[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
U.S. GOVERNMENT PRINTING OFFICE
58-021 WASHINGTON : 2010
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
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.