[Federal Register Volume 59, Number 113 (Tuesday, June 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14296]


[[Page Unknown]]

[Federal Register: June 14, 1994]


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DEPARTMENT OF AGRICULTURE

Federal Crop Insurance Corporation

7 CFR Part 400

 

General Crop Insurance Regulations; Reinsurance Agreement--
Standards for Approval

AGENCY: Federal Crop Insurance Corporation, USDA.

ACTION: Proposed rule.

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SUMMARY: The Federal Crop Insurance Corporation (FCIC) proposes to 
amend the General Crop Insurance Regulations, effective for the 1995 
and succeeding reinsurance years to revise the general qualifications 
for being awarded a Standard Reinsurance Agreement. This rule intends 
to provide additional information so that FCIC can more accurately 
identify those insurance companies at risk of bankruptcy.

DATES: Written comments pursuant to this rule must be received by June 
29, 1994.

ADDRESSES: Comments pursuant to this proposal should be sent to Mari 
Dunleavy. Regulatory and Procedural Development Staff, Federal Crop 
Insurance Corporation, U.S. Department of Agriculture, Washington, DC, 
20250. Hand messenger delivery may be made to, Suite 500, 2101 L 
Street, NW., Washington, DC. Comments received may be viewed and copied 
at Suite 503, 2101 L Street, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:
Mari Dunleavy, Regulatory and Procedural Development Staff, Federal 
Crop Insurance Corporation, U.S. Department of Agriculture, Washington, 
DC, 20250, telephone (202) 254-8450.

SUPPLEMENTARY INFORMATION: This action has been reviewed under USDA 
procedures established by Departmental Regulation 1512-1. This action 
does not constitute a review as to the need, currency, clarity, and 
effectiveness of this regulation under those procedures. The sunset 
review date established for these regulations is March 31, 1999.
    This rule has been determined not significant for purposes of 
Executive Order 12866 and, therefore, has not been reviewed by the 
Office of Management and Budget.
    This action will not have a significant economic effect on a 
substantial number of small entities. This action does not increase the 
paperwork burden on the reinsured company because the reinsured company 
must already provide the additional information required by this 
regulation to the state in which it is licensed. Therefore, this action 
is determined to be exempt from the provisions of the Regulatory 
Flexibility Act and no Regulatory Flexibility Analysis was prepared.
    This program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.450.
    This program is not subject to the provisions of Executive Order 
12372 which requires intergovernmental consultation with state and 
local officials. See the Notice related to 7 CFR part 3015, subpart V, 
published at 48 FR 29115, June 24, 1983.
    This action is not expected to have any significant impact on the 
quality of the human environment, health, and safety. Therefore, 
neither an Environmental Assessment nor an Environmental Impact 
Statement is needed.
    The Office of the General Counsel has determined that these 
regulations meet the applicable standards provided in subsections 2(a) 
and 2(b)(2) of Executive Order 12778. The provisions of this rule are 
not retroactive and will preempt state and local laws to the extent 
such state and local laws are inconsistent herewith. The administrative 
appeal provisions located at 7 CFR 400.169, must be exhausted before 
judicial action may be brought.
    Since reinsured companies must already provide the additional 
information required by the proposed rule to the state which licenses 
them, this proposed rule does not contain information collections that 
require clearance by the Office of Management and Budget under the 
provisions of 44 U.S.C. chapter 35, the Paperwork Reduction Act.
    It has been determined under section 6(a) of Executive Order 12612, 
Federalism, that this proposed rule does not have sufficient federalism 
implications to warrant the preparation of a Federalism Assessment. The 
policies and procedures contained in this rule will not have 
substantial direct effects on states or their political subdivisions, 
or on the distribution of power and responsibilities among the various 
levels of government.

Background

    The standard requirements for being eligible to obtain a Standard 
Reinsurance Agreement (Agreement) with FCIC are found in 7 CFR 400, 
subpart L, and currently require that a reinsured company pass eight 
out of eleven National Association of Insurance Commissioners (NAIC) 
Insurance Regulatory Information System (IRIS) ratios. These ratios are 
meant to be an early warning device, alerting state regulators to 
insurance companies that may be in financial distress. These ratios are 
indicators that evaluate changes in an insurance company's financial 
condition. This rule proposes that FCIC add six additional radios to 
the current eleven IRIS ratios to improve the overall evaluation of a 
reinsured company's financial condition, to require the reinsured 
company to explain discrepancies in all ratios, and to provide a 
financial plan to overcome each discrepancy. The additional ratios 
include one new IRIS ratio, Gross Premium to Surplus, three ratios used 
by A.M. Best (Combined Ratio After Policyholder Dividends, Quick 
Liquidity, and Return on Surplus) found in Best's Key Rating Guide, a 
Two-Year Change to Surplus Ratio developed by FCIC which calculates the 
same as the One-Year Change to Surplus IRIS ratio but for a two-year 
period; and a Net Change in Cash and Short-Term Investments ratio also 
developed by FCIC to measure net cash flow development.
    Thirty-three profitability, leverage, liquidity, and loss reserve 
ratios were calculated by FCIC for each current reinsured company. 
These calculations include both (NAIC), (IRIS), and A.M. Best ratios 
representing the current industry standard with which the reinsured 
company should be familiar. While it is proposed that only selected 
ratios will be used to determine eligibility, all ratios are available 
for financial analysis. The data required to complete the ratio 
calculations are derived from the Statutory Annual Financial Statement 
submitted by the reinsured company to the state insurance departments 
and FCIC. However, FCIC may supplement financial information contained 
in the Statutory Annual Financial Statement with information obtained 
from other audited or unaudited financial statements prepared in 
accordance with Generally Accepted Accounting Principles.
    The ratios were evaluated to determine which ratios within each 
category best represent Multiple Peril Crop Insurance (MPCI) liability 
and its impact on insurance companies. The selection criteria included 
factors such as the short-term nature and annual cash flow cycle of 
MPCI insurance, and the varying size and business mix of the insurance 
company. For each ratio an acceptable range was established to 
determine whether a company passed or failed the ratio.
    The current surplus requirement utilizes a Minimum Surplus Factor 
which limits a reinsured company's liability under the MPCI program 
based on the surplus available to the reinsured company. The 
liabilities of other lines of business written by the reinsured company 
are generally not considered. However, if a reinsured company 
underwrites only MPCI and crop-hail insurance, both liabilities will be 
considered. Since much of FCIC's MPCI insurance is delivered by 
insurers that write considerable premium and policies in the crop-hail 
market, increased evaluation using additional ratios for evaluating and 
comparing each company's financial integrity is necessary.
    Seventeen ratios were selected for the general qualifications, 
including the eleven present NAIC IRIS ratios. Company profitability is 
measured by the following six ratios: Combined Ratio After Policyholder 
Dividends, Two-Year Overall Operating, One-Year Change in Surplus, Two-
Year Change in Surplus, Return on Surplus, and Investment Yield. The 
profitability on an MPCI reinsured company is dependent on company 
underwriting practices, catastrophic loss experience and recovery, and 
its ability to generate an adequate return on investments.
    A reinsured company's liquidity and cash management are measured by 
the following four ratios: Agents' Balances to Surplus, Quick 
Liquidity, Liabilities to Liquid Assets, and Net Change in Cash and 
Short-Term Investments. The combination of varying annual loss 
experience, loss payout to premium collection time frame, and MPCI 
accounting procedures, require the company maintain sufficient 
liquidity. Cash and short-term investment management is a key factor in 
maintaining sufficient liquidity and meeting current obligations.
    The four leverage ratios used are: Gross Premium to Surplus, Net 
Written Premium to Surplus, Change in Net Writings, and Surplus Aid to 
Surplus. These measures will indicate if a reinsured company may be 
overexposing their surplus to risk variation and reinsurance 
dependency. The three loss reserve ratios used are: One-Year Reserve 
Development to Surplus, Two-Year Reserve Development to Surplus, and 
Estimated Current Reserve Deficiency to Surplus. These ratios determine 
if reserves have been understated to increase surplus and to estimate 
current reserve adequacy.
    Section 400.173 is removed as it is not necessary after revising 
Subpart L to determine if the insurer is otherwise financially sound. 
If an insurer does not pass the required ratios and submits a financial 
plan that does not alleviate discrepancies in the required ratios, the 
reinsured company will be considered not financially sound and will not 
be awarded a Standard Reinsurance Agreement.
    All participating insurance companies in the crop insurance 
industry have been fully advised of the content of this proposed rule 
during the preparation stage and in fact have participated in 
developing this rule. Since the rule must be effective prior to the 
effective date of the Standard Reinsurance Agreement (July 1, 1994), it 
has been determined that for good cause, a 15 day comment period is 
sufficient. In May, FCIC held a meeting for the express purpose to 
introduce and discuss the SRA and its standards for approval prior to 
its publication. All parties interested in the SRA were invited. Prior 
to its publication, a copy of this rule was sent to all persons 
interested in the crop insurance program.

List of Subjects in 7 CFR Part 400

    Crop Insurance.

Proposed Rule

    Accordingly, pursuant to the authority contained in the Federal 
Crop Insurance Act, as amended (7 U.S.C. 1501 et seq.) the Federal Crop 
Insurance Corporation hereby proposes to amend 7 CFR part 400, subpart 
L of the General Administrative Regulations effective for the 1995 and 
succeeding reinsurance years as follows:
    1. The authority citation for 7 CFR part 400, subpart L is revised 
to read as follows:

    Authority: 7 U.S.C. 1501-1520.

    2. The heading for subpart L is revised to read as follows:

Subpart L--Reinsurance Agreement--Standards for Approval

    3. Section 400.161 is amended by removing paragraph (f), 
redesignating paragraphs (a) through (e) as paragraphs (b) through (f), 
and adding a new paragraph (a) to read as follows:


Sec. 400.161  Definitions.

* * * * *
    (a) Annual Statutory Financial Statement means the annual financial 
statement of an insurer prepared in accordance with Statutory 
Accounting Principles and submitted to the state insurance department 
if required by any state in which the insurer does business, and the 
subsequent Audited Financial Report filed with the state insurance 
department as prescribed in the National Association of Insurance 
Commissioners Property and Casualty Annual State Instructions. These 
statement are to be audited by an independent Certified Public 
Accountant.
* * * * *
    4. Section 400.162 is revised to read as follows:


Sec. 400.162  Qualification ratios.

    The seventeen qualification ratios include:
    (a) Twelve National Association of Insurance Commissioner's (NAIC) 
Insurance Regulatory Information System (IRIS) ratios found in 
Sec. 400.170(d)(1) (i) and (ii) and Sec. 400.170(d)(2) (i), (ii), 
(iii), (vi), (vii), (ix), (xi), (xiii), (xiv), and (xv) and referenced 
in ``Using the NAIC Insurance Regulatory Information System'' 
distributed by NAIC, 120 West 12th St., Kansas City, MO, 64105-1925;
    (b) Three ratios used by A.M. Best Company found in 
Sec. 400.170(d)(2) (v), (viii), and (x) and referenced in Best's Key 
Rating Guide, A.M. Best, Ambest Road, Oldwick, N.J., 08858-0700;
    (c) One ratio found in Sec. 400.170(d)(2)(iv) which is formulated 
by FCIC and is calculated the same as the One-Year Change to Surplus 
IRIS ratio but for a two-year period; and
    (d) One ratio found in Sec. 400.170(d)(2)(xii) which is also 
formulated by FCIC by dividing the net change in cash and short-term 
investments by the cash and short-term investment balance for the prior 
year.
    5. Section 400.170 is revised to read as follows:


Sec. 400.170  General qualifications.

    To qualify initially or thereafter for a Standard Reinsurance 
Agreement with FCIC, an insurer must:
    (a) Be a licensed or admitted insurer in any state, territory, or 
possession of the United States;
    (b) Be licensed or admitted, or use as a policy-issuing Company an 
insurer that is licensed or admitted, in each state from which the 
insurer will cede policies to FCIC for reinsurance;
    (c) Have surplus, as reported in its most recent Annual Statutory 
Financial Statement, that is at least equal to the MPUL for the gross 
premium proposed to be reinsured multiplied by the appropriate Minimum 
Surplus Factor, found in the Minimum Surplus Table. For the purposes of 
the Minimum Surplus Table, an insurer is considered to issue policies 
in a state if at least two and one-half percent (2.50%) of all its 
reinsured gross premium is written in that state;
    (d) Have and meet the ratio requirement of Gross Premium to Surplus 
and Net Written Premium to Surplus and at least ten of the fifteen 
optional ratios in this section based on the most recent Annual 
Statutory Financial Statement, and comply with Sec. 400.172:

------------------------------------------------------------------------
                  Ratio                          Ratio requirement      
------------------------------------------------------------------------
(1) Required:                                                           
  (i) Gross Premium to Surplus..........  Less than 900%.               
  (ii) Net Written Premium to Surplus...  Less than 300%.               
(2) Optional:                                                           
  (i) Two-Year Overall Operating Ratio..  Less than 100%.               
  (ii) Agents' Balances to Surplus......  Less than 40%.                
  (iii) One-Year Change in Surplus......  Greater than -10%.            
                                          and less than 50%.            
  (iv) Two-Year Change in Surplus.......  Greater than -10%.            
  (v) Combined Ratio After Policyholder   Less than 115%.               
   Dividends.                                                           
  (vi) Change in Writings...............  Greater than -33%.            
                                          and less than 33%.            
  (vii) Surplus Aid to Surplus..........  Less than 15%.                
  (viii) Quick Liquidity................  Greater than 20%.             
  (ix) Liabilities to Liquid Assets.....  Less than 105%.               
  (x) Return on Surplus.................  Greater than -5%.             
  (xi) Investment Yield.................  Greater than 4.5%.            
                                          and less than 10%.            
  (xii) Net Change in Cash/Short-Term     Greater than -20%.            
   Investments.                                                         
  (xiii) One-Year Reserve Development to  Less than 20%.                
   Surplus.                                                             
  (xiv) Two-Year Reserve Development to   Less than 20%.                
   Surplus.                                                             
  (xv) Estimated Current Reserve          Less than 25%.                
   Deficiency to Surplus.                                               
------------------------------------------------------------------------

    (e) Submit to FCIC all of the following statements:
    (1) Annual Statutory Financial Statements;
    (2) Statutory Management Discussion & Analysis;
    (3) Most recent State Insurance Department Examination Report;
    (4) Actuarial Opinion of Reserves;
    (5) Annual GAAP Statement or Form 10K (does not apply to Mutual 
Insurance Companies);
    (6) Audited Annual Report to Shareholders; and
    (7) Any other appropriate financial information or explanation of 
IRIS ratio discrepancies as determined by the company or as requested 
by FCIC.
    6. Section 400.171 is revised to read as follows:


Sec. 400.171  Qualifying when a state does not require that an Annual 
Statutory Financial Statement be filed.

    An insurer exempt by the insurance department of the state from 
submitting an Annual Statutory Financial Statement must, in addition to 
the requirements of Sec. 400.170(a),(b),(c),(d), and (e), submit an 
Annual Statutory Financial Statement certified by a Certified Public 
Accountant, which if not exempted, would have been filed with the 
insurance department of any state in which it does business.
    7. Section 400.172 is revised to read as follows.


Sec. 400.172  Qualifying with less than twelve ratios meeting the 
specified requirements.

    An insurer with less than twelve ratios meeting the requirements 
contained in Sec. 400.170 may qualify if, in addition to the 
requirements of Sec. 400.170(a),(b),(c) and (e), the insurer:
    (a) Submits a financial management plan, acceptable to FCIC, to 
eliminate each deficiency indicated by the ratios, or provide an 
acceptable explanation if any failed ratio is not relevant to the 
insurer's insurance operations; or
    (b) Has a binding agreement with another insurer that qualifies 
such insurer under this subpart to assume financial responsibility in 
the event of the reinsured company's failure to meet its obligations on 
FCIC reinsured policies.


Sec. 400.173  [Removed]

    8. Section 400.173 is removed and reserved.


Sec. 400.174  [Amended]

    9. In Section 400.174, the words ``financial statement'' are 
removed and the words ``Annual Statutory Financial Statement'' are 
added in their place.


Sec. 400.175  [Amended]

    10. In Section 400.175(a), the words ``financial statement'' are 
removed and the words ``Annual Statutory Financial Statement or 
Financial Statement'' are added in their place.

    Done in Washington, DC on June 2, 1994.
Kenneth D. Ackerman,
Manager, Federal Crop Insurance Corporation.
[FR Doc. 94-14296 Filed 6-13-94; 8:45 am]
BILLING CODE 3410-08-M