period of 
stability, both financial and regulatory, to develop greater confidence 
in the partnership with the government as regulator. The companies need 
a clearer vision of the financial future, a coherent and consistent 
plan for understanding and managing the massive set of new regulations 
and an effective plan to deal with a lower income. It is important to 
make these points because we are concerned that the potential for 
unintended consequences inherent with some of the changes included in 
the 2011 SRA is not recognized nor understood by the regulator.
    In the authorization language, Congress limited the Administration 
to one renegotiation of the SRA every 5 years. We urge Congress to 
abide by the same time interval and set the crop insurance program 
aside for 5 years regarding further budget cuts. As Chairman Peterson 
has said, with these cuts in the crop insurance program, agriculture is 
the first sector in government to do its part in deficit reduction. 
With the 2008 Farm Bill cuts and the 2011 SRA cuts, support for the 
crop insurance program has been reduced by over $12 billion. These cuts 
to the program are deep and significant and, regardless of comments to 
the contrary, collectively they will have an impact on rural businesses 
and jobs. Therefore, we urge Congress to fully recognize these 
reductions and leave the crop insurance program out of any initiatives 
to cut Federal spending for 5 years, including budget reconciliation 
bills and farm bills.
                                Appendix

       Table 1. Estimated Distribution of 2011 Cut by State Groups
------------------------------------------------------------------------
                                                      Percent of Cut
------------------------------------------------------------------------
                           State Group 1                     83.8%
                           State Group 2                     22.0%
                           State Group 3                     ^5.8%
------------------------------------------------------------------------
Group 1 States: Illinois, Indiana, Iowa, Minnesota, and Nebraska.
Group 2 States: Alabama, Arizona, Arkansas, California, Colorado,
  Florida, Georgia, Idaho, Kansas, Kentucky, Louisiana, Michigan,
  Missouri, Mississippi, Montana, North Carolina, North Dakota, New
  Mexico, Ohio, Oklahoma, Oregon, South Carolina, South Dakota,
  Tennessee, Texas, Virginia, Washington, and Wisconsin.
Group 3 States: Alaska, Connecticut, Delaware, Hawaii, Maine,
  Massachusetts, Maryland, Nevada, New Hampshire, New Jersey, New York,
  Pennsylvania, Rhode Island, Utah, Vermont, West Virginia, and Wyoming.


   Table 2. Impact of Compensation Cap under Varying A&O Cap Scenarios
------------------------------------------------------------------------
                          A&O Cap Impact at Selected Pro-Rata Levels on
                  A&O                      A&O Pay Rate
                Payment ------------------------------------------------
                 Rate     No Cap    90%     85%     80%     70%     65%
------------------------------------------------------------------------
      Actual     21.9%     21.9%   19.7%   18.5%   17.5%   15.3%   14.2%
   Production
     History
     Revenue     18.5%     18.5%   16.7%   15.7%   14.8%   13.0%     12%
------------------------------------------------------------------------
                         Maximum Agency Pay Rates @ 80% Compensation Cap
                                    @ Selected Pro-Rata Levels
------------------------------------------------------------------------
      Actual               17.5%   15.8%   14.9%     14%   12.3%   11.4%
   Production
     History
     Revenue               14.8%   13.3%   12.6%   11.8%   10.4%    9.6%
------------------------------------------------------------------------
 2008 A&O Pro-rata would have been          64%

2009 A&O Pro-rata would have been            72%

2011 A&O Pro-rata expected                   83%

 State Group 1 Average Compensation 2009     23%

State Group 2 Average Compensation 2009      16%

State Group 3 Average Compensation 2009      14%
------------------------------------------------------------------------


    Mr. Moran. Thank you.
    The Chairman. Thank you for your testimony.
    I would like to move to Mr. Deal, Chairman of the Board, 
NAU Country Insurance Company in Andover, Minnesota.

STATEMENT OF JAMES D. DEAL, CHAIRMAN OF THE BOARD, NAU COUNTRY 
                 INSURANCE COMPANY, ANDOVER, MN

    Mr. Deal. Thank you, Mr. Chairman and the Members of the 
Committee on General Farm Commodities and Risk Management.
    I am Jim Deal; and I come to you as a retired Federal 
employee, a former manager of a corporation, a former CEO and 
owner of National Ag and NAU Country. However, as of July 1, I 
am retired and no longer have any vested interest in any MPCI, 
so I come to you as an individual. This program started back in 
1938, I started in 1956, so maybe my biggest contribution is as 
a historian more than anything else.
    The high point in my life, obviously, was when President 
Jimmy Carter selected me as manager of FCIC; and he definitely 
had ideas. Through the numerous conversations I had with him, 
he did not like the ad hoc free disaster programs. They had to 
be eliminated.
    Along with Secretary Bob Bergland, we worked hard to shore 
up the credit side for the farmers because of the tight credit 
even then. So we worked on that. So our thrust was to develop a 
program, and we selected crop insurance as the vehicle that we 
felt could best address it.
    The other thing that the Administration, and particularly 
the President wanted, he said he wanted the farmers to pay part 
of the premium. He wanted the government to control and put the 
program out, but he felt that we needed the private sector for 
the delivery to get the participation we wanted. That was the 
grounds we worked on.
    We got the Crop Insurance Act passed in 1980, and it was 
designed to make it more affordable and accessible to all 
farmers in all areas, and that marked the birth of the present 
crop insurance program. With the passage of the Act and its 
many amendments, and I talk about the history in my written 
testimony. I make a few comments on the SRA in the program.
    I first would like to compliment Bill Murphy and his 
willingness to work with the private sector, and get what I 
consider a good reinsurance agreement out. I am sure both sides 
are going to tell you they are not 100 percent happy with the 
results, and I have said many times that sometimes good deals 
come out when both parties feel they have lost something. We 
will see. Certainly this is the case with the SRA. There were 
many things on both sides that had to give and take.
    In my testimony, I talk about the risk, the underwriting 
gains, and in my estimation I believe the companies will walk 
away with a 15 percent reduction in gains. As in the previous 
testimony, those hardest hit in the Group 1 group, which you 
are aware of.
    However, I also talk in my testimony about how I support 
the principles applied to the A&O side. Because, back in the 
beginning, one of the issues we were to address was to get a 
subsidy that established way back in the conception of the 
program that would cover the cost. One of the major roles in 
that is the role the agent plays in educating and assisting 
farmers and making their management decisions, and they are 
many more fold now than they were when we passed the 
legislation.
    As they previously said, probably the most controversial 
issue is the hard and soft caps that are put in there. However, 
I believe these do give discipline to the program. Some will 
question what I say when I say that. I am not questioning as 
far as the amount. As I understand, there is a study that has 
been, or is going to be, conducted relative to the cost of 
administering this program. I think you have to realize in the 
crop insurance program, both the agents and the companies, it 
is much more intense and there is a lot more service work that 
is required in this in relationship to a private policy. So, 
sometimes this has not been addressed enough to really do that.
    I think this study, if they get it done and truly look at 
what is the cost of service, it is one of the issues we had 
when we passed the original legislation where we dealt strictly 
with commission to agents. I think that will help in this 
matter. I think the crop insurance program is the envy of the 
world.
    If I might make a couple statements, I think the CAT 
program is wrong. This is a program covering nurseries and big 
corporations. The imputed premium on that that the taxpayer is 
paying is $308 million. I think they ought to be paying the 
same as the rest of the producers. You are offering them about 
$8 billion in protection at the taxpayers' expense. I think it 
is something that needs to be looked at and corrected.
    The COMBO policy is a good move. I commend the RMA on 
combining this and simplifying the program.
    Another one that I have a dislike for is the seed company 
discount reductions. I think this simply is hurting the 
integrity and increasing complexity of producers. This program, 
in my judgment, should be eliminated.
    Revenue pricing: the base period when they used the 5 days 
out of the base period to pick the price can shoot a policy 
over or under dramatically. I think there should be a longer 
period of time to look at that.
    And APH, as was mentioned earlier, I think with the 
technology and things we have now, the period of that ought to 
be shortened to improve the administration of the program.
    And probably one of my most important points is the 
administrative changes that go on. Crop insurance has gone 
through a lot of turmoil in the last few years. I believe we 
need stability in the requirements to operate under the 
program, and stability in the financial terms of the agreement, 
to settle it down and stay with what we have.
    The future: The effect of the crop insurance program as it 
relates to the producers is an absolutely needed requirement. 
It really helps financially, especially in tight credit times 
that we are having now. This is so essential for the banking 
and lending institutions to have to shore up the loans so the 
farmer can produce it.
    The passing of the amendment and the major Act change in 
1980, and the future changes that have been made since then, 
the success of this program is nothing short of amazing. This 
program is the foundation of ag credit out there right now for 
the farmers so they will be able to come back the next years 
and produce.
    Last, I hope you really consider what has happened with the 
farm bill, with crop insurance, and the new SRA. As previously 
said, the farm bill took $6.5 billion out, which was moved 
towards nutrition programs, as I understand it. Now the new SRA 
takes $6 billion, of which $2 billion is going to conservation 
programs which we talked about. This represents, the two of 
them, about a 40 percent cut in the revenues for the companies.
    My last point, if $4 billion is going for debt reduction--
and it is Minnesota math so I don't know how close I am--but if 
you apply that to all of the Federal budget, that reduction 
should equate to somewhere between $2 to $2.4 trillion in debt 
reduction. So I hope you consider that crop insurance, we have 
done our part. I hope we get consideration on that.
    And so, with that, I would like to thank you for the 
opportunity to testify. I am happy to answer any questions. Or 
later on, like I said, I am retired, so if staff needs me, I am 
available. Thank you.
    [The prepared statement of Mr. Deal follows:]

Prepared Statement of James D. Deal, Chairman of the Board, NAU Country 
                     Insurance Company, Andover, MN

Introduction
    Good morning, Mr. Chairman, and Members of the House Agriculture 
Subcommittee on General Farm Commodities and Risk Management. My name 
is James Deal and I am testifying as a retired government employee and 
former Manager of the Federal Crop Insurance Corporation (``FCIC''). In 
my later years I was CEO and owner of National Ag Underwriters and NAU 
Country Insurance Company but have since retired and I currently have 
no vested interest in any MPCI crop insurance company. I welcome this 
opportunity to address the Committee on crop insurance as you prepare 
your work on the next farm bill.
    I will submit my full statement for the record; however, I would 
like to highlight some of the high points.
    My major role throughout my career with the government was when 
President Carter appointed me as Manager of the Federal Crop Insurance 
Corporation. I had two conversations with President Carter when he was 
running for President and also working closely with the Secretary of 
Agriculture, Bob Bergland whom I have known most of my adult life. Bob 
Bergland was the Chairman of the House Committee of Conservation and 
Credit before he became Secretary of Agriculture. Both the President 
and the Secretary had very definite opinions on what they wanted. 
President Carter had said he did not like the free disaster programs 
and wanted a more meaningful insurance program that was a three way 
partnership between the farmer, the government and the private sector. 
In the process of developing legislation, I received two personal notes 
from the President regarding what he wanted for the farmers. After Bob 
Bergland became Secretary of Agriculture, I worked closely with 
Congressman Ed Jones of Tennessee, who took over as Chairman and 
continued the development of the legislation. As Mr. Bergland has often 
said in reference to the disaster programs ``they are too little, 
delivered too late and of no meaningful value.''
    It seems like old times testifying here. Back in the 1970's I spent 
a great deal of time testifying before the Committees on the 
revitalization of the crop insurance program. In fact, I spent lots of 
time with staff back in Chambers and various meeting rooms shaping and 
developing the new legislation to make crop insurance a major program 
for farmers to help stabilize their credit needs.

Historical
    From the historical side, developing an all risk insurance program 
by the private sector has been tried well over the past 100 years, all 
of which failed. The reason for this failure was the risk of drought. 
Usually drought is wide spread and devastating and the government 
decided in 1937 to develop an insurance program to cover the risk the 
private section had failed at. The history of Federal Crop Insurance 
Program dates back to 1938 and I started working for Federal Crop 
Insurance program in 1956 so I guess I am mainly a historian now days! 
The program has gone through many changes from the beginning through 
today and the basic risk of drought was the challenge for the 
government to develop an actuarially sound program. Some highlights of 
the development of the program are as follows:

        Few sectors of the economy are as susceptible to the influence 
        of nature as is agriculture. While science and technical 
        knowledge have enabled the farmer to avoid or eliminate some 
        dangers which menace harvest, the farmer remains powerless to 
        avert damaging or total loss from weather hazards, insects and 
        other forms of natural disaster.

        Crop insurance is the most important part for the American 
        farmers' safety net. Input costs have risen substantially and 
        farmers must borrow money to complete planting. Weather risks 
        are greater than ever and price volatility has made ag 
        production riskier than ever. Banks and lending partners 
        require farmers to have a way to repay loans if crops don't 
        come through. Both large and small producers need a reasonable 
        way to guarantee production and revenue to stay in business. 
        The health of rural America is dependent on the farmer and crop 
        insurance.

        Original legislation was introduced in 1937 and passed in 
        February 1938. The original legislation was for wheat insurance 
        only and coverage began with the 1939 wheat crop. The coverage 
        was a ``premium in kind'' which meant a farmer's premium was to 
        deliver a bushel of wheat to the Evernormal Granary and if he 
        had a loss on his crop he was permitted to pickup his guarantee 
        from the same granary. However, this plan was never implemented 
        but was administered by monetary exchange rate.

        In 1938 Congress formed the Federal Crop Insurance Corporation 
        (FCIC) with three objective in mind, (a) to protect the income 
        of farmers against crop failure or price collapse; (b) to 
        protect consumers against shortage of food supplies and extreme 
        of prices; and (c) to assist business and employment by 
        providing an even flow of farm supplies and establish stable 
        farm buying power.

        Crop insurance was suspended at the end of 1943 with no 
        insurance offered for the 1944 crop year because of actuarial 
        and loss adjustment control were not following sound insurance 
        principles.

        An amendment to the Federal Crop Insurance Act in December 1944 
        reinstated the insurance program effective for the spring 
        planted crops in 1945. The 1945 program provided for insurance 
        on cotton, flax, and wheat on a national basis and corn and 
        tobacco on an experimental basis not to exceed 20 counties.

        An amendment to the Federal Crop Insurance Act, August 1, 1947 
        effective for the 1948 crop year provided for reorganization on 
        a sound actuarial basis. The amendment limited insurance to not 
        more than seven crops (including wheat, cotton, flax, corn and 
        tobacco) 200 wheat counties, 56 cotton counties, 50 counties 
        each for corn and flax and 35 tobacco counties. The amendment 
        also continued the provision for the addition of not more than 
        three additional crops and 20 additional counties each year 
        thereafter.

        The Act was further amended on August 25, 1949 (63 Stat. 663) 
        to expand the program to additional counties following the 
        favorable experience in 1947 with premiums exceeding losses 
        paid by nearly $8,500,000 and again in 1948 with premiums 
        exceeding indemnities by over $5,900,000. This amendment 
        authorized a maximum expansion each year from 1950 through 1953 
        equal to half the number of counties in which the Corporation 
        was authorized to offer crop insurance in 1948 on each 
        commodity. In addition, the Multiple Crop Insurance plan under 
        which the investment in several crops is insured under one 
        policy could be expanded to 75 counties in 1950 and to 25 
        additional counties in each of the next 3 years.

        Effective beginning in 1954 the maximum number of new counties 
        was increased from 20 counties per year to 100 counties per 
        year in addition to the number of counties in which insurance 
        was offered the preceding year. On September 12, 1964, the Act 
        was amended to raise the limit from 100 to 150 counties that 
        could be added each year.

        The Act was further amended on August 3, 1956 (70 Stat. 1031) 
        to authorize the charging of the direct cost of loss 
        adjustments and a portion of the administrative expenses 
        against premium income. These costs are not taken into 
        consideration when premium rates are computed.

        On July 23, 1957, the Act was further amended (71 Stat. 309) to 
        authorize the corporation to provided reinsurance on any crop 
        or plantation insurance provided in Puerto Rico by a duly-
        authorized agency of the Commonwealth provided such reinsurance 
        is not available from a recognized private sources at a 
        reasonable cost.

        On August 4, 1959, the Act was further amended (73 Stat. 278) 
        to eliminate the minimum participation requirement. This 
        provision made it necessary to have the smaller of the 200 
        farms or 1-3 of the farms producing insured crop in a county 
        covered by insurance in order for the program to operate in a 
        county.

        On September 12, 1964, the Act was further amended (78 Stat. 
        931 or 934) to raise the yearly addition of new counties to the 
        program from 100 to 150.

        Federal Crop Insurance, the only widespread all-risk crop 
        investment protection available to farmers, is a voluntary 
        program offered on an individual basis on basic and specialty 
        crops (including wheat, corn, cotton, tobacco and citrus) in 39 
        states. Insuring crops against natural hazards over which 
        farmers have not control. Federal Crop Insurance is intended to 
        help maintain a stable rural economy by spreading the impact of 
        crop loss and damage over a period of many years.

        Indemnities paid to farmers are paid from premiums collected 
        each year from participating farmers. Some administrative costs 
        are paid by Congressional appropriation.

        In the 1971 crop year, 3,536 individual crop programs were 
        operated in 1,452(?) counties. Over $800 million of production 
        and nearly 400,000 individual crops were insured in 1971.

        The limited expansion to new crops and new counties on a sound 
        actuarial basis has brought Federal Crop Insurance to its 
        present status. For 1977 Federal Crop Insurance offered 
        insurance protection for 26 crops with 4,063 individual crop 
        programs operating in 1,526 counties. Federal Crop Insurance 
        has now assumed more than $2 billion ($2,101,673,535.00) 
        liability for crop production investments and has a premium 
        income in excess of $100 million ($102,206,227.00).

        In 1980, Congress passed legislation that was designed to 
        increase participation in the Federal Crop Insurance Program 
        and make it more affordable and accessible. This modern era of 
        crop insurance was marked by the introduction of a public-
        private partnership between the U.S. Government and private 
        insurance companies bringing the efficiencies of a private 
        sector delivery system together with the regulatory and 
        financial support of the Federal Government.

        The passage of the Federal Crop Insurance Act of 1980 marked 
        the birth of the present Federal Crop Insurance Program and the 
        start of the public-private partnership that has been the 
        foundation for its success. With the passage of this Act, 
        Congress for the first time embraced the goal of establishing a 
        program that could provide protection for all farmers in all 
        regions, with the intent that it replaces ad hoc disaster 
        payments. I was Manager of FCIC and was the major architect for 
        the Administration on this legislation.

        The Federal Crop Insurance Reform Act of 1994 dramatically 
        restructured the program. And in 1996, the Risk Management 
        Agency (RMA) was created in the U.S. Department of Agriculture 
        to administer the Federal Crop Insurance Program. Through 
        subsidies built into the new program guidelines, participation 
        increased dramatically. By 1998, more than 180 million acres of 
        farmland were insured under the program, representing a three-
        fold increase over 1988. In 2008, more than 272 million acres 
        are insured through the program protecting a record-setting $90 
        billion of crop value.

        Although the implementation of the 1994 Act represented a major 
        challenge, private industry rose to the occasion. The new 
        program offering catastrophic insurance coverage was 
        implemented successfully. In the year following passage of the 
        1994 Act participation, participation rates rose to 88 percent. 
        Since that time private industry has assumed exclusive 
        responsibility for the delivery of catastrophic insurance 
        coverage in fourteen states and is expected to assume similar 
        responsibility in other states soon. Although participation 
        rates have fallen somewhat since the repeal of the 1994 Act 
        provisions that made crop insurance a prerequisite for receipt 
        of agricultural program benefits, they have remained well above 
        the 50 percent goal set by Congress in 1980.

        The widespread availability and high participation rates that 
        have recently been achieved with the help of the private sector 
        have finally permitted Congress to attain its long-sought goal 
        of turning the crop insurance program into a replacement for ad 
        hoc agricultural disaster assistance.

        In the 1994 Act, Congress sought to eliminate ad hoc disaster 
        assistance, and enlisting the private sector to increase the 
        participation in the program was an integral part of its 
        strategy. Congress has so far not wavered in its resolve to 
        rely on the crop insurance program as its sole vehicle for 
        delivering assistance to farmers stricken by natural 
        calamities.

        In May of 2000, Congress approved another important piece of 
        legislation: the Agricultural Risk Protection Act (ARPA). The 
        provisions of ARPA made it easier for farmers to access 
        different types of insurance products including revenue 
        insurance and protection based on historical yields. ARPA also 
        increased premium subsidy levels to farmers to encourage 
        greater participation and included provisions designed to 
        reduce fraud, waste and abuse.

        In 2000, Congress enacted legislation that expanded the role of 
        the private sector allowing entities to participate in 
        conducting research and development of new insurance products 
        and features. With the expansion of the contracting and 
        partnering authority, RMA can enter into contracts or create 
        partnerships for research and development of new and innovative 
        insurance products. Private entities may also submit 
        unsolicited proposals for insurance products to the Board for 
        approval. If approved by the Board, these unsolicited insurance 
        products could receive reimbursement for research, development 
        and operating costs, in addition to any approved premium 
        subsidies and reinsurance.

        Even this brief examination of the history of the program's 
        expansion and evolution indicates clearly that both Congress 
        and the nation's farmers have a strong and continuing interest 
        in encouraging widespread participation in the Multiple Peril 
        Crop Insurance Program. Congress has clearly recognized the 
        critical role played by private insurance companies and has 
        taken steps, in all key pieces of legislation it has passed 
        since 1980, to ensure their continuing involvement.

        The crop insurance industry has changed significantly since its 
        early days. Policies, procedures, and techniques have been 
        modified over the years. The industry is constantly evaluating 
        its insurance products in an ongoing effort to make sure that 
        they are relevant and affordable for the farmer. As a result, 
        the American farmer has more and better options to manage risks 
        than at any time in history.

The Program
See Exhibit 1
    I would first like to compliment Bill Murphy, head of Risk 
Management Association (``RMA''), in his willingness to work with the 
private sector in getting a good Standard Reinsurance Agreement (SRA) 
out. Both sides will tell you that they are not 100% happy with the 
result. I can tell you most good deals will end with both parties 
feeling like they had to give something up. This certainly was the case 
with the most recent draft of the Standard Reinsurance Agreement 
(``SRA''). I believe the new SRA brings a better balance of the risk 
which in turn will bring better balance of distribution. I have 
analyzed the profit and loss numbers and I believe the SRA is on an 
even keel with other private sector programs.
    Underwriting Gains--With respect to underwriting gains, the 
companies will walk away with an overall reduction of about 15% of 
total underwriting gains. This money has traditionally been used to 
build surplus and to create that ``rainy day'' fund for the time when 
we have a loss year and need to provide the appropriate payments to our 
producers. Keep in mind that the reduction is much higher in the five 
Group 1 states (IA, IL, IN, MN and NE) which will see reductions nearly 
double the average while the other states will see reductions less than 
the average. Companies will need to tighten up operating costs and bear 
the burden of these reductions as RMA strongly fees this was necessary 
to address criticism with the program.
    I also support the principals applied to A&O. Even larger cuts were 
mandated to the Administrative and Operating subsidies (``A&O'' 
subsidy) paid by the government for policy acquisition, underwriting, 
claims and general operating costs of the program. This subsidy was 
established at the program's inception so the American farmer didn't 
have to shoulder the administrative costs of the program. The role of 
the agent educating and assisting our farmers in making risk management 
and purchasing decisions is a critical part of the program.
    Most of the data being used to criticize RMA and the companies 
regarding A&O and agent commissions were exacerbated by the unusually 
high commodity prices in 2008. By 2010 the prices and volatility 
factors used for premium calculations had returned to normal levels. 
This concept was supported industry-wide and RMA worked on a formula 
that essentially caps the dollar amount of A&O even if prices were to 
escalate. This assists them in their budgeting process and answers the 
critics who have argued that the volatility in A&O payments is a burden 
the government should not have to shoulder.
    Probably the most controversial of these changes relates to the 
government's hard and soft caps on total agent commissions. The most 
effected agents are those in the Group 1 states who RMA has been 
criticized heavily by the GAO and other oversight bodies in the last 5 
years. Many of these agents received substantially more than all of the 
A&O leaving the company with nothing left to provide underwriting and 
claims service to the farmer . . . a major intent of the subsidy. Many 
other Group 2 and 3 agents may actually see commissions rise as a 
result of the new SRA as they were used to receiving a 10-14% rate of 
commission. However, I believe this will give good discipline to the 
expenditure side and will add to the service of the American farmer. 
Some would question when I say that but I truly believe this will stop 
companies from trying to outbid each other on commissions. If the 
companies all start out with the same base line it will enhance the one 
element which is competition on service. Service is the name of the 
game with 89% of the farmers in the program. A company's major thrust 
would no longer be marketing but service to maintain their customer 
base. As to whether the A&O number is correct in relation to the 
services rendered, my understanding is that a study is or has been 
scheduled to be conducted. I do believe there is more service required 
on the part of the agents and the company with crop insurance over 
other lines of insurance. The study should result in determining the 
proper compensation.
    The Crop Insurance Contract--A crop insurance contract is a 
commitment between insured farmers and their insurance providers. 
Either party has the right to cancel or terminate the contract at the 
end of each crop year. Unless the contract is canceled, it is normally 
automatically renewed the next year.
    Under the contract, the insured farmer agrees to insure all the 
eligible acreage of a crop planted in a particular county. This choice 
is made county by county and crop by crop. All eligible acreage must be 
insured to reduce the potential for adverse selection against the 
insurance provider. Adverse selection generally exists whenever the 
insured person has better knowledge of the relative riskiness of a 
particular situation than the insurance provider does.
    The insurance provider agrees to indemnify (that is, to protect) 
the insured farmer against losses that occur during the crop year. In 
most cases, the insurance covers loss of yield exceeding a deductible 
amount. Losses must be due to unavoidable perils beyond the farmer's 
control.
    Over the last few years, products that combine yield and price 
coverage have been introduced. These products cover loss in value due 
to a change in market price during the insurance period, in addition to 
the perils covered by the standard loss of yield coverage.
    Crop insurance policies also typically indemnify the insured person 
for other adverse events, such as the inability to plant or excessive 
loss of quality due to adverse weather. The nature and scope of this 
``helper'' coverage vary depending on the crop. This is because of the 
differences in crops individual natures.
    Government and Private Sector Roles--FCIC's mission is to encourage 
the sale of crop insurance--through licensed private agents and 
brokers--to the maximum extent possible. FCIC also provides reinsurance 
(subsidy) to approved commercial insurers which insure agricultural 
commodities using FCIC-approved acceptable plans. The private insurance 
companies reinsured by FCIC have sold and serviced all Multiple Peril 
Crop Insurance authorized under the Federal Crop Insurance Act.
    Since there is both public and private sector involvement in the 
crop insurance program, these relationships result:
    A contract of insurance exists between insured farmers and their 
commercial insurance providers.
    Premium rates and insurance terms and conditions are established by 
FCIC for the products it develops, or established with FCIC approval 
for products developed by insurance providers.
    Reinsurance agreements (cooperative financial assistance 
arrangements) exist between FCIC and the commercial insurance 
providers.
    The Federal Crop Insurance Program is the Envy of the World--It has 
taken not only years, but decades to have the Federal Crop Insurance 
Program attain the current levels of participation and benefit for 
American farmers. And, while certainly there is room and opportunity to 
continue improving the program, today it stands second to none as a 
world-class agriculture risk protection and management tool. In fact, 
other countries such as France have begun to research the program and 
are even starting their own crop insurance program.
    A lot of people have contributed to the development and evolution 
of the modern crop insurance program, however, no effort has been 
greater than that made by Congress and Members of this Committee. I 
want to take this opportunity to thank you for your support of a 
quality risk protection and management program. Given the natural and 
global market elements they work and live with every day that are 
beyond their control, America's farmers, ranchers and growers deserve 
the certainty and predictability of the risk management program you 
have provided.
    Changing Demographics--Growing global populations, demographic 
changes, and economic growth will substantially increase the demand for 
agricultural products and create new markets for American products 
while increased agricultural efficiency in other countries will force 
U.S. agriculture to be more competitive.
    Changing Structure of Agriculture--The structure of the food and 
fiber system--from farm to market--changed dramatically in the last 
decades of the twentieth century. Continued change is likely. An 
increasing share of U.S. food and fiber is being produced on fewer, 
larger, and more specialized farms. Similar change can be seen across 
the food and agriculture sector. Firms are larger, and production 
methods are more specialized. Production and marketing are more 
vertically and horizontally integrated. Concentration--characterized by 
sharp declines in the number of buyers or sellers of a product--is 
greater. Consumer preferences, new technology, and global markets drive 
continuing change, affecting farmers, processors, marketers, and 
consumers. Developing commercially feasible renewable resources and 
manufacturing products creates new demand for agricultural products and 
helps reduce U.S. dependence on foreign sources of nonrenewable 
resources.
    Congressional Funding--The ability of RMA to respond to the needs 
of its beneficiaries, customers, and producers is determined largely by 
the level of funding provided by Congress. Due to the widespread 
concern about managing the Federal deficit, maintaining the long-term 
viability of the Social Security Trust Funds, and other mandatory 
programs, future discretionary budgets are expected to remain 
relatively tight.
    Global Climate Change--Growing concern about the impact of 
emissions of greenhouse gases on the Earth's surface and atmosphere has 
prompted policy discussions and international negotiations. Specific 
concerns have been raised about the effects of global climate change on 
agriculture and the effects of agriculture on global climate change.
    Globalization--The globalization of all aspects of the food and 
fiber system is having a major impact on American agriculture. From 
competitive markets around the world, to diseases without national 
boundaries, to population growth and evolving diets, we are seeing 
profound changes worldwide. These changes have led to a dramatically 
new trade environment, threats of exotic diseases and pests to domestic 
production, and international controversies over the use of 
biotechnology. To remain competitive, the food and agriculture sector 
needs to take these developments into consideration.

Needed Program Improvements
    CAT Coverage--(See Exhibit 2)--Many forms of CAT coverage offer 
large corporate producers millions of dollars of liability coverage for 
a flat fee of $300 per policy. ``Imputed'' premium is 100% subsidized 
by the taxpayer. The ``imputed'' premium should be charged and that 
would put every producer on the same level. In 2009, ``imputed'' 
premium was $308 million annually with significant portions covering 
nurseries and other large commercial interest. The liability totaled 
more than $7.9 billion.
    COMBO Policy--COMBO policies has simplified programs that combine 
different types of revenue and production plans into a ``COMBO'' policy 
for 2011 and is a long awaited move that will help simplify the program 
for producers and for the companies. We commend RMA for this. Keep in 
mind that companies had to bear the burdens of this substantial rewrite 
with less money under the program. Congress needs to encourage RMA to 
continue to move forward with simplification.
    Information--The government needs to continue working with the 
industry to develop a Comprehensive Information Management System 
(``CIMS''). This is a positive enhancement for producers reporting 
information to companies and improves loss adjustment integrity and 
accuracy.
    Seed Company Discounts--The government has allowed producers a 
premium discount if the producers use their seed. This is accomplished 
through 508(h) filings. Once this opened up, other seed companies are 
filing for similar discounts. The issues are as follows:

   The new programs place the burden of additional 
        verification, underwriting, mandated spot checks and loss 
        adjustment procedures on companies while actually paying them 
        less (discounted premiums mean less A&O). The software 
        programming alone is a major expenditure for these programs.

   The additional production capabilities of the hybrids will 
        naturally increase coverages by improving producers APH over 
        time. Once these take effect, the discount is no longer 
        appropriate yet there is no plan to ever end the discounts. 
        This will throw off policy ratings in the future. This is 
        flawed.

   These programs are hurting program integrity and increasing 
        complexity to the producers and this program should be 
        eliminated.

    Revenue Pricing--Price and volatility discovery periods for revenue 
plans are too short and have an artificial impact on policy pricing. 
For example, volatility factors are determined based on statistics from 
only 5 trading days at the end of price discovery period. With 
substantial volatility in the markets, this can lead to some odd 
results causing producers to get policies that are substantially under/
overpriced. The companies and taxpayers are hurt by this in the end. 
This base premium period should be extended to a longer period of time.
    APH--With the rapid technological changes in production 
agriculture, the government needs to change its method of calculation 
producers' APH. By reducing the APH reporting periods, the program will 
better capture production yield data increasing coverages and better 
rating premiums. This will greatly improve the program while reducing 
record keeping burdens on the producer.
    Administration Changes--This is probably one of the most important 
points I can make. Crop insurance has been through a very turbulent 
time. The 2008 Farm Bill and now the new SRA has caused a lot of 
uncertainty for companies, our agents and reinsurance partners. New 
operating standards and program initiatives keep adding to the costs of 
delivering the program yet reimbursements are continually in jeopardy 
or going down. We need stability in the requirements to operate under 
the program and stability in the financial terms of the agreement. 
Further change will place stress on these long term plans and chase 
capital away from the program. The American farmer cannot afford this.

Future
    I would like to conclude with a few general comments relating to 
the future of the crop insurance program:

    (1) Without an effective risk management program like the current 
        Federal Crop Insurance Program, many farmers would not be able 
        to withstand the weather-related risk of producing crops and 
        they would not be able to secure adequate financing, especially 
        in the tighter credit environment of today, to properly finance 
        the capital intensive production of crops that agriculture has 
        become today. These farmers would not be farming, When farmers 
        don't farm, the nation's economy not only loses farm jobs, it 
        also loses jobs in sectors directly related to the production 
        of crops, including a wide array of production input products 
        and services.

    (2) Since passing the Crop Insurance Act of 1980 and the major 
        amendments done since the passing of the Act, the success of 
        the Program is nothing short of amazing. The crop insurance 
        programs is now the foundation for Ag Credit and renders the 
        farmers a comeback after a bad crop year and continue his 
        farming operation in the future.

    (3) Last, I hope you take into consideration the reduction this 
        program has taken not only in the farm bill but also in the 
        latest SRA. The 2008 Farm Bill provided a $6.5 billion in 
        savings from crop insurance to fund nutrition and other 
        programs over a 10 year period. The 2011 SRA has taken another 
        $6 billion out of crop insurance with $2 million for 
        Conservation Programs and $4 million for debt reduction. These 
        changes cumulatively represent a $12.5 billion reduction to 
        crop insurance over a 10 year period. This represents a 40% 
        reduction in the amounts companies receive to administer and 
        take risk under the program. If this percentage of debt 
        reduction ($4 million) was applied to the Federal budget it 
        would result in $2.3-$2.4 trillion of debt reduction. I hope 
        you remember that we have done our part already; however, it 
        goes without saying--no program is perfect and we need to 
        continue to refine the program and hopefully are able to adapt 
        to the ever-changing agriculture.

    Thank you once again for this opportunity and I want you to know 
that I am available to you and staff if anyone has any questions either 
now or in the future.

References
    Burger, Greg. ``General Farm Commodities and Risk Management.'' 
Testimony to House of Representatives Agriculture Subcommittee. May 5, 
2005.
    Harms, Steven C. ``History of Crop Insurance in the United 
States.'' Online posting. www.rainhail.com/pdf-files/rainhailcom/usc/
history.pdf.
    ``Crop Insurance Keeps America Growing.'' Online posting. 
www.cropinsuranceinamerica.org/about-crop-insurance/history.php. 
    United States Department of Agriculture, Risk Management Agency. 
``History of the Crop Insurance Program.'' Online posting. 
www.rma.usda.gov/aboutrma/what/history.html. 

Exhibit 1

[GRAPHIC] [TIFF OMITTED] T1158.010


   There are 16 private sector insurance companies that 
        currently sell and service policies through the Federal Crop 
        Insurance Program. Altogether, these companies issued more than 
        1.1 million policies in 2008.

        [GRAPHIC] [TIFF OMITTED] T1158.011
        

   According to Dr. Bert Little, Tarleton State University, the 
        rate of fraud in the Federal Crop Insurance Program is 
        estimated to be less than \1/2\ of 1 percent. By insurance 
        industry standards, this is an extremely low rate of fraud.

   More than 80 percent of insurable farmland in the United 
        States is now protected through the Federal Crop Insurance 
        Program. In 1985, that number stood at less than 18 percent.

Exhibit 2

[GRAPHIC] [TIFF OMITTED] T1158.015

[GRAPHIC] [TIFF OMITTED] T1158.013

[GRAPHIC] [TIFF OMITTED] T1158.014

[GRAPHIC] [TIFF OMITTED] T1158.012

    The Chairman. Thank you. That was a walk through history, 
and we appreciate your testimony.
    We would like now to move on to Mr. Dalton, President, 
Midwest Insurance Associates, Agri-Land Insurance Agency, on 
behalf of the Independent Insurance Agents & Brokers of 
America.

        STATEMENT OF JOHN F. DALTON, PRESIDENT, MIDWEST
   INSURANCE ASSOCIATES LLC AND AGRI-LAND INSURANCE AGENCY, 
                COUNCIL BLUFFS, IA; ON BEHALF OF
           INDEPENDENT INSURANCE AGENTS & BROKERS OF
                            AMERICA

    Mr. Dalton. Good morning, Chairman Boswell, Ranking Member 
Moran, and the rest of the Subcommittee.
    My name is John Dalton, and I am pleased to be here today 
on behalf of the Independent Insurance Agents & Brokers of 
America. I am the President of Midwest Insurance Associates, 
LLC, and Agri-Land Insurance Agency located in Council Bluffs, 
Iowa, and I am a member of the Big ``I'' Crop Insurance Task 
Force.
    As you know, for the 2008 crop year, the Federal Crop 
Insurance Program provided coverage on more than 272 million 
acres across all 50 states. This is more than 80 percent of the 
insurable acreage, with liability protection totaling almost 
$90 billion.
    Crop insurance agents are proud to be part of the 
successful expansion of this invaluable program to farmers, and 
I would like to thank you for the opportunity to provide our 
association's perspective on the state of the crop insurance 
industry.
    I would like to begin today by expressing our concern as 
independent agents regarding components of the 2011 SRA. The 
Big ``I'' strongly opposes the new SRA's commission cap 
provisions. The current SRA represents the first time that RMA 
or any government agency has attempted to regulate crop 
insurance commissions rather than allow the marketplace to 
determine the appropriate commission rate. This also represents 
the first time that the Federal Government has intervened in 
the agent-company relationship.
    For more than 20 years, insurance agents have worked side 
by side with the crop insurance companies, and the Federal 
Government, to increase the use of crop insurance across 
America. Crop insurance is a proven risk management tool that 
protects farmers against unforeseen calamities, and protects 
the Federal Government from even more disaster aid than it 
already hands out.
    The Big ``I'' is deeply disappointed that the RMA has 
chosen to reward the success of insurance agents by thrusting 
itself into the agent-company relationship and instituting a 
cap on agent earnings. RMA has set out to determine agents' 
earning ability, earnings that agents use to raise their 
families, stimulate rural economies, and hire and pay workers 
in an agreement which the agents have no voice or legal ability 
to represent themselves.
    In a time of great economic strain where rural economies 
are struggling and our best and brightest are migrating to more 
urban centers looking for better job opportunities, this 
proposal seeks to protect the interest of big business and 
impose caps on the Main Street workers. It is difficult for 
agents to understand how an Administration that has built its 
platform on supporting small businesses and regenerating rural 
economies has chosen now to turn their backs on Main Street 
America.
    The proposed 80 percent commission cap does not save the 
government any money, not one red cent; and it only serves to 
further compromise the crop insurance program and its intended 
beneficiaries, farmers and ranchers. The $6 billion cut to the 
program, on top of the cuts already made to the 2008 Farm Bill, 
coupled with the controlling commission cap proposal, greatly 
undermine crop insurance agents.
    The proposed changes to the delivery cost system concern us 
because these changes have a disproportionate effect on the 
Corn Belt States. Our large agricultural economy employs 
thousands of workers and creates thousands of sustainable jobs. 
In Iowa alone, there are over 7,000 workers who are tied to the 
crop insurance program. As a result, jeopardizing the solid 
structure of the Federal Crop Insurance Program may have far-
reaching and unintended consequences for a state like Iowa, 
because its economy depends so heavily on agriculture.
    The RMA's stated reason for instituting this commission cap 
is to protect companies from themselves, and they specifically 
cite the 2002 failure of the American Growers Insurance Company 
as a justification for the agent commission cap. However, 
common sense would suggest that there may be additional factors 
associated with the failure of this company.
    It is widely known that American Growers was overly reliant 
on risky insurance products, specifically, the Crop Revenue 
Coverage Plus policy when they became insolvent. CRC PLUS, 
developed by American Growers, allowed farmers to buy up the 
spring price for their crops. In most cases, the farmer could 
buy more revenue coverage at the 75 percent level, and at a 
lesser premium, than buying an increased level of coverage at 
the lower spring price. For this reason, farmers in the Midwest 
lined up to buy corn and soybeans at the increased price, and 
farmers in the South bought up the CRC PLUS policies for cotton 
and rice.
    American Growers soon lost track of the added liability 
generated by the additional price option that had been 
purchased on the commodities. When all of the paperwork for all 
of the new policies was finally received by the company, it was 
too late to purchase reinsurance for the additional coverage, 
and American Growers had no choice but to accept the additional 
liability. The poor crop year, combined with the failure of the 
new CRC PLUS policy, caused the company to collapse. American 
Growers received no more or no less A&O than any other crop 
companies at that time, yet they were the only company to fail.
    Furthermore, even if RMA is truly concerned about the long-
term viability of the crop insurance companies, there are less 
intrusive methods. RMA could have easily raised capital reserve 
requirements and solvency standards to ensure that companies 
had enough reserves to handle bad insurance years. Instead of 
taking this logical step, the RMA chose a far more 
controversial and more damaging path. Quite simply, instead of 
protecting companies by forcing them to be responsible and 
ready to protect themselves, RMA chose to protect the crop 
insurance companies by directly harming the agents. This is why 
the Big ``I'' firmly believes that RMA has clearly chosen the 
interest of the insurance companies over that of small 
business.
    I would also like to voice the strong opposition of the Big 
``I'' to the ``covenant not to sue'' provision in the new SRA. 
This new provision, which is meant to apply both to insurance 
companies and to agents, would prohibit agents and companies 
from filing a lawsuit against the RMA over the A&O cuts to the 
program. Insurance agents are not parties to the SRA and should 
not be forced by such an agreement to waive their legal rights. 
The practical effect of this covenant not to sue is that agents 
cannot negotiate with RMA on the A&O cuts during the drafting 
of the SRA, and the agents are now going to be denied their 
legal right to challenge these cuts in court.
    RMA is essentially saying that agents are not allowed to 
have any voice whatsoever on an issue that directly affects 
their livelihood, and are unable to seek legal redress if 
unfairly harmed.
    Finally, we believe that the RMA may have overstepped its 
legal authority by instituting both the agent commission cap 
and the covenant not to sue. Insurance agents by law are not 
allowed to be parties to the SRA negotiations, and are, 
therefore, unable to formally negotiate these provisions even 
though they apply directly to insurance agents.
    Additionally, we have found no explicit authority which 
gives RMA the authority to regulate commissions.
    The Big ``I'' thanks the Committee for allowing us to 
present this testimony at today's hearing, and we would like to 
work with Congress on a legislative fix of the damaging 
provisions in this new agreement. Thank you.
    [The prepared statement of Mr. Dalton follows:]

   Prepared Statement of John F. Dalton, President, Midwest Insurance
 Associates LLC and Agri-Land Insurance Agency, Council Bluffs, IA; on 
      Behalf of Independent Insurance Agents & Brokers of America

    Good morning, Chairman Boswell, Ranking Member Moran, and Members 
of the Subcommittee. My name is John Dalton and I am pleased to be here 
today on behalf of the Independent Insurance Agents & Brokers of 
America (IIABA). Thank you for the opportunity to provide our 
association's perspective on the state of the crop insurance industry. 
I am the President of Midwest Insurance Associates LLC and the Agri-
Land Insurance Agency in Council Bluffs, Iowa and a member of the Big 
``I'' Crop Insurance Task Force.
    The Big ``I'' is the nation's oldest and largest national trade 
association of independent insurance agents and represents a network of 
more than 300,000 agents and agency employees nationwide. Independent 
agents offer all lines of insurance--property, casualty, life, health, 
employee benefit plans, retirement products, and crop insurance. Our 
agents serve the needs of their communities not only by offering 
important insurance products to their neighbors, but also by serving as 
key community leaders--we have agents who serve as volunteer 
firefighters, youth leaders, school board and city council members.
    The typical agency employs licensed support-staff, who help in 
servicing the products as well as the writing agent. They have 
considerable overhead--computers with high-speed Internet connections, 
office space leases, advertising costs, auto expenses, payroll, their 
own insurance (liability, workers' compensation, health) taxes, and 
other expenses that are drawn directly from the agent's commissions 
collected from selling insurance products.
    Today an agent does more work per crop policy than ever before. 
Agents do all the data entry, and they keep the yield records per 
unit--not per policy. The reality is that agents require an 
extraordinary amount of expertise in servicing this insurance product 
per acre. Crop insurance agents are proud to be partners in the 
successful expansion of this invaluable program for farmers, and we 
appreciate the opportunity to provide our perspective today on the 
important role independent agent's play in the sale and delivery of the 
Federal Crop Insurance Program (FCIP).

Standard Reinsurance Agreement
    I would like to begin by thanking you for your leadership during 
this difficult economic time, and I would like to take this opportunity 
to express our concerns, as independent agents, regarding components of 
the 2011 SRA renegotiation as outlined in the third draft released on 
June 30, 2010. According to the new SRA, there will be a hard cap of 
$1.35 billion (or 18%) for Administrative and Operating (A&O) 
reimbursements to crop insurance companies. Companies will be further 
forced to cap agent commissions at 80% of the total A&O, per state. A 
total of 100% of the A&O will be available to agents if the company 
chooses to offer profit sharing.
    The Big ``I'' strongly opposes the new SRA's commission cap 
provisions. The current SRA represents the first time that RMA, or any 
Federal agency, has attempted to regulate crop insurance commissions 
rather than allow the marketplace to determine the appropriate 
commission rate. This also represents the first time that the Federal 
Government has intervened in the agent-company relationship. For more 
than 20 years, insurance agents have worked side by side with crop 
insurance companies and the Federal Government to increase the use of 
crop insurance across America. Crop insurance is a proven risk 
management tool that protects farmers against unforeseen calamities--
and protects the Federal Government from even more disaster aid than it 
already hands out. Because of the work of insurance agents, the crop 
insurance program has grown from relative obscurity to the widely used 
and successful program we are discussing today.
    Statistics for the 2008 crop year, as reported by the Risk 
Management Agency (RMA), show how widely the program is accepted and 
utilized by farmers and how effectively and efficiently it serves their 
risk management and cash flow needs. For the 2008 crop year, the 
program provided coverage on more than 272 million acres across all 50 
states, which is more than 80% of the insurable acreage, with liability 
protection totaling almost $90 billion. The Big ``I'' is deeply 
disappointed that the RMA has chosen to reward the success of insurance 
agents by thrusting itself into the agent-company relationship and 
instituting an unreasonable cap on agents' earnings.
    RMA has set out to determine agents' earning ability--earnings that 
agents use to raise their families, stimulate rural economies, and hire 
and pay workers--in an agreement in which the agents have no voice or 
legal ability to represent themselves. In a time of great economic 
strain, where rural economies are struggling and our best and brightest 
are migrating to more urban centers looking for better job 
opportunities, this proposal seeks to protect the interests of big 
businesses and impose caps on main street workers. It is difficult for 
agents to understand how an Administration, that has repeatedly 
professed support to small businesses and the regeneration rural 
economies, has chosen to now turn their backs on main street America.
    The proposed 80% commission cap does not save the government any 
money and only serves to further compromise the crop insurance program 
and its intended beneficiaries--farmers and ranchers. The $6 billion 
cut to the program--on top of the cuts already made to the 2008 Farm 
Bill--coupled with the controlling commission cap proposal greatly 
undermine crop insurance agents. These agents are the very people who 
have worked so hard to build the success of this program, revitalize 
rural communities, and build strong foundations for new and existing 
farmers.
    In addition, we all know that commodity prices are cyclical, and 
commodities have a long and uninterrupted history of moving both up and 
down. The A&O subsidy for 2010 in Iowa will be significantly down 
compared to 2009 because of lower commodity prices and lower commodity 
volatilities. The proposed changes to the delivery cost system concern 
us because these changes have a disproportionate effect on the Corn 
Belt states. Our large agriculture economy employs thousands of workers 
and creates thousands of sustainable jobs. The number of agents and 
companies writing in the Midwest make this program highly competitive.
    According to the National Crop Insurance Services (NCIS), ``agent 
commissions were cut more substantially in the Corn Belt areas, 
specifically the Midwest, than in other areas.'' Furthermore, NCIS 
noted that ``they are rebalancing the program by making is less 
profitable in the Corn Belt, and more profitable in other areas.'' As a 
result, jeopardizing the solid structure of the FCIP may have far 
reaching and unintended consequences for a state like Iowa because its 
economy depends so heavily on agriculture. This rebalancing will most 
likely have little effect on economies that do not rely as heavily on 
the crop insurance business. Agents have acted in a responsible and 
prudent manner by working to enhance and deliver the crop program to 
farmers and ranchers all across the country, especially in places where 
demand is the highest.
    The RMA's stated reason for instituting this commission cap is to 
protect companies from themselves, and they specifically cite the 2002 
failure of the American Growers Insurance Company (American Growers) as 
a justification for the agent commission cap. However, common sense 
would suggest that there may be additional factors associated with the 
failure of this company. It is widely known that American Growers was 
overly reliant on risky insurance products, specifically the Crop 
Revenue Coverage Plus policy (CRC PLUS) when they became insolvent. CRC 
PLUS, developed by American Growers, allowed farmers to ``buy up'' the 
spring price for their crops. In most cases, the farmer could buy more 
revenue coverage at the 75% level and at a lesser premium than buying 
an increased level of coverage at the lower spring price. For this 
reason, farmers in the Midwest lined up to buy corn and soybeans at the 
increased price, and farmers in the South bought up CRC PLUS policies 
for cotton and rice. American Growers soon lost track of the added 
liability generated by the additional price option that had been 
purchased on the commodities. When all of the paperwork for all of the 
new polices was finally received by the company, it was too late to 
purchase reinsurance for the additional coverage and American Growers 
had no choice but to accept the additional liability. The poor crop 
year, combined with the failure of the new CRC PLUS policy program 
caused the company to collapse. American Growers received no more or no 
less A&O than the other crop companies at this time, yet they were the 
only company to fail.
     Furthermore, even if the RMA truly is concerned about the long 
term viability of crop insurance companies, there are other less 
intrusive methods that RMA could have taken short of these 
unprecedented commission caps that are very damaging to small 
businesses in an extremely difficult economy. For example, the RMA 
could have easily raised capital reserve requirements and solvency 
standards to ensure that companies had enough available reserves to 
handle bad insurance years. Instead of taking this logical step, the 
RMA instead chose a far more controversial and more damaging path. 
Quite simply, instead of protecting companies by forcing them to be 
responsible and ready to protect themselves, RMA chose to protect 
insurance companies by directly harming agents. This is why the Big 
``I'' firmly believes that RMA has clearly chosen the interests of 
large insurance companies over those of small business owners.
    I would also like to voice the Big ``I's'' strong objection to the 
``covenant not to sue'' provision in the new SRA. This new provision, 
which is meant to apply to both insurance companies and agents, would 
prohibit agents and companies from filing a lawsuit against the RMA 
over the A&O cuts to the program. Insurance agents are not parties to 
the SRA and should not be forced by such an agreement to waive their 
legal rights. The practical effect of this covenant not to sue is that 
agents cannot negotiate with RMA on the A&O cuts during the drafting of 
the SRA, and agents are now going to be denied their legal right to 
challenge these cuts in court. RMA is essentially saying that agents 
are not allowed to have any voice whatsoever on an issue that directly 
affects their livelihood, and are unable to seek legal redress if 
unfairly harmed.
    Finally, we believe that the RMA may have overstepped its legal 
authority by instituting both the agent commission cap and the 
``covenant not to sue.'' Insurance agents, by law, are not allowed to 
be parties to the SRA negotiations and are therefore unable to formally 
negotiate these provisions, even though they apply directly to 
insurance agents. Additionally, we have found no explicit authority 
which gives RMA the ability to regulate commissions. The Big ``I'' is 
strongly opposed to the RMA's overreaching and will pursue any and all 
avenues to fighting these provisions.

Agent Workload and Program Complexity
    Unlike other lines of insurance sales, a crop agent's 
responsibilities require a much more hands-on approach, which 
invariably increases the threshold for errors and omissions (E&O) 
exposure (Professional Liability). On average, with advance meeting 
preparation, travel, and meeting time, an agent spends approximately 7 
hours on a policy during the sales window alone. A transaction 
typically begins with the agent quoting the wide variety of different 
plans of insurance available, then explaining production reporting and 
supporting record requirements to the farmer. The agent explains 
different date requirements by crop and coverage for application, the 
actual production history (APH), the acreage report, and the farmer's 
options and claims. He completes APH-related forms for the farmer, 
calculates preliminary yields, reviews production early to determine if 
there is a revenue loss, reviews the APH form for completeness and 
accuracy, and forwards the signed form and any applicable worksheets to 
the company. The agent must also review approved APH from the company 
to ensure accuracy, explain approved APH yields to the farmer, and 
provide him with a copy.
    Additionally, the agent is responsible for implementing procedures 
for Preventive Planting, Yield Adjustment, Unit Division changes, Power 
of Attorney requirements, or any of the other technical policy 
provisions. All of preceding goes into writing the policy--and does not 
even factor in the consequences of a potential loss, which occurs more 
often than any other line of insurance. Compared to the sale of life, 
farmowners, homeowner's, or auto insurance, the sale of crop insurance 
is indeed extremely complex and challenging.

Crop Insurance_an Indispensable Financing Tool
    The 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 and more 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 would be unable to obtain 
financing without crop insurance.
    Farmers understand more and more that crop insurance is another 
cost of doing business. However, the purchasing cost of crop insurance 
provides certain benefits for the farming operation, including greater 
ability to finance land purchases, enter into land rental contracts, 
and arrange production input purchases. Protection provided by the 
program gives a lender much more confidence in extending credit.

Conclusion
    The Big ``I'' thanks the Committee for allowing us to present this 
written testimony at today's hearing, and we would be happy to work 
with this Committee at any time to further explain the vital role that 
crop insurance agents play in the FCIP. The Big ``I'' strongly opposes 
the new SRA and would like to work with Congress on a legislative fix 
to the damaging provisions in this new agreement.

    The Chairman. Thank you, Mr. Dalton.
    I would now like to recognize Ms. Kathy Fowler, President, 
National Association of Crop Insurance Agents, Memphis, Texas.

 STATEMENT OF KATHY FOWLER, PRESIDENT, NATIONAL ASSOCIATION OF 
               CROP INSURANCE AGENTS, MEMPHIS, TX

    Ms. Fowler. Good morning, Chairman Boswell, Ranking Member 
Moran, and Members of the Committee.
    As previously mentioned, I am Kathy Fowler from Memphis, 
Texas, and I am President of the National Association of Crop 
Insurance Agents, NACIA. I thank you for this opportunity to 
testify before this Committee.
    As you may know, while crop insurance agents are an 
integral part of this crop insurance program, we are not one of 
the parties privy to the standard reinsurance agreement 
negotiations. So, we truly appreciate this opportunity to 
contribute to the discussions surrounding the crop insurance 
program.
    As we take a look at the impact of the new SRA, it is yet 
to be seen what will come out of this agreement. That will be 
decided with agents and companies on the ground. As small 
business owners, we have to determine how to move forward on 
continuing to provide products to our farmers, and continuing 
our support of rural America. As agents, we have a unique 
position of interacting with farmers on a daily basis. We get 
to know their families, their farming operations, and their 
risk-management needs.
    What we have found is that crop insurance is the preferred 
safety net. It is not only understood by farmers, but it is the 
most dependable form of risk management available. Of all of 
the programs, crop insurance is the only program that has 
proven itself. With crop insurance, a farmer knows exactly what 
will happen when misfortune hits. And, more than that, a farmer 
knows his crop insurance agent is going to be there to answer 
any questions. Agents provide extended business hours, schedule 
meetings at night and weekends to accommodate the farmers when 
a natural disaster strikes. Farmers prefer crop insurance to 
other safety net programs, and have developed a real trust for 
this program. With other programs, assistance is too uncertain 
for farmers and lenders to waste time and money.
    We do believe there are a good number of pilot and 
expansion programs that provide risk management. We would like 
to thank RMA for using the savings from the SRA for the needed 
expansion of the Pasture, Rangeland, and Forage Rainfall Index 
Program, especially in Texas. This program was approved 2 years 
ago, but funding was not provided until now. We are eager for 
good pilot programs to work, but if they are not funded, 
farmers are unable to benefit.
    We would like to point out that the vegetative part of this 
program, PRF, has no traction. Producers do not fully 
understand or trust the vegetative program. Participation lags 
well behind the rainfall program.
    Because crop insurance works, it is critical to maintain 
and support this program. The 2008 Farm Bill shifted the 
premium billing date of October 1 to August 15, with a payment 
due date of September 15. This is the most difficult financial 
time for producers. If premium payments are due on September 
15, starting in crop year 2012, farmers with spring crops will 
struggle to make timely payment. Those who have to delay 
payment will face a 15 percent simple interest penalty payment 
at the time with the least amount of cash flow. We urge this 
Committee to postpone this date change to prevent putting 
unnecessary pressure on producers.
    While we understand that the SRA has been signed and agreed 
to, certain provisions bring concern to agents. We question the 
legality of the SRA provisions, such as imposing a limit on the 
ability of agents to negotiate the amount of their compensation 
with crop insurance companies even though we are not a party to 
the SRA negotiations.
    It is our role to live and work with the agreement made by 
the companies and the government. We may find that the new 
agreement works smoothly and it is business as usual; or we may 
find that we need to make adjustments, cuts, and diversify our 
business. While we understand that the $6 billion cut will 
affect the 2012 Farm Bill baseline and could affect program 
funding, we would like to recommend to this Committee that any 
additional cuts in the 2012 Farm Bill will jeopardize the 
service delivered to producers that they have come to rely on.
    Producers do not solely rely on our knowledge of the 
program and their farming operation, but on the fact that we 
are a conduit between the insurance companies and the insurance 
recipients, the farmers. Unlike typical casualty insurance, we 
have a lot more customer interaction. It doesn't stop with the 
purchase of the product or filing the claim. We may interact 
with a producer anywhere from 15 to 20 times per farming 
operation, and this job is something that cannot be 
accomplished from Washington or regional offices or online. An 
agent's job requires personal relationships, knowledge, 
expertise of not only the crop insurance program and lending 
procedures, but actual knowledge of the growing crop. We truly 
set the liability structure for their policy that allows them 
the collateral for their livelihood.
    As Congressman Walz mentioned earlier, the added land 
provisions I do agree need some updating. As we move forward, 
we need to ensure any decision or changes improve our present 
crop insurance program and serve our farmers' risk management 
needs, as opposed to simply making cuts because funding is 
needed for new initiatives or will benefit other non-related 
programs.
    I thank you again for this opportunity to testify, and I 
will be glad to answer any of your questions.
    [The prepared statement of Ms. Fowler follows:]

Prepared Statement of Kathy Fowler, President, National Association of 
                   Crop Insurance Agents, Memphis, TX

    Good morning, Chairman Boswell, Ranking Member Moran, and Members 
of the Committee. As previously mentioned, my name is Kathy Fowler, and 
I am president of the National Association of Crop Insurance Agents 
(NACIA). I thank you for the opportunity to testify before this 
Committee. As you may know, while crop insurance agents are an integral 
part of the crop insurance program, we are not one of the parties privy 
to the Standard Reinsurance Agreement (SRA) negotiations. We appreciate 
the opportunity to contribute to the discussion surrounding the crop 
insurance program. For my part, I would like to explain the 
productivity of the program under new or upcoming regulations and 
legislation from the agent's view.
    We are here today to discuss the potential impact of a decision 
made between companies and the government during the last SRA 
negotiations. It has yet to be seen what will come out of this 
agreement, as that will be decided with the agents and the companies on 
the ground. As small business owners, we have to determine how to move 
forward while continuing to provide products to our farmers and 
continuing our support of rural America.
    As agents, we have the unique position of interacting with farmers 
on a daily basis. We get to know their families, their farming 
operations, and their risk management needs. What we have found is that 
crop insurance is their preferred safety net. It is not only understood 
by farmers, but it is the most dependable form of risk management 
available. Of all the programs, crop insurance is the only program that 
has proven itself. Since 1938, farmers have relied on crop insurance to 
provide the best policy to fit each distinctive farming operation.
    With crop insurance a farmer knows exactly what will happen when 
misfortune hits, and more than that, a farmer knows his agent will be 
there to answer any questions. Agents provide extended business hours, 
nights, and weekends to accommodate the farmers when a natural disaster 
strikes. Farmers prefer crop insurance to other safety net programs and 
have developed a trust for those programs. With other programs, 
assistance is too uncertain for farmers or lenders to waste their time 
and money.
    We do believe there are a number of good pilot and expansion 
programs that provide risk mitigation. And we would like to thank the 
RMA for using some of the savings from the SRA for the needed expansion 
of the Pasture, Rangeland, and Forage Rainfall Index Program (PRF-RI), 
especially in Texas. This program was approved 2 years ago, but funding 
has not been provided until now. We are eager for good pilot programs 
to work, but if they are not funded, farmers are unable to benefit. We 
would also like to point out that the vegetative part of the Pasture, 
Rangeland, and Forage policy has no traction. Producers do not fully 
understand or trust the vegetative program, and participation lags well 
behind the rainfall program.
    Because the crop insurance program works, it is crucial to maintain 
and support the program. However, various provisions in the 2008 Farm 
Bill and the SRA have or will significantly impact the crop insurance 
industry. The 2008 Farm Bill shifted the premium billing date to August 
15, with a payment due date of September 15, the most difficult 
financial time for producers. If premium payments are due on September 
15 starting in 2012, farmers with spring crops will struggle to make 
timely payment. Those who have to delay payment, will face a 15 percent 
simple interest penalty payment at a time when the least amount of cash 
flow is available. We urge the Committee to postpone this date change 
to prevent putting unnecessary pressure on producers.
    While we understand that the SRA has been signed and agreed to, 
there are certain provisions that bring concern to agents. We question 
the legality of the SRA provisions, such as imposing a limit on the 
ability of agents to negotiate the amount of their compensation with 
crop insurance companies even though we are not parties to the SRA and 
had no direct role in its negotiation. These provisions have the 
potential to reduce the productivity of rural communities, from the 
agents to the farmers.
    It is our role to live and work with the agreement made by the 
companies and the government. We may find that the new agreement works 
smoothly, and business can continue as usual; or we may find that we 
have to make adjustments, such as diversifying our business. While we 
understand that a $6 billion cut will affect the 2012 Farm Bill 
baseline, and subsequently affect program funding, we would like to 
remind this Committee that any additional cuts in the 2012 Farm Bill 
will jeopardize crop insurance services producers have come to rely on. 
This could also affect thousands of small businesses in rural America 
and would be devastating.
    Producers do not rely solely on our knowledge of the program or our 
knowledge of their farming operation, but on the unique position we 
hold as a conduit between insurance companies and the insurance 
recipients--the farmers. By combining our knowledge of the insurance 
industry and our understanding of the distinctive attributes and needs 
of each farming operation, we are exclusively positioned to provide 
producers with the crop insurance that best fits each operation. Unlike 
typical casualty insurance, our interaction with the customer does not 
stop with the purchase of the product or the filing of a claim. We may 
interact with the farmer 15-25 times for every farming operation. This 
job is not something that can be accomplished directly from Washington, 
regional government offices, or online. An agent's job requires 
personal relationships, personal knowledge, and personal expertise of 
not only crop insurance and lending procedures, but also knowledge of 
the growing crops. We set the liability structure for their policy that 
allows them collateral to maintain their livelihoods.
    As members of farming communities, we are intricately linked with 
the economical development of rural America. Many crop insurance agent 
companies are small businesses with ten or fewer employees. During an 
era where rural communities are shrinking and urban cities are growing, 
increasing jobs in small towns is crucial to keeping the heart of rural 
America pumping. The values embedded in small towns are a significant 
part of the American lifestyle. Maintaining and even increasing crop 
insurance agent jobs will contribute to the development of rural 
communities by reinvesting money and manpower in local businesses, 
school systems, and local governments. My agency is just one example of 
the entrepreneurial and hard-working spirit that pulses through rural 
communities. Crop insurance agents not only provide a direct service to 
producers, but provide services to the community at large.
    According to RMA, in 2009, the crop insurance program distributed 
approximately 1.17 million policies, covering nearly 264 million acres 
with $79.2 billion in protection. Many levels of crop insurance reach 
70 to 85 percent of potential crop value and 80 percent of major 
program crop acreage are insured. This program has proven to be the 
fundamental safety net for farmers year in and year out. It is relied 
upon by producers to ensure them access to credit that allows them cash 
flow to fund their businesses.
    Going forward, we need to ensure that any decisions or changes 
improve our present crop insurance program and serve our farmers' risk 
management needs, as opposed to simply making changes because funding 
is needed for new initiatives or to benefit other non-related entities.
    In conclusion, I would like say how proud we are to be a supportive 
part of America's agricultural safety net for farmers who provide low-
cost food and fiber to our nation's consumers. We look forward to 
continuing our support of farmers, with the help of Congress, the RMA, 
and crop insurance agencies.
    Thank you again for the opportunity to testify, and we appreciate 
your continued support of this program. I would be happy to answer any 
questions you may have.

    The Chairman. Thank you.
    I call to Members' attention that Mr. Costa, the gentleman 
from California, has joined us. He is not a Member of the 
Subcommittee, but he is a Member of the full Committee. I have 
conferred with my Ranking Member, and we would like to welcome 
you to join us and, in fact, invite you to introduce our next 
witness.
    Mr. Costa. Thank you very much, Mr. Chairman, Ranking 
Member Moran, and the Members of the Committee, for the good 
work that you do on these very important issues.
    I am very pleased and honored to have a constituent, Mr. 
Jordan Roach, who is our last witness to testify on the second 
panel. I urge Members to pay close attention, as you have with 
the other witnesses, to his testimony, the Tale of Two Cities, 
as he refers to it. It reminds us once again that American 
agriculture is diverse throughout our nation, and one size does 
not fit all, and crop insurance, as it is applied to the 
different regions of America, have very important aspects when 
farmers, ranchers, and dairymen are balancing risk assessment 
versus the risk management, and the limited tools they have 
available to them to balance that risk assessment with that 
risk management.
    Mr. Roach, we welcome you here, as all the witnesses, for 
the good work you are doing on behalf of American agriculture.
    The Chairman. Thank you, Mr. Costa.
    With that, Mr. Roach, you may begin.

  STATEMENT OF JORDAN A. ROACH, VICE CHAIRMAN, CROP INSURANCE 
           PROFESSIONALS ASSOCIATION LLC, FRESNO, CA

    Mr. Roach. Thank you very much.
    Mr. Chairman, Congressman Moran, and Members of the 
Subcommittee, thank you for this opportunity. My name is Jordan 
Roach. I am from Fresno, California, and I am Vice President of 
Mary Roach Insurance Agency, which has provided farmers with 
professional and trustworthy crop insurance for 18 years.
    Like many of the producers that we serve, our company is a 
family business. My mom started it, and I grew up around it in 
the vineyards and orchards of the farmers that we serve. And I 
must add that I hope one day my newborn daughter, Madeleine, 
will have the chance to follow in her grandmother's footsteps.
    I am honored to appear before you as Vice Chairman of the 
Crop Insurance Professionals Association, or CIPA, an 
organization that is comprised of veteran agents dedicated to 
making crop insurance the best it can be for all farmers. For 
CIPA agents, crop insurance is not just a business, it is a way 
to serve farmers and ranchers who are also our friends and 
neighbors, and whose success is important to our communities.
    Before going into substance, I would ask for three letters 
from CIPA to the USDA concerning the SRA might be included in 
the record.
    The Chairman. Without objection, so ordered.
    [The documents referred to are located on p. 78.]
    Mr. Roach. The letters articulate our best hopes and 
deepest concerns over the SRA, and I believe they will have 
lasting relevance as you enter the farm bill debate.
    The theme of the letters, of my testimony, and of CIPA as 
an organization is this: Crop insurance is a model for public-
private partnership that has accomplished much. It can 
accomplish more; and, given the challenges facing U.S. 
producers and fiscal constraints facing the government, it 
should be built upon.
    In my written testimony, I do use the Tale of Two Cities 
metaphor to describe the state of crop insurance. These times 
are at once very exciting and troubling.
    First the good news: Crop insurance is better and more 
vital to producers today than ever before. Crop insurance 
provides farmers with relevant and bankable protection, a 
contrast to ACRE and SURE, and especially critical to beginning 
farmers. Crop insurance is a safety net available to almost all 
producers where alternatives leave out specialty crop 
producers.
    Farmers also appreciate the business-oriented contractual 
nature of insurance, paying for the coverage that they need, 
knowing it will be there timely and in full if disaster 
strikes, and that their privacy will be protected.
    Finally, a private, competitive, and accountable agent 
force, along with the companies, have continually worked to 
improve products and services to producers. We would not have 
the successful program we have without private delivery.
    For these reasons and other considerations relevant to 
lawmakers, including cost effectiveness, public acceptance, and 
WTO legality, one would hope that Washington would be 
celebrating the achievements of crop insurance.
    But now the bad news. The SRA confirms that no good deed 
goes unpunished. USDA's PR spin machine worked overtime to 
justify deep cuts to private-sector delivery, rather than 
finding ways to better the program for the farmers it serves. 
CIPA's position on the SRA was simple: Rather than taking money 
from the industry and from the important baseline for 
agriculture, savings should be reinvested to address producer 
needs. If the goal of the Administration was to reduce overhead 
and delivery, this goal could be achieved by simply lowering 
the premium rates for all producers and, thus, A&O and premium 
for the government.
    CIPA also encouraged the USDA to improve the APH to better 
reflect what farmers expect to produce, and to improve and 
expand policy options for underserved regions, crops, and 
practices. Sadly, with the exception of the PRF expansion, this 
did not happen. The SRA was therefore a missed opportunity to 
help farmers and was a blow to the agriculture budget, but it 
also means real pain and uncertainty for the industry.
    Agents are impacted by the cuts to A&O, which at 15 to 20 
percent on top of the 12 percent sustained in 2008, are severe. 
This cut is especially noxious because it contradicts a 
certainty that was written into the last farm bill, and comes 
at the same time that the COMBO policy and other new 
regulations and requirements are being foisted upon the 
industry. Total A&O will now be capped at roughly $1.3 billion, 
15 percent less than the 2010 estimate and 25 percent below the 
3 year average, even while the workload is increasing. This 
will cause a real problem.
    But the commission caps in the SRA are the coup de grace, 
an unprecedented intrusion by the government into private 
contracts between companies and agents. The caps are 
unnecessary to ensuring the financial health of companies, and 
save absolutely no taxpayer dollars. But we fear that they will 
undermine competition, service to underserved producers, and 
rural jobs. Hardest hit will be agents in states like Iowa and 
California. In the ``I'' States, where the market has pushed 
standard commission rates higher, the cut could be anywhere 
from 30 to 50 percent for 2011.
    In my State of California, where CAT coverage is the only 
economical option for many producers, commissions will be 
reduced to 4.8 percent. Combined with rate reductions which are 
on the horizon in the next couple of years, we expect a 50 
percent reduction in commissions for CAT. This cap will impose 
serious hardships on the delivery of CAT, particularly to 
smaller farmers who are more likely to use it.
    So where do we go from here? Fortunately, our industry is 
dynamic. While there will be economic and job ramifications, 
when we get through it, we will continue to provide a quality 
service to growers. As we head into the farm bill, I would ask 
you to consider what has and has not worked for the American 
farmer. We believe that crop insurance must be protected. No 
other program can deliver the same tailored risk management 
protection to all growers for such a low cost to the taxpayer.
    We would also ask that the Subcommittee consider ways to 
spur USDA to use its existing authorities to expand quality 
coverage to all areas, and improve the existing policies, so 
that all producers have access to 85 percent revenue coverage. 
This goal was set by Chairman Lincoln at the Senate Agriculture 
Committee's first farm bill hearing, and we think that it 
represents wise and forward thinking, and it would certainly 
hedge the political and budgetary risks that are certain to 
come in the next farm bill.
    Thank you once again for the opportunity to testify.
    [The prepared statement of Mr. Roach follows:]

 Prepared Statement of Jordan A. Roach, Vice Chairman, Crop Insurance 
               Professionals Association LLC, Fresno, CA

    Mr. Chairman, Congressman Moran, Members of the Subcommittee, thank 
you for providing me with this opportunity to testify before the 
Subcommittee.
    My name is Jordan Roach. I am a crop insurance agent from Fresno, 
California and I serve as Vice Chairman of the Crop Insurance 
Professionals Association, or CIPA.
    CIPA is an agent organization comprised of veteran agents from 
across the country, from South Carolina to California, from Texas to 
Minnesota.
    For CIPA agents, selling and servicing crop insurance is not just a 
business. It is a way to serve farmers and ranchers who also happen to 
be our friends and our neighbors and whose success is important to our 
whole community.
    The purpose of this hearing is to review the state of the crop 
insurance industry. Mr. Chairman, this review is a ``Tale of Two 
Cities.''
    In the first place, on the ground, Federal crop insurance is better 
and more vital today than ever before.
    Everybody from lawmakers in Washington to local lenders are 
increasingly emphasizing that as budgets for farm bills get slimmer and 
slimmer, farmers and ranchers must increasingly manage their own price 
and production risks through tools such as crop insurance.
    Producers who have traditionally benefited directly under farm 
bills will today point to (1) the near irrelevance of the Marketing 
Assistance Loan and Loan Deficiency Payments and Countercyclical 
Payments; (2) the great uncertainty of the new SURE program; and (3) 
the inability to take ACRE to the bank in order to obtain operating 
loans; and these producers conclude, more often than not, that the only 
safety net that they really have that is tailored to the risks unique 
to their individual operations is Federal crop insurance. And, in the 
case of most of my growers in California--who do not receive any direct 
benefit under the farm bill--this is absolutely the case.
    Giving further witness to the centrality of Federal crop insurance 
to the American farmer and rancher is the $80 billion in liability 
covered just last year, which is up from $47 billion 5 years earlier 
and just $31 billion 10 years ago. All told, producers received about 
$9 billion in indemnities in 2008 and another $5.2 billion in 2009. 
And, in stark contrast to ad hoc disaster assistance and SURE, crop 
insurance indemnities were paid to farmers and ranchers in the same 
timely manner in which one might reasonably expect to receive an 
indemnity on their car or home or other property and casualty line of 
insurance.
    There are also other signs pointing to the emergence of Federal 
crop insurance as a core component of the farm safety net. As the 
Federal Government grapples with how to address budget deficits and 
debt, some taxpayers may not understand the importance of a farm bill 
but they do appreciate the need for insurance.
    As the Doha Round continues to falter and we see increased 
potential for trade litigation, Federal crop insurance provides an 
unassailable source of protection.
    As forces unfamiliar with the realities of farming and ranching 
today attempt to ratchet down allowable levels of support to producers 
and attempt to publicly embarrass producers for any support they do 
receive, Federal crop insurance works to address the real risk 
management needs of the farm while protecting producer privacy.
    And, as farmers and ranchers seek some sense of certainty as they 
make long-term plans and investments, Federal crop insurance, which is 
enshrined in permanent law, offers at least some safe harbor from the 
rocky financial waters all around.
    For these reasons and a host of others, one would think that 
Washington would be working to build upon the incredible success of 
Federal crop insurance since passage of the Agricultural Risk 
Protection Act of 2000. After all, as the Chairman of the Senate 
Agriculture, Nutrition, and Forestry Committee noted in that 
Committee's first farm bill hearing, there is existing authority under 
the Federal Crop Insurance Act to aggressively meet the risk management 
needs of all producers from all regions and of all crops. All that is 
required is a will to use that authority to help all producers obtain 
85% revenue protection. We wholeheartedly agree with Chairman Lincoln: 
this is the right thing to do.
    Unfortunately, in recent years, Washington has not only failed to 
move quickly down the road of expanding the quality and affordability 
of crop insurance coverage to the American farmer and rancher, but it 
seems to have actually hit the brakes and thrown us in reverse. While 
producers on the ground are clamoring for risk protection that is 
tailor-made to their operations, some in Washington appear headed in an 
opposite direction. This is the second part of the Tale.
    Recent Presidential budget submissions; the slow pace of new policy 
development and approval; failure to address some systemic program 
issues, such as Actual Production History; the imprudent push for group 
risk and whole farm revenue approaches; as well as the recent 
renegotiation of the Standard Reinsurance Agreement are all very 
troubling omens for producers, especially beginning farmers, who depend 
on narrowly tailored risk management tools to weather Mother Nature and 
volatile markets and to obtain credit. I will touch on each.
    First, I would like to thank this Committee for rejecting the 
Administration's agriculture budgets--which have included suggestions 
like eliminating CAT policies--year in and year out. I know this 
Committee appreciates that the farm safety net accounts for less than 
\1/4\ of 1 percent of the total Federal budget and only about 16% of 
the USDA budget and that even if we were to eliminate the farm safety 
net entirely, it would take 100 years of savings to eliminate just a 
single year of the U.S. deficit.
    Second, regarding the renegotiation of the Standard Reinsurance 
Agreement, allow me to first direct your attention to the testimony of 
CIPA Chairman Ronnie Holt who appeared before the full Committee in 
Lubbock, Texas on May 17 and to three letters of correspondence from 
CIPA to Secretary Vilsack, dated February 12, April 22, and June 16, in 
which we outlined our grave concerns. I would respectfully request that 
these letters be made a part of the record so that I might avoid 
repeating the points in the context of this testimony.
    CIPA's position on the SRA renegotiation was pretty simple. We 
argued that, if the goal of the Administration was to reduce overhead 
in the delivery of crop insurance, the goal could be better achieved by 
lowering premium rates for all producers. Lower premium rates for 
producers would not only help farmers but it would also lower 
administrative and operating expense payments, underwriting gains for 
companies, and the premium costs paid by the Federal Government.
    Alternatively, CIPA encouraged the Administration to avoid deep 
cuts to Federal crop insurance that would undermine the all-important 
budget baseline for agriculture as Congress heads into the 2012 Farm 
Bill; service to farmers and ranchers; and good jobs in states like 
Iowa, Kansas, and my home State of California. We argued that the 
savings should not go deeper than the level of cuts resoundingly 
rejected by both the House and the Senate during consideration of the 
2008 Farm Bill and that any savings, whatever the level, ought to be 
reinvested back into Federal crop insurance to help producers obtain 
higher coverage at more affordable prices.
    Among other things, we also argued for improvements to Actual 
Production History to eliminate the ``double deductible'' that many 
farmers must now pay; for improvements to the rating of certain crops 
and practices in order to lower producer-paid premiums commensurate 
with the lower risks; for improvements to policies for underserved 
crops and regions of the country to get all producers to 85% revenue 
protection, as Chairman Lincoln has called for; and for an aggressive 
expansion of policy options for producers to choose from to best 
protect their operations. We, as agents, were prepared to take cuts to 
our own commissions to pay for these important priorities that would 
greatly help our customer farmers and ranchers because we believe 
Federal crop insurance is about the producer. Yet, sadly, this problem 
has also been ignored.
    Instead, the Administration elected to cut the companies and agents 
who deliver Federal crop insurance to the tune of $6 billion, on top of 
the $6 billion in cuts already sustained in the farm bill, many of the 
effects of which are still to be felt, such as the delay in payments to 
companies and the requirement of early payment of premiums by 
producers. Of the $6 billion, $4 billion in budget baseline was forever 
lost, thanks to the SRA. Moreover, even a good portion of the $2 
billion in budget baseline said to have been ``saved'' under the SRA 
has, in fact, been lost from the farm safety net, having been dedicated 
to other mission areas within the Department of Agriculture.
    While we appreciate the need to address our nation's staggering 
debt, and earnestly hope that this contribution toward deficit 
reduction will somehow shield the whole farm safety net from future 
cuts, we fear that, if past is prologue, this Committee will be invited 
to the next budget reconciliation event, nevertheless. Thus, with the 
farm safety net provided under the farm bill and Federal crop insurance 
already threadbare, we fear that future cuts are going to cause even 
more serious economic pain in the countryside, especially if there is 
an unexpected downturn in crop prices.
    To the credit of this Committee and to the Congress, this was 
surely not what was intended in the farm bill. In fact, as I alluded to 
earlier, both chambers of the Congress decisively rejected cuts that 
measured just a small fraction of the total cuts ultimately sustained 
in the recently concluded SRA. Moreover, the SRA authorized by the 
Congress in the farm bill was about two things: (1) rebalancing the 
sharing of risk between companies and the Federal Government; and (2) 
avoiding sharp spikes in administrative and operating expense payments 
as experienced in 2008. Unfortunately, however, the SRA devolved into a 
treasure hunt to pay for other programs and, only when that hunt 
failed, eventually into an effort to cut the budget.
    Thanks to the efforts of many Members of this Committee and other 
Members of the House and Senate who recognize the importance of Federal 
crop insurance to our farmers and ranchers and to our rural communities 
and jobs, some ground was made up between the first and the third USDA 
drafts of the SRA, not only in terms of the aggregate level of cuts but 
also in regards to substantive policy. For example, administrative and 
operating expense payment levels were brought within the realm of 
reason and total cuts were reduced from $8.4 billion down to $6 
billion. We certainly want to acknowledge and thank you for your 
efforts.
    But, frankly, speaking directly to the point of this hearing, the 
state of the crop insurance industry has been severely battered after 
what amounts to a 3 year political storm that culminated in an SRA that 
gambles dangerously with the future strength and viability of Federal 
crop insurance. For instance, the cuts to administrative and operating 
expense payments will come at the very same time that the COMBO policy 
is being introduced; at the same time that complex discounts like 
``BYE'' are churned out; at the same time that cuts made in the 2008 
Farm Bill are realized; as common land unit requirements are added; as 
greater interaction occurs between farm bill programs (i.e., SURE, 
ACRE) and crop insurance policies; and as the financial stakes grow 
bigger and bigger and, consequently, more and more is being asked by 
producers of their agents--agents whose commissions are about to be cut 
under the SRA by as much as 50% when commission caps are factored in.
    For agents, the commission caps contained in the SRA are a 
gratuitous punch. First, the caps save no taxpayer money. Second, the 
caps are wholly unnecessary to the goal of ensuring the financial 
health of companies. In USDA's own words: ``As a regulator, RMA 
performs a rigorous financial analysis each year on each company to 
ensure that it has the financial capacity to withstand 2 consecutive 
years of significant losses.'' These review procedures, which were 
revamped and strengthened in the wake of a 2002 company failure, which 
actually had absolutely nothing to do with agency commissions, provided 
appropriate means to ensure that a company's commission expenses are 
not out of line. But, while we may never know the real motive behind 
the commission caps, we can know the following about the commission 
caps: (1) that they represent an unprecedented intrusion by the Federal 
Government into private contracts between companies and agents; (2) 
that they will undermine service competition and service to underserved 
producers; (3) that they will mean a 4.8% commission on CAT policies 
(an end-around on specialty crop producers in states like California 
and Florida after Congress has repeatedly rejected OMB attempts to 
eliminate CAT coverage altogether); and (4) that they will cut some 
agents, including those in Iowa, by as much as 50%, meaning lost 
economic activity and jobs in rural communities.
    For the record, I am not an agent with a commission higher than the 
percentage of administrative and operating expense payment. But I do 
not resent those who do receive higher commissions--in fact I aspire to 
be one of those guys and I believe the signals that I process from this 
free and open market are healthy in that they make me want to do the 
things I need to do to be a better agent. But moving from the 
philosophical to the practical, I also know that cutting someone's 
income stream by as much as 50% from one year to the next is not a 
responsible thing to do to anyone, much less in an economy like ours. 
It requires little imagination on the part of anybody who runs a 
business or meets a payroll to tell you what happens in the wake of 
cuts of this magnitude.
    In fact, the commission caps, the cut in the administrative and 
operating expense payment, and the covenant not to sue that was entered 
into by the government and the companies but which also presumes to 
bind agents were enough for CIPA to seek outside legal counsel from a 
prominent law firm on the legality of the SRA, something that is 
evidently very much in doubt given the excessive efforts to insulate 
the contract from any legal challenge. To date, CIPA has declined to 
seek redress in Federal court mainly because the organization did not 
wish to put in jeopardy the contracts of our agent members.
    In this vein, it is appropriate to observe that the agents are 
increasingly regulated by the Risk Management Agency not only in terms 
of how we sell and service policies but now how we are compensated 
financially despite the fact that there has been no privity of contract 
between RMA and agent, and agents have no seat at the table when the 
SRA that they are no less bound to is negotiated.
    The bottom line is that the recently concluded SRA process marked a 
missed opportunity to strengthen Federal crop insurance for producers 
while saving on delivery costs. Instead, spin and cynicism trumped 
aspiration--and everybody lost in the process. Producers lost the 
opportunity for better coverage at lower cost. Congress lost funds to 
write a new farm bill. And, yes, agents lost revenue needed to cover 
payrolls and sell and service policies to our farmers and ranchers.
    Fortunately, for everybody, our industry is dynamic and creative 
and it will find a way to make the most of what it has been given 
despite the deep cuts. In the coming days under this SRA, there is 
certainly going to be some economic upheaval and adjustment, just as 
the Administration apparently envisioned. But we will get through it, 
just as we have in the past, and we will continue to strive to provide 
the best service possible to our growers.
    And, as we head into the 2012 Farm Bill debate, it is important to 
consider what has and has not worked for the American producer. Some 
may want to push lawmakers in the direction of group risk protection, 
even though farmers cannot take this sort of protection to the bank, 
something especially hard on the beginning farmer who is the very 
producer Washington wishes to protect. Others may want to push Congress 
into a whole farm revenue approach although the examples of this on the 
ground have left an awful lot to be desired. Still others may wish to 
push lawmakers into a one-size-fits-all kind of crop insurance or a 
crop insurance delivered by the Federal Government, despite the chills 
each of these propositions sends down the backs of farmers due to their 
track records.
    In the swirl of these new ideas, I would simply ask that you 
consider what you have in Federal crop insurance, which works 
exceptionally well for so many, is the only game in town for so many 
others. And I would also ask that you consider what it can be--even 
absent legislative action--if we join together to act and press USDA to 
use its authorities to expand quality coverages for all crops in all 
areas and improve the existing policies so that all producers would 
have viable options to buy-up at the 85% level.
    Next year, the 112th Congress will walk into the next farm bill in 
a deep budgetary hole, given the baseline that has been lost through 
this SRA process, and the expiring budget baseline associated with the 
SURE program. Yet, expecting to further whittle an already shaved-down 
farm safety net in order to pay for other things may well jeopardize 
the coalitional efforts long necessary to pass a farm bill. Moreover, 
offering new fangled ways to provide producers with less will not work 
either. While the status quo offered by the commodity title of the farm 
bill today offers some comfort to producers, I would just say we can do 
better.
    By encouraging USDA to aggressively use its authority under the 
Federal Crop Insurance Act to expand and improve the quality of 
coverage and address some of the problems producers face under the 
program, we can at least lower the very high stakes of what is bound to 
be a tough and contentious farm bill process.
    Thank you once again for the opportunity to testify before this 
Subcommittee. I look forward to answering any questions Members may 
have.

                              Attachment 1

February 12, 2010

Hon. Thomas J. Vilsack,
Secretary,
U.S. Department of Agriculture,
Washington, D.C.

    Dear Secretary Vilsack:

    On behalf of the Crop Insurance Professionals Association (CIPA), 
an organization comprised of veteran crop insurance agents from across 
the nation, I write to express our grave concern regarding the 
provisions of the first draft of the new Standard Reinsurance Agreement 
(SRA), issued December 4, 2009.
    We strongly support efforts to improve and expand the access to 
quality coverage for producers under Federal Crop Insurance and to 
build upon its accelerated record of success since passage of the 
Agricultural Risk Protection Act (ARPA) of 2000. To this end, we are 
persuaded that the Federal Crop Insurance Corporation should set an 
ambitious goal of ensuring that, within 5 years, all U.S. producers 
have the same affordable access to quality coverage as enjoyed by 
producers best served under Federal Crop Insurance today.
    Unfortunately, we are equally persuaded that that goal will never 
be achieved under the terms of the draft SRA. Instead, the SRA 
regrettably represents the single greatest retreat of Federal Crop 
Insurance in its 72 year history and a sharp reversal of ARPA, tabling 
deep and destabilizing cuts to private sector delivery that will, in 
the end, result in fewer companies, less access, lower coverage, and 
lost jobs.
    The President, in his State of the Union address, stated that, 
``Jobs must be our number one focus in 2010.'' We wholeheartedly agree 
and respectfully submit that the private sector delivery system of 
Federal Crop Insurance is already the source of thousands of good-
paying jobs and economic stability in rural communities across this 
nation.
    Beyond its inestimable value to farmers--i.e., allowing them to 
obtain credit, manage their price and production risks, and ultimately 
recover from a loss--the private sector delivery system of Federal Crop 
Insurance has added thousands of jobs in the last 10 years as sales 
have roughly tripled, covering $80 billion in liability with $3.5 
billion in producer-paid premiums in 2009.
    Mr. Secretary, in your remarks to the U.S. Conference of Mayors, 
you observed that the Supplemental Nutrition Assistance Program (SNAP), 
formerly known as Food Stamps, is an economy-driver, helping truckers, 
grocery stores, and farmers. In the same manner, but to a far greater 
extent, the two or four agents leasing office space and adding staff to 
compete in small towns, the adjuster in his or her vehicle travelling 
at all hours to adjust claims, and the company actuaries, computer 
programmers, and clerical staff in mid-sized communities all help drive 
the economy in the heartland--and all are tied directly to Federal Crop 
Insurance. At the end of the day, everyone can agree that moms and dads 
will measure an economic recovery not by whether they are eligible for 
SNAP but by whether they have a job.
    Yet, notwithstanding the importance of Federal Crop Insurance, the 
draft SRA proposes to cut investment in private sector delivery by 
fully \1/3\, imperiling this economy-driver and thousands of jobs that 
depend on it. Even as jobs legislation to incentivize hiring of new 
employees is under active consideration in Congress, including tax 
incentives for small businesses that hire new employees, the mere 
unveiling of the draft SRA has already had the opposite effect on jobs, 
chilling the hiring of new employees, putting into question the 
maintenance of current workers, and putting off computer upgrades and 
other kinds of investments that create economic activity and jobs 
throughout rural communities. It is only reasonable to conclude that 
the actual imposition of these cuts would prove far more detrimental 
than the mere prospect of them.

Crop Insurance Successes
    Federal crop insurance increasingly represents the single most 
relevant and reliable personal business risk management tool available 
to farm and ranch families, wherever the region and whatever the 
commodity. We believe that private sector delivery is integrally 
responsible for this, allowing Federal Crop Insurance to offer narrowly 
tailored risk protection that is based on actual price and production 
while fully protecting producer privacy, being wholly compliant with 
our nation's trade commitments, and being understandable to the 
taxpayer.
    This is certainly true in the case of fruit and vegetable 
production and the production of other specialty crops that 
policymakers in Washington increasingly seek to promote in combating 
childhood obesity and, more generally, in promoting healthier diets. It 
is also more and more the case with respect to livestock producers who 
have not, until more recently, participated in standing Federal 
policies designed to indemnify losses. And, finally, it is most 
certainly true for producers of many staple crops that are able to 
utilize tailored yield and revenue coverage to stay in business, 
relying on quality service and products and a timely adjustment and 
indemnification in the event of a loss.
    As such, the negotiation of the SRA--which may very well decide 
whether Federal Crop Insurance continues to expand access to quality 
coverage, contracts in its services to producers or otherwise just 
treads water--must be a careful process neither driven by extraneous 
budget demands nor a convulsive response to a 1 year anomaly.
    Critics of the current method of determining administrative and 
operating (A&O) payments make considerable issue about the increase of 
such payments from just under $1 billion in 2006 to $1.3 billion in 
2007 and $2 billion in 2008, before receding to $1.58 billion in 2009. 
But what is truly remarkable in this set of facts is the tremendous 
positive growth in sales of insurance behind that A&O increase. Between 
2006 and 2008, farmer-paid premiums (based on prices set by RMA) 
increased at an even faster pace than A&O, rising from $1.9 billion to 
$4.2 billion. This more than doubling of sales certainly speaks to the 
value and importance of crop insurance to producers, but it is also a 
testament to the quality of the sales force and the service that is 
currently provided by our competitive private sector delivery system.
    Equally impressive is the nearly $8.7 billion in claims in 2008 
that were timely assessed by adjusters and paid by companies and the 
$4.5 billion in claims from the 2009 crop that are also already 
adjusted and paid. As you know from your own experience in delivering 
benefits to millions of Americans who are served by the policies 
carried out by the Department of Agriculture, the labor, capital, and 
time involved in the timely processing of benefits should not be 
underestimated. For instance, despite a great deal of hard work and 
diligence, the Department is just now assessing losses and issues 
relative to the 2008 crop with respect to the benefits it delivers, and 
will only begin examining 2009 crop losses months from now. Only those 
who have never delivered benefits on the ground would dismiss the 
extraordinary cost and effort involved.
    In sum, Federal Crop Insurance is relied upon by producers facing 
extraordinary risks precisely because protection can be tailored to 
individual risk management needs, with the guidance of a quality sales 
force, and it is reliable when disaster strikes, providing timely 
adjustment and indemnification. Unfortunately, by proposing to slash 
private sector delivery by fully \1/3\, the draft SRA strikes at the 
very heart of Federal Crop Insurance.

Needed Improvements
    Notwithstanding the substantial gains made in the quality of 
service and products to producers under Federal Crop Insurance since 
2000, CIPA believes there is room for improvement. As such, we 
wholeheartedly agree with the nation's leading farm organizations that 
to the extent any savings can be generated from the SRA renegotiation 
without doing violence to private sector delivery such savings ought to 
be reinvested into Federal Crop Insurance. Specifically, we support the 
following:

  b Improvements to Actual Production History (APH) so producers that 
        have seen rapid technological advances and producers in areas 
        that have experienced multiple year losses can insure more of 
        the crop they expect to make in any given year. Existing APH 
        requirements that often rely on outdated or artificially low 
        yields have left many farmers with a ``double-deductible'' 
        (i.e., a deductible reflected in the difference between what 
        the producer reasonably expects to yield and his or her APH, 
        and the additional minimum 15% deductible required under a 
        policy). Producers ought to be able to insure 85% of what they 
        can reasonably expect to produce based on actuarially reliable 
        data.

  b Coupled with the APH issue, improvements to the rating of certain 
        crops or practices should be pursued. For instance, advanced 
        varieties now dominate planted acreage in the United States. As 
        such, would not lowering rates generally for these crops be a 
        more efficient means to recognizing lower risk than the current 
        piecemeal approach of approving endorsements?

  b Improvements to policies for crops that are relatively underserved, 
        whether in the context of improved access to higher coverage 
        levels, greater access to revenue products, or through new 
        policies that better address the unique nature of the perils 
        faced by such crops. In the past 10 years, there has been a 
        significant increase in the quality of coverage for producers 
        of many crops. In the next 5 years, the goal of the Federal 
        Crop Insurance Corporation should be to ensure a similar 
        increase for crops still underserved.

  b Expansion of policies that are working, including the Pasture 
        Rangeland and Forage policy, but which have been withheld from 
        certain areas due to obstacles that are not imposed by statute.

  b Development of new products to support the growth of advanced fuels 
        under the new RFS2 regulation just released (e.g., EPA projects 
        over 11 billion gallons of biodiesel from corn stover and 
        switchgrass will help meet the 36 billion gallon mandate for 
        renewable fuels by 2022).

  b Finally, the streamlining of compliance mechanisms so that 
        integrity is ensured without placing undue burdens on the 
        delivery system or producers.

    As agents serving our farmer customers on a day to day basis, we 
believe these issues should be addressed and we would be pleased to 
work with the Risk Management Agency, producer groups, and companies in 
this regard.

Problems With the Draft SRA
    Unfortunately, the cuts proposed under the draft SRA would not only 
do great violence to private sector delivery but, based on the 
Administration's proposed budget, the money taken from crop insurance 
would be channeled to government programs rather than toward better 
meeting the risk management needs of producers under Federal Crop 
Insurance.
    The obvious jaw-dropping issue from an agent's point of view is the 
sheer magnitude of the cuts to A&O that appear wholly untethered to 
reality. It does not require an especially trained eye to discern that 
the crop reference prices used to calculate A&O discriminate against 
certain crops, are outdated and artificially depressed, are capped but 
not cupped, and bear no relationship whatsoever to either crop prices 
today or those forecast for the effective period of the next SRA. Based 
on industry analysis, we understand the draft would effectuate a 32% 
cut to companies and agents in the most recent crop year, atop the 12% 
cut sustained a little more than a year ago.
    That a product or benefit can be effectively delivered at a certain 
cost in 2011 and beyond simply because it was delivered at that level 4 
years ago is, we would contend, a rationale that ignores the realities 
of managing a competitive business. This is true even if one overlooks 
the virtual doubling of sales of Federal Crop Insurance since 2006.
    Moreover, with respect, the assertion that, ``these changes will 
result in more stability for agents, loss adjusters, company employees 
and others in rural America that are affiliated with and dependent upon 
the crop insurance industry'' is a fantastically Orwellian description 
of the kind of devastation common sense dictates anyone to expect from 
a 32% cut, especially when stacked on top of a 12% cut sustained a 
little over a year ago.
    As is usually the case, the more candid assessment is also the more 
accurate one. In its assessment, NCIS observed: ``[the proposed funding 
reductions] would dramatically reduce the companies' returns on premium 
and invested assets and put current business at risk, force sharp 
reductions in payments to agents, expenditures on offices and other 
inputs, and reduce service to producers.'' More candid yet, the draft 
SRA will put more Americans out of work.
    Yet another issue of serious concern under the draft SRA is the 
upfront denial of potential underwriting gains to companies despite the 
ostensible purpose of the SRA renegotiation which was to rebalance the 
sharing of risk. The draft SRA at least appears to take a private 
sector delivery system in a decidedly public direction, with all of its 
adverse implications to producers. We agree with farm organizations 
that contend that adjusting rates is the more logical approach to any 
perceived excess in underwriting gains. We would note that such an 
approach would also result in reduced A&O and lower premiums for both 
the producer and the Federal Government.

The Realities of A&O
    While we understand the concern RMA and others have expressed with 
regard to the way A&O is currently structured, we submit that a 
solution that is designed to solve the problem of a 1 year anomaly in 
the past by creating more serious problems in every year thereafter is 
no solution at all.
    While the current practice used to calculate A&O as a percent of 
premium may not avoid a 2008, it works cost-effectively in the other 
years and over time and beats every alternative floated to date.
    The decoupling of A&O from crop prices or premiums, as proposed 
under the draft SRA, would militate against the most fundamental 
objective of Federal Crop Insurance: encouraging high sales of high 
coverage.
    Because the Federal Crop Insurance Corporation establishes the 
rates of each policy for each crop based on a 1:1 loss ratio (such that 
producers are not charged for delivery costs), some method has to be 
used in order for companies to recoup the cost of selling and servicing 
policies. In the business of insurance, the denominator for allocating 
delivery costs has always been the premium.
    Other factors fluctuate too wildly (e.g., commodity prices) or can 
be manipulated too easily (e.g., the number of policies sold), but 
premium is the one constant. Premium is ultimately what we are selling 
and it is the only figure that reflects both the value of what is 
covered and the probability that a loss may occur.
    If the policy is properly rated, more premium is always a good 
thing for the business of insurance. This is why commissions for the 
sale of insurance have always, across all lines of insurance, been 
based on premium--to incentivize the sale of more premium. By the same 
token, if the public policy goal of Federal Crop Insurance is still to 
encourage more producers to insure their risks and to do so at higher 
levels of protection, then it still makes eminent sense to compensate 
for the sale of premium in the same way--as a percentage of premium.
    Citing statistics that show A&O costs per policy increasing over 
the past 5 or 10 years as a basis for cutting A&O is neither probative 
nor helpful to the process because this statistic bears no relation to 
actual workload. The reality is that all policies are different and, 
thus, the notion of a per policy commission or A&O reimbursement is 
simply divorced from what is actually happening on the ground. One 
policy may cover thousands of acres with multiple tracts and multiple 
practices, all carrying their own set of data and needs, while another 
may cover a very simple tract of 40 acres planted to the same crop 
every year.
    While it is true that the overall number of policies sold has 
decreased over the past several years, reflecting a trend of 
consolidation, this can hardly be translated to mean less workload on 
the delivery system. To the contrary, total acres covered under Federal 
Crop Insurance have actually increased significantly (by 30 million 
acres from 2006 to 2008), and given that every tract of additional 
acreage carries its own set of data and needs, this translates into to 
greater workload and cost of delivery.
    While actual costs vary and are as difficult to quantify as a 
crop's cost of production, what we know from actual experience is that 
the time and expenses involved in providing a quality service to 
customers have in fact increased significantly in recent years; in part 
due to the increased needs and expectations associated with the higher 
costs to the farmers who rightly expect a commensurate level of 
service, and in part due to the added requirements, regulations and 
other changes to Federal Crop Insurance initiated by RMA.
    Page 17 of the NCIS response to the first draft contains an 
important list of changes and developments that have added to the cost 
delivering a quality service to producers. To this list, we would add 
the following:

  b Increased training time for agents and staff relative to:

    3 New policies and pilot programs.

    3 Computer programming and quoting software changes.

    3 Changes and new wrinkles to existing policies.

    3 The new ``COMBO policy'' or common crop policy.

    3 New endorsements and complex discounts, including BYE.

    3 Compliance directives.

    3 Changes in FSA-delivered farm programs that are connected to crop 
            insurance.

    3 The use of the Comprehensive Information Management System.

    3 The use of Common Land Units.

    3 Gaining and maintaining solid knowledge of markets and 
            interacting Federal policies to provide a comprehensive 
            service to the customer in the increasingly high stakes and 
            complex business of agriculture.

  b Increased service time per customer because of:

    3 The expectations that come with paying more for better coverage.

    3 The complexity and number of policy options, including many new 
            policies or endorsements.

    3 The increased use of revenue policies that involve greater 
            volatility.

    3 The increased market volatility and higher stakes that have 
            increased producer demands for time, information, and 
            counseling.

    3 The consolidation of policies with more crops and more acres 
            added to existing policies.

    3 The increased interaction with FSA programs (i.e., ACRE and SURE) 
            that inevitably lead to questions and demands on an agent's 
            time.

    3 The increased compliance requirements that involve more record 
            keeping, authorizations, etc.

  b Increased direct costs to agencies in the form of:

    3 Investments made in staff and office space to meet increased 
            demands associated with increased sales.

    3 Investments in computer systems and technology to quote policies 
            and maintain records.

    3 Costs of sales and advertising in an increasingly competitive 
            business.

    3 Costs associated with Errors & Omissions insurance for agencies 
            as the value of insurance coverage written has increased 
            and penalties for non-compliance have grown more severe.

    In terms of both time and money, agencies have, in fact, seen a 
substantial increase in the cost of doing business in the last few 
years as sales have increased. As such, to arbitrarily cut and freeze 
the A&O reimbursement at 2006 levels or lower for major crops will meet 
with what one should reasonably expect: a freeze on new hiring, the 
lay-off of existing workers, finding ways to cut corners, and no new 
investment.
    As agents, we take a long-term view of the business, knowing there 
will be bad years but trusting these will be offset by good years. 
Business decisions in agriculture should not be based on a single 
year's experience, nor should A&O calculations be driven by a 1 year 
anomaly. One needs look no further than 2009, when premium-based A&O 
and commissions retreated by 21% from the year before, to illustrate 
the danger in such an approach. In fact, based on lower volatility 
factors, lower commodity prices and the full implementation of farm 
bill cuts, we are bracing for yet another drop in 2010.
    In short, while it is true that, alongside our producer customers, 
agents experienced the high of 2008, we also shared the experience of a 
protracted string of lows in the late 1990s and the early years of the 
past decade when there was no intervention to help us. We accept this 
as a reality of doing business. It has been suggested that the A&O 
calculation contained in the first draft of the SRA locks in greater 
certainty. We would agree. It locks in certain failure.

The Legality of Reference Prices
    While our chief concern regarding the A&O calculation proposed 
under the draft SRA deals with its reliance on arbitrary and 
inappropriately low reference prices, we concur with the legal analysis 
of NCIS that the proposed calculation violates the Federal Crop 
Insurance Act.
    We will not recite here the legal analysis already provided by 
NCIS. We understand that the Department believes it is on solid legal 
grounds. As such, we simply provide notice to the Federal Crop 
Insurance Corporation that we believe we would have no alternative but 
to seek relief in Federal court to prevent the implementation of the 
plan contained in the first draft of the SRA.

Conclusion
    To ensure all America's farmers and ranchers have the risk 
management tools they need, to create and save jobs, and to spur 
economic growth in rural communities, the Administration should build 
upon Federal Crop Insurance's record of accomplishment since 2002.
    Any savings that can be achieved in the SRA renegotiation without 
doing violence to Federal Crop Insurance or its private sector delivery 
system should be reinvested into Federal Crop Insurance to provide 
greater access to higher coverage, rather than diverted from the budget 
baseline of the farm safety net.
    The proposal to decouple A&O from the value of policies (premiums 
and liability) runs counter to the goals of Federal Crop Insurance and 
violates the law. The specific A&O proposal tabled in the first draft 
of the SRA would result in fewer companies, fewer agents, less access, 
lower coverage, and lost jobs.
    In sum, the magnitude of the cuts and the means to achieving such 
cuts are unnecessarily destructive when more sensible, nondestructive 
means of achieving efficiencies while fully protecting Federal Crop 
Insurance are clearly available.
            Sincerely,

            [GRAPHIC] [TIFF OMITTED] T1158.016
            
Ronnie Holt,
Chairman,
Crop Insurance Professionals Association.

CC:

Hon. James W. Miller;
Hon. William J. Murphy;
Hon. Blanche L. Lincoln;
Hon. Saxby Chambliss;
Hon. Collin C. Peterson;
Hon. Frank D. Lucas;
Members of the Senate Committee on Agriculture, Nutrition, and 
Forestry; and
Members of the House Committee on Agriculture.
                              Attachment 2
April 22, 2010

William J. ``Bill'' Murphy,
Administrator,
Risk Management Agency, U.S. Department of Agriculture,
Washington, D.C.

    Dear Administrator Murphy:

    Please accept this letter as a supplement to our letter, dated 
February 12, which fully sets forth the views of CIPA with respect to 
the First and Second SRA drafts, generally.
    We are compelled to make a statement relative to a provision 
contained in the February 23 draft SRA referred to as the ``soft cap'' 
on agent commissions.
    First, we are deeply concerned that the ``soft cap'' on commissions 
represents an unprecedented interference by the agency into what are 
currently wholly private contracts--sometimes multi-year contracts--
between companies and agents. We believe the combined effects of the 
imposition of a ``soft cap'' and reference prices used to calculate A&O 
would have severe practical as well as legal implications.
    Second, the government imposed cap runs against the principle of 
service competition that is vital to the success of this public-private 
partnership. Commissions are a critical way for companies to reward 
agents who do an exceptional job in servicing their farmer customers.
    To eliminate this point of competition will reduce the incentives 
for agents which will in turn and over time reduce the quantity and 
quality of competition. While this effect is somewhat mitigated by a 
company's ability to profit share, the ``soft cap'' still presents 
great uncertainties for small businesses that will have a negative 
impact upon jobs in rural communities across the nation.
    On this note, we have read the RMA's argument that a soft cap is 
needed to prevent another company failure like the one seen in 2002. 
However, on p. 13 of the RMA's FAQ piece respecting the 2nd draft, you 
also state, ``As a regulator, RMA performs a rigorous financial 
analysis each year on each company to ensure that it has the financial 
capacity to withstand 2 consecutive years of significant losses.'' 
These review procedures--which were revamped and strengthened in the 
wake of the 2002 failure--seem very appropriate, and provide a means by 
which RMA can ensure that a company's commission expenses are not 
excessive. We believe this proven method is far preferable to the 
commission cap, which we see as tantamount to an elementary school 
teacher penalizing the whole class because the teacher fears the 
possible misbehavior of one student.
    Finally, believing the cap is more about taking money out of the 
private delivery system than anything, we must note that the 80% cap on 
commissions, when combined with other cuts to A&O for companies, would 
effectuate a deep and unsustainable cut for many agents in many 
regions, and make the sale and servicing of certain policies that are 
already unprofitable even less so.
    Based on the NCIS's April 9 comment, A&O for the 2010 crop year in 
the State of Iowa under provisions of the 2nd Draft SRA will be down 
45% from the 2009 A&O, which is already down 25% from 2008. This, of 
course, is before the cap is applied. If, one assumes that average 
commissions in Iowa are around 20%, one would be looking at an 
additional 30% cut generally just to come into compliance with the cap.
    To put numbers on this, in 2008 Iowa received $185 million in A&O, 
in 2009 it received $128 million and in 2010 it is expected to receive 
$105 million; and based on current commissions all of this money or 
perhaps even more would have stayed in the state, and gone to people 
and businesses in rural communities to sustain jobs.
    Under the combined provisions of the 2nd Draft (applying the 80% 
cap on commissions to the expected $70 million in A&O payments, going 
forward), those same Iowa communities would be limited to roughly $56 
million. In short, this cut is simply too deep and we respectfully warn 
that the economic repercussions will be real, painful and directly tied 
to this SRA.
    Another area that highlights the problem with the 80% cap is with 
respect to the sales and servicing of CAT policies, which currently 
provide LAE equal to 6% of the imputed premium.
    The cap would make the maximum commission on a CAT policy equal to 
4.8% of imputed premium, which is simply too low to justify the work 
associated with the sale to many specialty crop producers or smaller 
growers of crops where buy-up is simply not viable.
    Generally, we applaud and encourage efforts to move growers away 
from CAT toward higher coverage, and if buy-up were a viable option for 
growers of all crops, we would not be as concerned.
    But CAT remains the only viable option for some crops, and the 
growers of these crops should not be further penalized by a commission 
structure that makes it unprofitable for any agent to provide them 
service.
    For these reasons, CIPA strongly recommends that the cap on agent 
commissions contained in the 2nd Draft be eliminated.
            Sincerely,

            [GRAPHIC] [TIFF OMITTED] T1158.016
            
Ronnie Holt,
Chairman,
Crop Insurance Professionals Association.
                              Attachment 3
June 16, 2010

Hon. Thomas J. Vilsack,
Secretary,
U.S. Department of Agriculture,
Washington, D.C.

    Dear Secretary Vilsack:

    On behalf of the Crop Insurance Professionals Association (CIPA), I 
write to convey our grave concern over the third draft of the Standard 
Reinsurance Agreement (SRA) and respectfully request that the 
Administration address these concerns in a fourth draft.
    First, we reiterate our sincere hope that you will reinvest the 
savings resulting from the SRA negotiations into Federal crop insurance 
in order to help farmers and ranchers by expanding access to quality 
coverage. For examples, developing and approving quality policies for 
all crops and regions and addressing certain problems, such as lagging 
actual production histories, are vitally important.
    Unfortunately, the third draft redeploys only a small fraction of 
the total savings from the SRA negotiations for this purpose. As a 
consequence, farm and ranch families are seriously shortchanged in this 
process, Congress is left in a fiscal lurch as reauthorization of the 
farm bill approaches, and Federal crop insurance is left to somehow 
deal with combined cuts of more than $12 billion in a matter of just 2 
years.
    The emergence of Federal crop insurance as a primary and essential 
safety net for producers began in earnest in 2000 and the public 
private partnership has proved a remarkable success. Unfortunately, 
innovation in aggressively meeting producer risk management needs seems 
to have taken a back seat to seemingly endless rounds of cuts that show 
no signs of letting up until the cuts reach the bone and irreparable 
damage is done. If this occurs, Washington will have cut through the 
one thread of policy that, to date, has not generally been politicized 
and which has offered producers a semblance of stability in these 
uncertain economic and policy times.
    For the sake of producers, we hope that this does not occur. As you 
know, it certainly does not have to. The Administration's stated 
objectives of deficit reduction and reducing the cost of delivery can 
be achieved in another way that is not harmful. As we have observed 
many times, simply bringing down premiums that producers pay in lieu of 
an SRA renegotiation would achieve both objectives without injury to 
Federal crop insurance.
    Second, we wish to strongly caution the Department that the 
unprecedented introduction of caps on agent commissions will, in point 
of fact, work to undermine the Administration's stated objective of 
better serving underserved producers. We also strongly caution that as 
much as a 50% cut on commissions anticipated in some states, including 
Iowa, is going to expand unemployment lines in many mid-sized and small 
towns.
    There are other unsettling parts to the third draft. One example is 
a provision that actually states that if a company or even a third 
party litigates a provision of the SRA because they believe that it 
violates the law and they prevail in a court that the costs to the 
Department stemming from the lawsuit be borne by the companies signing 
the SRA. The provision raises a serious question about the SRA's 
compliance with the law and the Department's confidence in its answer 
to that question.
    We sincerely hope that the Department and other parties to the SRA 
will look before they leap and address these and other serious concerns 
in a fourth draft.
            Sincerely,

            [GRAPHIC] [TIFF OMITTED] T1158.016
            
Ronnie Holt,
Chairman,
Crop Insurance Professionals Association.

    The Chairman. Thank you. It has been an interesting 
presentation here this morning.
    I will start off with a couple of questions. We have votes 
coming up. If they come too quick, we will just recess and come 
back.
    I am concerned--and Mr. Murphy knew this; we have talked 
about this--about the caps, getting into the business between 
the company and the agent and so on. I am also concerned about 
the legal aspect of it.
    Some of you have heard me tell this story. I was just 
sharing it with Ms. Botts just a moment ago. We are going to 
look into this a little further.
    My last overseas assignment, I was in a NATO headquarters 
in Iberian Command Atlantic. I had a senior position. At our 
mess table, we had a big round table, and we had quite an 
international meeting at noon every day, and I was in the hot 
seat quite a bit. I discovered after some time--and it kind of 
set me back a little because I have sort of been a critic--that 
other nations around the world envy our judicial system. They 
envy it very much. I thought that was kind of unique. It made 
an impression on me at that time, that many years ago.
    Back when we were developing the last farm bill and we got 
into the mandatory arbitration, some of you remember that, that 
sparked me to think that fair is fair. I am not comfortable 
with that. So so much for that for this moment.
    I would like to address maybe a question to Mr. Frerichs of 
Rain and Hail. Last weekend, I flew my little puddle-jumper 
around southern and central Iowa. I saw a lot of water 
everywhere. The floods are going down. The dikes and levees 
didn't break, we sweated that out. But I saw a lot of standing 
water in a lot of spots in corn fields and bean fields that are 
not going to grow a thing. Of course, there are so many acres 
overall, I am not saying we are going to have a short crop, but 
there will be a lot of individuals, at least in those areas, 
that will really be impacted.
    I just wonder if you might address, a company like Rain and 
Hail in Des Moines, because I flew right over their 
headquarters as I went from Saylorville down river. I had my 
chief of staff with me. We were kind of looking things over and 
thinking, wow, this is pretty bad, but it could have been 
worse.
    But what would the impact be if--and I will use some years 
where Iowa experienced flooding or drought. In your written 
testimony, you mentioned RMA uses good weather, consistent good 
yields to base their cuts. With that point, what would be the 
impact if they had used years when Iowa experienced flooding or 
drought? They have been through both of them quite a little 
bit, in my experience. I have accused Jerry that those Chinook 
winds that he sends up once in a while from south, southwest 
Iowa, gets you in trouble sometimes.
    But anyway, your comments.
    Mr. Frerichs. Chairman Boswell, thank you for the question.
    I just came back from Iowa last night on a commercial 
flight, and going in and out of Iowa I saw the same water you 
saw. I saw the rivers out of the banks. It does look pretty bad 
from the air.
    First and foremost, I would like to tell you that Rain and 
Hail will make sure that every one of those claims that farmers 
have this year, or in back-to-back loss years gets worked, gets 
worked quickly, and farmers get the payments that they are 
required to receive under the crop insurance policies. Rain and 
Hail prides itself on service, and we will make sure that 
happens.
    This program requires capital standards, capital 
requirements, unlike any other Federal program. We are required 
to have surplus roughly equal to two times what we write in 
premium. So back-to-back losses obviously would affect us. We 
would have underwriting losses, presumably, on a nationwide 
basis. If it is just one state, perhaps not. Every year 
somewhere in the U.S. crops fail, and we make those payments. 
Say it was a drought like 1988 back to back, obviously, that 
would impact a company's financial reserves, and it may impact 
how much over time a company can write.
    I would submit to you that is what happened to the company 
that Administrator Murphy mentioned in his testimony earlier 
today. That company did not fail because of excess expenses. 
Sure, excess expenses added to it at the tail end. That company 
failed 2 or 3 years earlier because of bad risks. Insurance 
companies don't generally fail because of excess expenses. They 
fail because they take on bad risks, and that is what happened 
to this company.
    The Chairman. I recognize Mr. Moran.
    Mr. Moran. Mr. Chairman, thank you.
    Mr. Frerichs, you just addressed one of the questions, and 
I was going to address it to Mr. Dalton. I wanted to make sure 
that we got on the record that Mr. Murphy, in response to a 
question that I asked in a prior hearing about the 
justification for the commission caps, used the failure of an 
insurance company as the explanation for why this is important. 
I want to make sure that I understand if there is more to it 
than this issue, and if company commissions, or expenses, had 
anything to do with its failure.
    Mr. Frerichs. Mr. Moran, as you may well know, I worked for 
that company for a year, the year that they went under. I would 
submit to you and to the Subcommittee that there were a lot of 
issues that resulted in that company going under.
    It looked--it actively sought for a buyer. One of the 
potential buyers was Rain and Hail, as it turns out. That deal 
went pretty far along, and then RMA put some terms on the 
conditions of the sale that Rain and Hail could not agree to, 
and so they walked away.
    Ultimately, that company failed because of bad risks that 
it took. Its capital eroded over time. It was allowed to 
purchase another company a year or 2 prior to that, so it 
expanded, and it did not adjust its expenses. So expenses were 
clearly an aspect of this. But it was at the very tail end of 
it. I think that is what RMA is missing.
    They put significant financial requirements on the 
companies. We provide anything and everything to them that they 
want to know about a company. That is part of the SRA. You 
shall provide whatever we ask for, and we do that. Clearly, at 
some point, they missed the capital health of that company, and 
agreed to let them write premiums that they probably should not 
have been writing.
    Mr. Moran. Thank you very much.
    Mr. Parkerson, let me turn to you. You brought the graphic 
in front of you, the stack of regulations. Your testimony is 
that the handbook has grown from 309 pages and appendix 3 has 
grown by 621 pages. Do you have any estimate of the additional 
financial cost to companies, given these new administrative 
costs? And I don't know whether you know the answer to that 
question, but whatever that amount is would increase the loss 
or the reduction in support for companies by more than the $6 
billion that the SRA agreement--that we attribute to the SRA 
agreement. Any comments or response to that?
    Mr. Parkerson. Yes. Thank you, Mr. Moran.
    We did take a survey. As I said, all 16 SRA holders are 
members of our organization. We did a survey of those 
companies. We found that, according to those companies, that we 
would probably end up spending pretty close to $100 million in 
trying to pay for, not only on computers, but training and all 
of the aspects in supporting the program over the next couple 
of years.
    So those are not in total from any expenses. That is what 
those companies say it will cost them to put in the new 
computers.
    Obviously, to match, RMA is putting in their new computers 
and to match that the requirements of the new program that is 
coming out, the COMBO policy that they are doing. All of that 
came up to, as I understand, about $100 million that they 
estimate over the next couple of years to spend.
    Mr. Moran. Thank you, Mr. Parkerson.
    And, finally, to those who represent the agents, shouldn't 
there be a legitimate concern about the cap on agent 
commissions could lead to a decrease in the number of--I am 
sorry, a decrease in the service to those that you write 
policies for, your customers? Is there a concern that the 
commissions all become standardized, and there is no reason 
then to compete for better service among those you serve?
    Mr. Dalton. Thank you.
    I know in our agency that we are looking this coming year 
to about a 30 percent cut in our agency revenues, which would 
amount to about $180,000. When you talk about the service end 
of this thing, this is scary to me, because we are looking at 
probably having to close an office and lay off a couple of 
employees.
    We service a lot of small farmers; and, in Iowa, a small 
farmer is someone who is farming 300 or 400 acres. They are 
doing this on the weekend. Those people actually require more 
of my time than the guy that is farming 3,000 or 4,000 acres 
because they are doing it as a business. Very seldom do I spend 
less than 8 hours a year with a customer. That usually equates 
to four or five different visits.
    I am concerned that if I have to lay off people because of 
these cuts that I am not going to be able to service these 
people; and, consequently, the service is going to go down. And 
what we are trying to accomplish is better service for our 
people, rather than less. This is definitely going to have a 
devastating effect on my office.
    I started this agency from scratch in 1983. I had one 
customer, and it was me. We have now grown where we have four 
offices and 13 employees. We have never had a layoff. We 
provide stable jobs. I think our people are well paid. Having 
to lay off people because of these substantial cuts bothers me, 
and we are talking about people who have been with me for 20 
years and are experts in the field. When you start getting rid 
of people, your service is going to go down the tube, no matter 
what you do.
    Mr. Moran. Thank you, Mr. Chairman.
    The Chairman. Mr. Walz.
    Mr. Walz. I, too, would like to address my condolences to 
our Ranking Member. I never had the opportunity to meet your 
mother, but I have seen the product of her work, and it is all 
positive.
    Mr. Moran. I was going to say, I didn't realize we were 
going to get so partisan so quickly.
    Mr. Walz. I was going to say, we often use the term 
gentleman around here, but the gentleman from Kansas embodies 
that. While this place can bring out the worst in people, it 
oftentimes brings out the best. And I can tell you my 
experience here, that is always true with the gentleman from 
Kansas. He is always dignified and a thoughtful Member. I am 
sorry for your loss.
    Thank you all for being here. I do truly appreciate you all 
being here.
    Ms. Fowler, you mentioned this is a program that farmers 
understand. I was thinking, I was watching a program last night 
on TV on quantum physics and time travel, and it is easier for 
me to understand that than this program. So I am trying to 
piece it all together. I think we are all here for the same 
reasons, trying to figure out how to make this thing work.
    I think Mr. Frerichs brought up a fair point. We are all 
concerned with budgets. It is important, but we have a lot of 
folks that need to be honest. This idea of a budget freeze or 
something, that is lazy legislating. You are going to freeze 
bad programs and you are going to freeze good programs that 
return money.
    I think it is important to put everything in perspective. 
Since July 1 to this day, we have spent more in Iraq and 
Afghanistan than the $12.5 billion we would save on this, and 
it is important for the American public to have a open 
discussion on cost benefits.
    I would also like to say, we are all here trying to make 
this work, and Mr. Deal gave us the history of this as he moved 
this thing into the private sector. This is a true public-
private partnership. We have to be careful about demonizing.
    I heard several of you say an unprecedented intrusion by 
the Federal Government. No, that was the internment of the 
Japanese in World War II. It is probably a stretch to use that 
rhetoric.
    I think we need to be careful. You have a great argument. 
You have points to make. We want to make it work, and we are 
listening.
    I want to get to the point where this works so our agents 
can deliver the kind of service I know that they do. I talk to 
them every day, I hear them out there, and I know they are 
doing that, and I know our producers want that. And we are 
trying to get where this country makes the best use of its tax 
dollars to protect those producers. We can do that here.
    I, too, am a little disappointed that this SRA did not have 
the input you needed. I want to hear from you. I am listening. 
The question I have for you is that this continues to trouble 
me, and I don't know how we get there with all of the different 
programs we have, countercyclical direct payments, all of these 
things. Is this crop insurance--is this a model for where we 
can get?
    And the thing I have, the ad hoc disaster assistance, we 
keep trying, and Mr. Deal talked about Jimmy Carter trying to 
get away from that. Well, we are still here with the ad hoc 
disaster assistance. Is there a way that we strengthen this 
program that can pull in and make up for some of that, and we 
start to use a market-based approached to solving that?
    I really want to make this thing work. I know producers 
love this program, and you have all been part of making this 
work. Let's make it better now. Let's figure out how to make it 
better. Is there a way to do that?
    I know that question is pretty broad, but it is helping me 
understand my role of where we should ask the questions.
    Mr. Rutledge. Thank you for the question.
    To begin with, if you were to ask the farmers of our nation 
if they had to give up everything but keep one agricultural 
program, I think they would say crop insurance. As far as a way 
to strengthen that, RMA, along with the industry, has worked to 
increase the available coverage to the producers and that would 
be one way that you could go about that.
    I will pass the mike on to the next person.
    Mr. Parkerson. I would echo what Mr. Rutledge said, but I 
would also like to throw in the fact that, because we do 
represent all of the companies and oftentimes we are in Kansas 
City and foreign delegations come in to talk to the RMA group, 
they often come by NCIS and ask us about this partnership that 
you have mentioned. It is obviously very envious of what we 
have here. We have had German delegations, Chinese, all the 
Europeans, and they want to know how this works. We are 
definitely trying to help them understand that. But it is a 
truly enviable program from around the world, and it needs to 
be protected for our producers now.
    Mr. Walz. That is my point on this. I think we all come in 
this together. I know there is a frustration on this. It 
certainly isn't a sinister takeover by the government to try 
and get involved in this or anything. But if there is an 
overstep, we need to know where it was, and we need to figure 
out how to step back from that. Because I hear this from 
people. I think, Mr. Rutledge, your statement was dead on. I 
hear that from people: Well, I don't know what is going to 
happen, but don't take away crop insurance. I do hear that.
    Anyone else?
    Mr. Dalton.
    Mr. Dalton. Congressman, I would like to give you my 
firsthand experience on this disaster program. We own some farm 
ground in southern Iowa, 2008 was not a good year. Obviously, I 
am involved in the crop insurance business, and I carry that 
for my own risk management. I was pretty well made whole by the 
crop insurance in 2008. We have a land manager that takes care 
of the ground for us, and the county we are in was declared a 
disaster area in 2008.
    This spring I get a call from him; and he says, I have a 
rather substantial check here for you.
    And I said, For what?
    Disaster money.
    I said, I don't have any disaster. I have already received 
my money back from the insurance company for my claim.
    So why are we paying this twice? It seems to me if we have 
our growers putting money into an insurance pool, if all of 
them are involved in that and we focus our efforts toward that, 
you have money to pay the claims without this ad hoc disaster 
thing which seems to keep popping up.
    Mr. Walz. Mr. Roach.
    Mr. Roach. Crop insurance in California is the only safety 
net available. There are no direct payments or countercyclical 
or loan deficiency. But we don't even have 85 percent coverage 
available in California either on crop insurance. Still looking 
for improvements, I would say push towards 85 percent revenue 
coverage for all producers, regardless of what type of crops 
that they have.
    Mr. Deal. May I make a comment, Congressman.
    Mr. Walz. Yes. I'm sorry to run over.
    Mr. Deal. I would give the same answer I gave in 1978. The 
courage has to come from you in Congress to eliminate the ad 
hoc disaster program.
    Mr. Frerichs. Mr. Walz, as a St. Olaf graduate, I 
appreciate the question. Built on a hill and run on a bluff, 
right.
    Are there model aspects to there program? Absolutely. To 
use Chairman Boswell's terms, did RMA step too far, did USDA 
step too far in this agreement? Absolutely. That is the nature 
of the beast, though. We give and take, and we go back and 
forth. And, hopefully, over time, we have a successful 
partnership; and clearly that has been the case over the last 
30+ years.
    So, yes, there are aspects of this program. I am a firm 
believer in the private delivery of this program. I believe it 
results in competition. And, yes, it results in competition at 
the agent level, not at the farmer level.
    We take what we are given from USDA in terms of rates. We 
cannot change them. That is unlike any other insurance program 
in the world, but that is the way this works. So, yes, there 
are aspects that are very, very successful, and there are 
awards, too. It is a process.
    Mr. Walz. Well, I appreciate all your candidness and help.
    Thank you, Mr. Chairman.
    The Chairman. Good discussion.
    Mr. Schrader.
    Mr. Schrader. Thank you, Mr. Chairman.
    Mr. Rutledge, you indicate in your testimony some concern 
over changing business models as the SRAs renegotiated, why 
this wasn't phased in over time. I guess I would ask you why 
aren't the changes phased in over a period of time to allow the 
insurance companies to adjust their business models.
    Mr. Rutledge. Well, I expressed in my oral testimony that 
this would lead to fewer companies, fewer agents, et cetera. I 
think if it was phased in over a 2 year period, especially some 
of the changes in the Group 1 states, it might give companies 
more of a time frame to prepare for the changes. It might give 
them a few more opportunities to continue to stay in business.
    Mr. Schrader. So why aren't the changes phased in, from 
your understanding.
    Mr. Rutledge. It was discussed during the negotiations with 
RMA, and it was initially viewed favorably. At the end of the 
day, they felt that, given the other changes--I can't speak for 
RMA, of course, but I think they just felt it wasn't needed, 
maybe. So I don't really have an answer for why it wasn't.
    Mr. Schrader. Maybe Mr. Murphy will get to me later on that 
when he gets a chance.
    Mr. Frerichs. Congressman Schrader, $6 billion in savings, 
that was the target. If you phase it in, you don't hit it, 
simple as that.
    Mr. Schrader. Very good.
    Mr. Parkerson, you and others have indicated that the 
Milliman study is flawed in a number of areas in some of the 
assumptions made. Can you elaborate on that. 
    Mr. Parkerson. Yes. We had in the process--first of all, I 
will say this and, quite candidly, RMA, Bill Murphy and his 
people, we had a respectful negotiation. But I truly believe 
that there was a number set, and we even asked this in this 
negotiation. There was a number set. They knew what they 
wanted, and we went about trying to answer those, but they got 
what they wanted.
    And I will say that in some of the respects that were 
mentioned to the studies, we had asked for background 
information, we had asked for data and information and have not 
received exactly what we have asked for. We still were not able 
to run some of the models. Nor were we able to get the baseline 
that RMA used. And that would be key to fully understanding the 
cuts and the process.
    Mr. Schrader. Okay, very good.
    I guess the question to Ms. Fowler or anyone on the panel, 
my home State of Oregon, particularly western Oregon, doesn't 
really participate, at least to my knowledge, in a great degree 
to a lot of these programs. What is the rationale behind that? 
You pointed out the vegetative program is not going to be 
working. That is probably more the eastern side of my state.
    Ms. Fowler. It totally depends on the program in that 
particular area, depending on what the rates may be, the price 
elections, different things that are in your particular area.
    Mr. Schrader. Why is the vegetative program not being 
picked up on in the----
    Ms. Fowler. Oh, I am sorry.
    On the vegetative program, it is very difficult to 
understand the infrared data that comes; and, also, it appears 
there is somewhat of a lag time, and a lack of trust and 
understanding that program. There is just very little 
participation in that program. Much easier are the rainfall, 
the NOAA records. If it rains in your 12 x 12 grid, you are 
going to know.
    Mr. Schrader. Mr. Frerichs, the testimony from Mr. Murphy 
indicated that the agents in ``I'' States are paid 
significantly higher than, say, Texas or some other states. Is 
there a reason that that should be the case? And I assume that 
is the reason the ``I'' States take a bigger hit, obviously, 
under the new SRA.
    Mr. Frerichs. Yes, there is a reason for that. The 
underwriting--the expected underwriting gains in the ``I'' 
States have traditionally been higher than other parts of the 
country.
    Traditionally, when Iowa goes, it goes big, like the 
drought of 1988. But the frequency of it, even though it is 
very severe, the frequency of it is much lower than a state 
like Texas, or a state like North Dakota, or any of the states 
in the Great Plains where the risk of farming is greater. You 
have more frequent loss events and, therefore, more indemnity 
payments and, as a result, lower expected underwriting gains 
over time.
    In theory, if the program--if all the crops were rated 
correctly, you would have equal expected underwriting gains, in 
theory. But it doesn't quite work out that way because once you 
take frequency into account--and this was one of the goals of 
the negotiation, was to take that under consideration, and we 
think that RMA did that but went a little bit too far. But once 
you start taking frequency into account, then your expected 
underwriting gains are not equal. And so the business in Iowa 
is expected to return more to an insurance company than, say, 
the business in Texas. Is that an equity issue? No, that is a 
Mother Nature issue.
    Mr. Schrader. Very good.
    Thank you. I yield back.
    The Chairman. Thank you.
    Mr. Pomeroy.
    Mr. Pomeroy. Thank you.
    The Chairman. About 10 minutes to vote, so we are going to 
try to wrap up. I wouldn't want to cut you off.
    Mr. Pomeroy. What are you telling me, Mr. Chairman.
    The Chairman. I am telling you I want to yield the gavel.
    Mr. Pomeroy. Okay. I got the message. Let me be quick.
    I find this panel very interesting, and I am not surprised 
by the thrust of the comment. Adjustment in what we are paying 
our private partner to crop insurance has been changed 
significantly with this SRA renegotiation.
    The reason for my remarks on the prior panel were to try to 
put into the record the very real threat to crop insurance 
posed by others in this Congress. This bill does not begin and 
end in this Committee room. We are part of the process. And so 
I believe that some adjustment had to be made.
    As an old insurance commissioner, I can't understand how we 
don't weaken our arguments completely when we look at 
commissions paid over and above A&O expenses for example. It 
would seem to me that you, on the one hand, are having a threat 
to company solvency or, on the other hand, you are 
acknowledging that you are overpaying for the actuarial portion 
of the program; because companies can casually cut into it to 
pay agent commission for purposes of bidding for a given agent 
for purposes of expanding market share.
    When confronted with those arguments by GAO and the 
oversight committee--these are tough questions. So my own 
opinion is companies shouldn't pay more than A&O and, if they 
are, something is wrong with that.
    Mr. Deal, your long time experience in the program might be 
helpful on offering some perspective on that question. Is it 
ever justified for a company to pay more than 100 percent of 
A&O on agent commission.
    Mr. Deal. I think the issue gets back to what is the true 
amount that is needed for service. I don't argue that the 
amount that they are doing is right. I think a study has to be 
done to really define the service that the companies are 
rendering and the service that the agents are rendering, and 
that there is ample compensation for that.
    You are right. The publicity out in the company is not good 
on the path of some of these agents. It isn't kept quiet. It is 
in the community.
    So I agree with you. The new SRA gives good discipline to 
the issues that you are talking about. I think the study will 
determine what the numbers are and what the numbers should be. 
I think the new SRA goes a long ways to squelching some of the 
negative terms you are hearing out there. And I grant you have 
a big job ahead of you, because there is much of Congress that 
does not look at whole agriculture as an expenditure and say 
maybe this ought to be. So I don't envy your job of moving 
ahead with this deficit that we have and where do you pull 
numbers from and how you do that. I mean, we are just a little 
piece of that.
    Mr. Pomeroy. On the cuts that were in the farm bill, many 
of them are related to timing of payments. Because you can gain 
basically a scoring window, and the Chairman put those in for 
purposes of protecting just as much of this program as he 
possibly could under what we were given.
    Was there a $6 billion marching order, Mr. Parkerson? I 
think that is an important point. I asked it in the privacy of 
my office of RMA. Did OMB give you a figure? And they have told 
me no.
    And I see Keith Collins in the audience. We remember when 
he was here as head of FCIC.
    And we know that there had been a number given from the 
Office of Management and Budget, and it was wrong. That is not 
what this SRA was ever supposed to be about. They indicated 
this is a bottom-up process looking at program review. Believe 
it or not, but that is the information they told me. And I 
actually don't believe this one came from the Office of 
Management and Budget.
    Relative to the role played by agents--so I don't want to 
just sound like I am not sympathetic to what is going on out 
there--the products are more complicated than ever before and 
more essential to the survival of the family farm than ever 
before. I believe it reflects the success of the program. But, 
on the other hand, there is a good bit of work.
    I call our insurance agents risk counselors. Because, 
basically, they help understand where is the exposure, how do 
we protect it. And we have to be cognizant there is an awful 
lot of terrific work done in the delivery of the product by our 
private-sector partners. It comes around and around. Maybe we 
just ought to deliver this product in the FSA office. I have 
heard it many times during my years in Congress.
    Clearly, the product is much more complicated than can be 
competently delivered, in my opinion, in a crammed session of 
an already overworked FSA office, supported by bad computers. 
If we are going to rely on private-sector partners, we have to 
treat them fairly.
    I cannot conclude that the ultimate result of the SRA is an 
unfair result. It is a dramatic result. You have not convinced 
me it is an unfair result in light of the external pressures of 
the program that could have produced much more horrific 
results.
    I have found what you said very interesting and understand 
where you are coming from.
    Thank you. I yield back, Mr. Chairman.
    The Chairman. Thank you very much.
    That concludes our--we have had a very good discussion. I 
say this to my Ranking Member and the rest of the panel. It was 
a good discussion. I think we are going to have to have more. 
So, Mr. Murphy, Mr. Moran and I have decided we want to invite 
you up for a visit. We will do that, and we hope it will happen 
soon. So our schedulers will work on that.
    With that, I would like to recognize Mr. Moran for any 
closing comments he might want to make.
    Mr. Moran. Mr. Chairman, thank you very much for the 
hearing you conducted today.
    I appreciate the witnesses. I look forward to having 
additional conversations with the witnesses, the people they 
represent, as well as Mr. Murphy at the Risk Management Agency.
    The only thing that I would add is that Mr. Frerichs has 
indicated at some point in time maybe we ought to look at the 
process and the outline by which the SRA renegotiations 
proceed, with the desire of making certain that there are 
better checks and balances than maybe exist today.
    And Mr. Pomeroy's comment, in my view, somehow we have to 
get the OMB out of this, where the goal of SRA negotiations is 
not some set dollar amount of savings. Because that then drives 
the process as compared to a lot of other factors that are very 
important. So I look forward to working with you and others to 
see that we reach that in the long term.
    The Chairman. I certainly concur with your comments, and we 
will do that. We are all in this for the same reason. We want 
to make this safety net as good as we can make it and available 
and affordable, and that is our common goal.
    So, with that, under the rules of the Committee, the record 
of today's hearing will remain open for 10 calendar days to 
receive additional material and supplements, as well as written 
responses from the witnesses to any questions posed by Members.
    This hearing is about to adjourn. I would like to thank 
every one of you for taking the time. Thank you very much for 
coming and spending this time and sharing your concerns, your 
expertise. And I also want to thank Administrator Murphy for 
the time you spent with us today. I think this has been a good 
hearing. I appreciate it, and we will continue to work 
together. Thank you very much.
    [Whereupon, at 11:50 a.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
      
                          Submitted Questions

Questions Submitted by Hon. Leonard L. Boswell, a Representative in 
        Congress from Iowa??
Response from William J. ``Bill'' Murphy, Administrator, Risk 
        Management Agency, U.S. Department of Agriculture
    Question 1. You mention in your testimony that RMA plans to provide 
a performance-based discount, or refund, as part of the savings from 
the SRA. What is the plan for providing this discount?
    Answer. The Federal Crop Insurance Act contains a provision that 
allows for a performance-based discount to be provided to a producer 
who has good insurance or production experience relative to other 
producers of that agricultural commodity in the same area. RMA is 
currently evaluating producer experience and developing a program that 
places emphasis on longevity of program participation and overall good 
demonstrated loss experience within the Federal Crop Insurance Program. 
While many details are currently being worked out, RMA plans to provide 
some preliminary information on this program in the near future with 
the goal of implementing the program later this year.

    Question 2. Please explain the rationale behind the insertion of 
the covenant not to sue into the final draft.
    Answer. The new SRA requires the companies to covenant against 
bringing legal action against RMA regarding the A&O subsidy structure, 
and to include such a covenant in agent contracts. This provision was 
included in the new SRA because of potential legal challenges by 
companies and other parties if any changes were made to the A&O subsidy 
structure. In particular, Congress included two separate provisions 
regarding how A&O can be established in the Federal Crop Insurance Act 
(Act) and there was honest disagreement over which provision had 
precedence.
    To ward off potential legal challenges, in the third draft of the 
SRA RMA elected to include an economic disincentive to sue but it did 
not prohibit such suits. Companies argued that this provision might 
have been too broad and too severe. On reflection, RMA agreed. The 
companies offered, as an alternative, a draft of the covenant not to 
sue. Such covenants are not uncommon in the private sector when parties 
wish to resolve the dispute and complete the negotiation of a deal. 
Because the situation was similar here, RMA was not opposed to using 
the covenant not to sue to resolve its dispute with the companies.
    With respect to the application of the covenant not to sue to the 
agents, RMA had a legitimate concern that while the companies had 
agreed to include a covenant not to sue, they could still negate the 
agreed-to financial provisions in the SRA by encouraging their agents 
to sue. Although agents do not sign the SRA, they are included in the 
definition of ``affiliate'' in the SRA, which is mentioned at least 20 
times, not including the Appendices. Further, their function in the 
crop insurance program is to act on behalf of the companies. As 
representatives of the companies, the agents are regulated to the same 
extent as the companies. Therefore, agents are not truly independent 
entities with respect to the crop insurance program and, as 
representatives of the companies, they should be bound by the same 
terms and conditions that bind the companies, including the covenant 
not to sue.

    Question 3. USDA has indicated that funds saved as part of the SRA 
negotiations would be used to meet OMB's Administrative PAYGO 
requirements that the costs of expanding crop insurance pilot programs 
be offset by cuts in other programs/provisions.
    Isn't it true that under the Crop Insurance Act, FCIC has the 
statutory authority to implement new crop insurance programs (including 
expanding pilot programs) without the need to find additional funding 
as long as the programs fit within the statutory cost framework? In 
other words, aren't OMB's Administrative PAYGO requirements to offset 
program costs internal Administration requirements that are not 
required by law?
    Answer. Currently the annual appropriation provides ``such sums as 
are necessary'' for the administration and delivery of FCIC's programs, 
provided the FCIC does so within the statutory authorization and 
funding provided by the Federal Crop Insurance Act. The Administrative 
PAYGO requirement is an initiative to incorporate fiscal discipline 
into administrative decisions that increase mandatory spending. Yes, 
FCIC has the statutory authority to implement new crop insurance 
programs or expand pilot programs. The Administrative PAYGO 
requirements are not statutory, but guidance, which are incorporated in 
section 31.3 OMB Circular. A-11, Preparation and Submission and 
Execution of the Budget. When FCIC is directed in statute to implement 
a new program or pilot, it does so without regard to Administrative 
PAYGO. However, under its general statutory authority, it is at FCIC's 
discretion to implement new programs and pilots, when they are not 
expressly directed to carry them out in statute. The cost of 
implementing new programs is a reason FCIC may not exercise its 
discretion to implement such new programs. FCIC previously considered 
cost before the Administrative PAYGO requirements were in place when 
deciding to implement new programs. Administrative PAYGO only 
formalizes having to consider cost when deciding to implement new 
programs where the spending is mandatory, and FCIC is compliant with 
these requirements.

    Question 3a. Did FCIC expand pilot programs before OMB introduced 
its internal, Administrative PAYGO requirements in 2005? How many crop 
insurance pilot programs have been expanded since Administrative PAYGO 
was introduced in 2005?
    Answer. Yes, prior to the Administrative PAYGO requirements, FCIC 
expanded pilot programs either by adding new or additional counties 
within a pilot program, or by expanding various features or coverage to 
provide additional benefits and risk protection. As noted before, 
however, cost was always a consideration when deciding to approve new 
or expansion of programs. RMA expanded the Sugar Beet Stage Removal 
Option pilot program, and expanded the Forage Seed pilot program while 
also converting it to a permanent program.

    Question 3b. What pilot programs has FCIC wanted to expand but was 
prevented from doing so because it could not find the Administrative 
PAYGO offsets that OMB required?
    Answer. To date, RMA has not been prevented from expanding any 
program under the Administrative PAYGO requirements. Funding has been 
available for all pilot program expansions including for the Pasture, 
Rangeland, and Forage pilot program, which was recently funded and 
expanded for the 2011 crop year.

    Question 4. How do you address the concerns raised about the 
Milliman study on the companies' rate of return on equity, specifically 
the time horizon used and the fact that the model did not take into 
account actual firm equity and crop insurance requirements for equity?
    Answer. Regarding the time horizon used in the Milliman study, the 
Data Acceptance System (DAS) used by RMA to monitor policy-level crop 
insurance data was established in 1989. The time period analyzed by 
Milliman encompasses the entire DAS data set currently available at 
RMA. Although a longer historical time period may have been desirable, 
the Milliman analysis reflects the longest historical data set of all 
Approved Insurance Providers (AIP) the profitability studies currently 
have available. Indeed, the study sponsored by the crop insurance 
industry and conducted by Grant Thornton, LLP (Grant Thornton), 
examines data only back to 1992. Milliman acknowledged in its report 
that surveying only 20 years limits the conclusions one may draw as to 
the likelihood of potential catastrophic events. To fully consider this 
possibility, it performed a hypothetical analysis in which the 20 year 
span includes a second ``disaster'' year, similar to that of 1993 in 
place of an average year. The result of this hypothetical exercise is 
an average historical rate of return which still exceeds the reasonable 
rate of return by 2.3 percent. Regarding firm equity assumptions, 
Milliman correctly observes that for a multi-line insurer, policyholder 
surplus is shared by all lines of insurance written by the company. 
Consequently, being able to attribute any portion of the surplus to a 
particular line of insurance is complicated and requires a method for 
allocating the surplus across lines of insurance. Despite the 
difficulty, one must consider allocations of surplus to specific lines 
of insurance to solve an extensive range of financial and regulatory 
problems common to the insurance industry. Milliman employs the 
National Association of Insurance Commissioners (NAIC)-sanctioned 
method for allocating surplus across lines. Milliman finds that 
investment earnings from policyholder surplus are a significant element 
of AIP profitability. Properly accounting for these earnings is not 
possible without a credible surplus allocation method. Milliman assumes 
that investments earned from policyholder surplus are the same rate for 
crop insurance as for other property and casualty (P&C) lines of the 
company. Investment earnings are an important contributor to the 
profits of all insurance companies, including those of crop insurance 
companies. However, the two major sources of investment earnings--(a) 
operations and (b) policyholder surplus--should be treated differently 
between crop insurance and other lines. Milliman recognizes that crop 
insurance companies do not collect premiums upfront for investment 
prior to claims being paid, as with other lines. The resulting 
assumption by Milliman is that the companies do not earn any investment 
income from operations. On the other hand, crop insurance inherently 
shares investment earnings from policyholder surplus with the company's 
other insurance lines. Milliman uses the guidance provided by the NAIC 
for allocating policyholder surplus across lines of insurance to 
properly attribute these investment earnings to AIPs.

    Question 5. Where is RMA at with regard to the study of agent 
business costs?
    Answer. The Government Accountability Office study GAO-09-445 
``CROP INSURANCE: Opportunities Exist to Reduce the Costs of 
Administering the Program'' recommended that RMA conduct an evaluation 
of the costs of program delivery. RMA is committed to contracting for 
such a study. However, the 2008 Farm Bill authorized RMA and the 
companies to negotiate a new SRA effective for the 2011 reinsurance 
year, which began July 1, 2010. Given this deadline, it was not 
possible for a contracted study of program delivery costs to be 
completed in a timely manner to be relevant for the negotiation. RMA 
will now begin an effort to contract for a study of program delivery 
costs that would provide meaningful and timely information and analysis 
for future negotiations of the SRA. We anticipate that a Statement of 
Work will be completed in the fall of 2010, such that the Agency can 
begin to solicit proposals from outside parties to conduct the 
evaluation.

    Question 6. The Adjusted Gross Revenue (AGR) insurance product has 
not been very successful in attracting farmer interest, despite the 
fact that farmers with diversified production enterprises have long 
wanted an option that works for them. It has also been a struggle for 
organic farmers to find crop insurance options that work for them, 
especially in light of higher premium charges on the front end and 
payouts at the conventional price at the back end if there has been a 
significant loss. Is the Department giving any consideration to 
improving AGR coverage or to fixing problems with insurance for organic 
producers as part of its strategy on using the portion of the $2 
billion designated for RMA program improvement? If so, could you share 
with the Committee the contours of the options being discussed? If not, 
why not?
    Answer. RMA understands and appreciates the need for a product that 
will cover the multitude of specialty and organic crops that do not 
have conventional crop insurance programs. Both of the AGR programs 
insure all commodities on the farm on a whole farm basis. These two 
programs rely heavily on historic, farm, tax forms for underwriting 
purposes.
    For 2010, only 410 farms nationwide are insured with the AGR 
product and 540 farms, nationwide, are insured with AGR-Lite. Organic 
producers are covered under both AGR products.
    The AGR products have not been widely popular. This is primarily 
due to the complexity of accounting, records, and reporting necessary 
to convert tax information into an insurance guarantee and to account 
for a multitude of commodities under one policy.
    At this time, the AGR products continue to be the only risk 
management product available for some commodities. RMA is currently 
evaluating the effectiveness and future of the AGR and AGR-Lite plans 
of insurance to determine if the potential exists for improving these 
products, or better specifying the target market best suited for these 
products to work most effectively for producers. However, the AGR 
program is not one of the initiatives currently being considered under 
the $2 billion designated for RMA improvements. RMA continues to move 
forward in improving crop insurance coverage for organic producers so 
they will have viable and effective risk management options like many 
of the conventional crop programs. Consistent with the 2008 Farm Bill, 
RMA contracted for research into whether or not sufficient data exists 
upon which RMA could determine a price election for organic crops, and 
if such data exists, to develop a pricing methodology using that data. 
Also included in the contract was research into the underwriting, risk, 
and loss experience of organic crops as compared with the same crops 
produced in the same counties during the same crop years using 
nonorganic methods. Three reports have been completed from this study, 
and RMA plans to make them available in the near future.
    RMA intends to establish dedicated price elections for organic 
crops that are supported by data and sound economic pricing principles. 
The first of these organic price elections may become available for the 
2011 crop year. In addition, RMA will continue to capitalize on 
improved data collection and sharing of organic production and price 
data occurring throughout USDA, an initiative to better leverage the 
resources of all of our agencies to address this important segment of 
agriculture.

    Question 7. Concerns have been expressed about the impact of RMA's 
current policy of allowing producers to transfer their current Actual 
Production History or APH to new lands that they may acquire. These 
concerns range from assigning blame for breaking out grass and 
pastureland for crop production to causing an increase in cash rental 
rates and making it harder for beginning farmers to compete with 
established producers who have better APHs. Can you explain how the APH 
transfer provision works? And do you think it is exacerbating either of 
these two situations, increasing cash rents or incentivizing the 
breaking out of new land?
    Answer. Producers customarily add land to their farming operations 
and RMA procedure allows producers to use the average of their approved 
APH yields for a crop/practice/type on land newly added to their 
operation (commonly referred to as added land), if certain criteria are 
met. This allows producers to use their production history to establish 
the approved APH yield instead of using the county transitional yield 
(T-Yield) on newly added land. However, if the land being added exceeds 
RMA's established acreage limitation of 640 acres, a review by the RMA 
Regional Office is required or the approved yield for the land being 
added is limited to the county T-Yield. If the land being added exceeds 
2000 acres, the approved yield for the added land is limited to the 
county T-Yield. Generally, APH yields cannot be transferred to a 
different person unless both parties share in the production of the 
crop for the current crop year, or when a farming operation is 
transferred and the transferee assisted in the establishment of the 
approved APH yields. The Basic Provisions stipulate acreage that has 
not been planted and harvested or insured in at least one of the three 
previous crop years is generally uninsurable unless a written agreement 
is authorized by RMA. For a written agreement to be approved for newly 
broken land, the crop planted on the recently broken acreage must be 
appraised by the approved insurance provider to yield 90 percent or 
greater of the approved yield used to determine the production 
guarantee provided by the written agreement. The approved yield for 
these written agreements for newly broken land are generally a 
percentage of the county established T-Yield for the crop with 
approximately 70 percent of these written agreements providing a 
production guarantee per acre equal to, or less than the county T-
Yield. Additionally, over the last nine years, acreage with these 
written agreements had an average loss ratio of about half compared to 
the same crops, producers, and counties for acreage that was not 
subject to a need for a written agreement. The restrictions of the 
production guarantee to be based generally on a percentage of the 
county T-Yield and other requirements placed on newly broken land to 
obtain crop insurance on such land minimizes any incentive crop 
insurance may have to break out new land for a profit.

    Question 8. Given the tremendous interest in revenue products for 
many different enterprises, how can we get more revenue protection for 
producers through the approval process at USDA? What are your 
constraints with regard to the pricing information necessary to have a 
viable revenue product?
    Answer. Section 522(e)(4) of the Federal Crop Insurance Act (Act) 
prohibits the Federal Crop Insurance Corporation (FCIC) from conducting 
research and development for any new policy for an agricultural 
commodity offered under the Act. Many new insurance programs are 
developed and submitted by private entities to the FCIC Board of 
Directors (Board) for approval under section 508(h) of the Act. If the 
Board determines that the product is actuarially appropriate, follows 
sound insurance principles and is in the best interests of producers 
and taxpayers, it will be approved for sale. RMA also contracts for 
certain development efforts, and Board approval is generally consistent 
with that of privately submitted products.
    Regarding constraints on pricing information, data utilized in 
establishing prices for revenue products must be credible, reliable and 
consistently available, as with all insurance products. In addition, 
data must be available to project a price and to calculate an actual 
price at harvest, and generally must be from independent sources or 
collected in a way that does not allow undue influence or manipulation 
that could cause program vulnerabilities.
    Existing revenue products for the major commodities utilize the 
futures market to establish the projected and harvest prices. The 
futures market provides extensive historical prices that are 
appropriate to use in evaluating price risk and in establishing 
projected and harvest prices. In the absence of data from the futures 
market, there are often very limited sources of data that can be 
obtained in a manner that provides independent, unbiased results that 
will accurately reflect market expectations that producers can rely 
upon. Research into potential sources of price data for new revenue 
products have to be conducted on an individual crop basis to assure a 
consistent and reliable source of data and methodology can be 
established.

Questions Submitted by Hon. K. Michael Conaway, a Representative in 
        Congress from Texas
    Question 1. The Federal Crop Insurance Corporation Board of 
Directors approved a Cottonseed Pilot Endorsement program in 2009. It 
was the hope of many producers that the program would be implemented 
for the 2010 crop year; unfortunately it was not. Can you update the 
Subcommittee on the status of this program and when it will be 
implemented?
    Answer. RMA intends to release the Cottonseed Pilot Endorsement 
program for sale to producers beginning with the 2011 crop year.

    Question 2. I have heard from many producers who utilized the Group 
Risk Income Protection or GRIP. This year GRIP was discontinued for 
many crops in many counties across the country. Why was this program 
discontinued and since it was a very popular program, what is RMA doing 
to possibly reinstate or revamp the program?
    Answer. The Group Risk Plan (GRP) and Group Risk Income Protection 
(GRIP) plans of insurance utilize information collected and reported by 
the National Agricultural Statistics Service (NASS) county estimates 
program. NASS implemented modifications to their publication standards 
that requires estimates for a given crop be supported by at least 30 
reports where the respondent reported both harvested acreage and yield, 
or production from respondent reported yields must account for a 
minimum of 25 percent of the current year's production estimate for 
that county or district. Implementation of these standards has 
increased the reliability of NASS' published county level estimates, 
but has resulted in fewer publishable county estimates.
    Although RMA has used county estimates provided by NASS that have 
not met NASS' publication criteria, doing so requires RMA to rely on 
information not generally available to the public. There have been two 
appeals in which the NAD. Director found against RMA in their review. 
The director of NAD held that RMA acted inconsistently with applicable 
regulations and calculating GRIP indemnity payments. 7 C.F.R. section 
407.9 specifically provides that payment yield (which is the same as 
the final county yield) is the official estimated yield published by 
NASS. Thus, the applicable regulation, section 407.9, and the GRIP 
Coverage Insurance policy, require RMA to rely on published NASS 
figures, specifically the published NASS figure for the payment yield 
(or final county yield). In addition, as the result of an extensive 
program review, NASS has determined that in some cases they will no 
longer produce county estimates for a given crop and/or state, or 
cropping practice within a state. In order to ensure that the GRP/GRIP 
programs, especially the determination of the final county yields upon 
which indemnities are based, operate in a manner transparent to all 
affected policyholders, RMA reviewed the eligibility of all GRP/GRIP 
corn, grain sorghum, cotton, and peanuts county programs.
    RMA considered several criteria in its review. These criteria 
include whether the most recent Census of Agriculture shows at least 50 
farms in the counties producing the crop. In addition, concentration of 
acreage within the county, again based on the most recent Census of 
Agriculture (http://www.agcensus.usda.gov/), must score less than 1,000 
on the Herfindahl-Hirschman Index, a measure of the concentration of 
acreage that assures that no single producer, or small group of 
producers, can unduly affect the county average yield and create 
indemnity payments. There also must be at least 30 of the most recent 
consecutive years of published NASS data available for the crop so that 
there is a sufficient basis to establish credible premium rates.
    RMA also considers a minimum 15,000 planted acres in each of the 
last 10 years to assess the likelihood of credible NASS county 
estimates being available on an ongoing basis. Recent significant 
shifts in planted acreage were also considered, as this can reflect 
changes in production practices that may not be accounted for in 
establishing the expected county yield, the basis of the insurance 
guarantee.
    Finally, RMA considered where policies have been sold and the 
resulting insurance experience. A significant proportion of counties 
have had no GRP or GRIP business in the last few years. The review 
resulted in RMA removing 1,062 counties, 752 of which have had no 
policies earning premium for the 2009 crop year. For the 2010 crop 
year, RMA deleted 469 counties for corn (137 with policies earning 
premium); 350 counties for soybeans (146 with policies earning 
premium); 75 counties for cotton (16 counties with policies earning 
premium); 125 counties for grain sorghum (11 with policies earning 
premium) and 43 counties for peanuts, none of which had policies 
earning premium.
    RMA is in the process of reviewing information available for the 
GRP/GRIP programs for the 2011 crop year to evaluate counties where the 
program was deleted and whether any new information warrants 
reconsideration, and if any additional deletions are warranted.

    Question 3. Obviously we all are very concerned about the baseline 
implications of the recently signed SRA. Of the $2 billion that you are 
reinvesting do you have a complete list of programs that those monies 
will be used for that you could share with the Subcommittee?
    Answer. The savings from the SRA will be used to offset the cost of 
expanding several programs administered by RMA and FSA. With regard to 
those programs administered by RMA, savings from the SRA has already 
been used to offset the cost of expanding insurance coverage for 
pasture, rangeland, and forage (PRF) in the states of Colorado, Idaho, 
North Dakota, Texas, Oklahoma, Oregon, Pennsylvania, South Dakota, 
Georgia, Utah, Florida, California, New Mexico, Arizona, and New York. 
PRF coverage will be expanded to Minnesota, Arkansas, and Nevada in 
subsequent years.
    The SRA savings will also offset the cost of providing a 
performance-based premium refund to those growers with exceptionally 
good loss experience. The SRA savings will also allow the potential 
expansion of crop insurance coverage to strawberries, forage seeding, 
sugarbeets, pistachios, honeybees, aquaculture, poultry, and crops 
grown exclusively for bioenergy. Finally, a portion of the SRA savings 
will be used to offset the cost of revising or expanding the 
availability of current crop insurance products.
    With regard to those programs administered by FSA, a portion of the 
SRA savings will be used to improve and enhance the availability of the 
Conservation Reserve Program (CRP) and the Conservation Reserve 
Enhancement Program (CREP).

    Question 3a. Cotton is a very important crop in my district. It is 
my understanding that the cotton industry has contacted you about using 
some of these savings for programs such as redesigning the quality loss 
adjustment for cotton. This would come at a nominal cost and RMA has 
agreed in principle with the new program. Can you ensure me that RMA 
will carefully review this request?
    Answer. RMA has been in discussions with the cotton industry 
regarding potential changes and improvements to the cotton quality loss 
adjustment provisions. Progress has been made but additional detailed 
information is likely needed to fully implement all desired changes. 
RMA is actively working with the appropriate USDA agencies to obtain 
the needed data. While there may be some administrative funding issues 
among the agencies, RMA is working to address or resolve those issues.

Questions Submitted by Hon. Jim Marshall, a Representative in Congress 
        from Georgia
    Question 1. How much money is budgeted annually for RMA to take 
acreage reports?
    Answer. Insureds provide acreage reports to their agents, who in 
turn provide the reports to their companies. The acceptance and 
processing of acreage reports is a key aspect of servicing Federal crop 
insurance policies, and FCIC pays the companies an Administrative and 
Operating (A&O) subsidy to perform such required services.

    Question 2. How can USDA refine the acreage reporting process so it 
will meet all the agencies' needs within USDA and eliminate the need 
for producers to make duplicate reports within USDA?
    Answer. In July, USDA formed the Acreage/Crop Reporting 
Streamlining Initiative (ACRSI) as a joint effort between its offices 
for program administration and information technology to coordinate an 
effort with the vision to ``have a common USDA framework for producer 
commodity reporting in support of USDA programs''. The project intends 
to establish common USDA producer commodity reporting standards to meet 
the needs of the agencies that require the data in the administration 
of their programs, contribute to the elimination of duplication of 
information collection, and simplify producer reporting. The project 
looks to expand on the success of the Comprehensive Information 
Management System which compiles common producer, program, and land 
information collected by FSA, RMA, and approved insurance providers. 
The project has also engaged the precision agriculture industry in an 
effort to collaborate on establishing standards to enable producers to 
use these systems to meet USDA program requirements. USDA is committed 
to seeking greater efficiency and effectiveness in the administration 
of its programs through the use of technology and better in-house 
coordinated efforts among its various agencies.

    Question 3. Would a separation of duties between selling insurance 
and processing claims inject more integrity into the crop insurance 
program and assure greater responsibility in the use of tax dollars?
    Answer. Under the SRA's Conflict of Interest Provisions, sales 
agents and their relatives are prohibited from being involved in loss 
adjustment activities in the county or an adjoining county where the 
sales functions are performed. In addition, loss adjusters are not 
permitted to adjust losses for individuals with whom they have a 
business, financial or legal relationship, or for relatives. All agents 
and loss adjusters must submit annual Conflict of Interest disclosures 
to their companies which allows the companies to conduct mandatory and 
discretionary reviews to identify any activities prohibited under the 
SRA's Conflict of Interest provisions. Therefore, such separation of 
duty is already mandated.

    Question 4. In response to a provision in the 2008 Farm Bill, RMA 
made several recommendations regarding pecans in its recent Report to 
Congress. As we wait to see how RMA intends to act on the report's 
finding, I would like RMA's comments on the possible benefits of 
implementing the following changes for the 2011 crop cycle:
    Changing the current 10 year history RMA uses in determining pecan 
coverage to 6 years.
    Answer. This recommendation was put forth for perennial crops for 
which alternate bearing and downward trending yield adjustments are 
applicable. The pecan revenue policy is a 2 year coverage module, which 
negates the need for alternate bearing yield adjustments. RMA is 
evaluating the feasibility of using a shorter base period. However, 
this will require a legislative change and the use of a shorter base 
period may expose pecan producers to more variable insurance guarantees 
in any given year.

    Question 4a. Allowing growers to obtain insurance once trees in a 
new grove produce 600 pounds or more of pecans rather than waiting 12 
years prior to obtaining insurance on a new grove.
    Answer. The current 12 year growing season requirement is an 
eligibility requirement before pecan acreage is insurable. RMA plans to 
propose removing the 12 year growing season requirement and to make 
pecan acreage insurable once a certain level of production is met. The 
production levels may vary from one region to another. Any change to 
the eligibility requirements must go through the regulatory process 
subject to public comment.

    Question 4b. Establishing a 60 percent ``catastrophic cup,'' which 
will ensure that producers will not have to report less than 60 percent 
of their actual production history average for the purposes of 
calculating losses.
    Answer. The 60 percent ``catastrophic cup'' mentioned by Mr. 
Marshall is in regards to the yield substitution generally available to 
crops insured under the APH plan of insurance that provides individual 
yield coverage. Under APH, when the producer's recorded or appraised 
yield for the commodity was less than 60 percent of the applicable T-
yield, the producer can exclude and replace such yield with a yield 
equal to 60 percent of the applicable T-yield. The Pecan Revenue policy 
is not under the APH plan of insurance. However, RMA is currently 
evaluating the feasibility of providing a similar adjustment for 
pecans.

    Question 4c. Allowing growers to increase their covered acres by up 
to 25 percent with no production history rather than restrict it to 
12.5 percent of their current coverage.
    Answer. RMA requires approved average revenue per acre to be 
recalculated when a producer's acreage increases by more than 12.5 
percent to ensure the correct revenue guarantee is established. 
Allowing producers to keep the same average revenue per acre when the 
insured acreage is increased by more than 12.5 percent may create 
program vulnerabilities. RMA has no plans to change this requirement.

    Question 4d. Allowing growers to insure groves by farm number 
rather than their county average.
    Answer. Currently producers can insure their acreage by enterprise 
or basic units. It has been requested that producers be allowed to 
insure optional units by farm serial number. RMA will review this 
optional unit recommendation as we work on revisions to the Pecan 
Revenue Policy. Any change to unit structure would likely require an 
adjustment in premium rates and must go through the regulatory process 
subject to public comment.

    Question 4e. Raising the maximum production dollars per acre for 
growers from $1,350 to $1,800 per irrigated acre when determining 
premium payments.
    Answer. Under RMA's current rating methodology for pecans, all 
pecan producers with an approved average revenue per acre of $1,350 or 
greater pay the same premium rate. RMA is researching alternative 
rating methodologies for calculating premium rates for pecans. One 
method under consideration is very similar to the methodology used for 
the APH plan of insurance. Under this rating methodology, each pecan 
producer's premium rate would be based on their own specific approved 
average revenue per acre and its relationship to the applicable county 
average revenue per acre. Producers with approved average revenues 
greater than the applicable county revenue per acre would have premium 
rates lower than the county average premium rate. In essence, the 
greater the individual pecan producer's approved average revenue per 
acre in relation to county average revenue per acre the lower the 
individual's premium rate. And, the lower the individual pecan 
producer's approved average revenue per acre is in relation to the 
country average revenue per acre the higher the individual's premium 
rate will be.
    Based on its preliminary findings, RMA believes this rating 
methodology may provide more fair and equitable premium rates to pecan 
producers. However, RMA must complete additional producer impact 
analyses before reaching a final decision. Any potential rate changes 
would not likely be applicable until the 2012 crop year.

                                  
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